June 2014 Legal Brieds

• U3C late fee, small loan amounts change
• SSNs and ITINs
• New implied SCRA requirements
• Last-minute flood insurance guidance

U3C late fee, small loan amounts change

By Pauli D. Loeffler

As provided under Title 14A of the Oklahoma Statutes, the Administrator of the Oklahoma Department of Consumer Credit has issued the dollar amount adjustments to various sections of Oklahoma’s Consumer Credit Code (“U3C”). The dollar amount changes will take effect on July 1, 2014.

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, 2014, the amount per under (b) will increase from $24.00 to $24.50.
Before a bank can charge any late fee, it must be disclosed, and the consumer must agree to it in writing. If your loan agreement/note states a set dollar amount, a bank has no way to increase the amount of late fee that the consumer has previously agreed to pay until the loan is modified or renewed. Any time a loan is originated, deferred or renewed, the bank is given the opportunity to obtain the borrower’s consent in writing with regard to the late fee.

On the other hand, the loan can contain this language regarding the late fee:

“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,”

By utilizing disclosure of the late fee in this manner, the bank will be able to increase the amount of the late fee whenever this amount is increased by the Administrator of the OKDOCC.

3-508A Loans. 3-508A is the section of the U3C containing provisions for the maximum 30% annual percentage rate on loans having the unpaid principal balance not exceeding a certain amount. This amount increases from $1440.00 to $1470.00 on July 1, 2014. This section is the one that “blends” rates for unpaid principal balances in two additional tiers. As of July 1, the unpaid principal balance of $1470.01 (adjusted from $1440.01) but not exceeding $4,900.00 (adjusted from $4,800.00) is subject to a maximum annual percentage rate of 21%. The unpaid principal balance of $4,900.01 (adjusted from $4,800.01) and above is subject to a maximum rate of 15%. Sec. 3-508A also provides for an alternative to these “blended” rates: a maximum annual percentage rate of 21% on unpaid balances.

3-508B Loans. Some banks make Section 3-508B loans. These are 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 and are subject to adjustment. The specific fees chargeable on one of these “508B” loans are stated with regard to dollar brackets. Both the dollar brackets and the fees chargeable within each bracket are adjusted for inflation, and the revised amounts can be found in the link provided 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, 2014. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30, 2013, might result in excess charges for certain small loans.

On its website, American Bank Systems provides a 3-508B pricing calculator that it updates with changes. On that webpage, you will also find a link to American Bank Systems’ 3-508A “Maximum Annual Percentage Rate Chart” and 3-508B “Loan Pricing Matrix.”

3-511 Loans. I often get a call from a banker puzzled by a warning from their software that a loan may exceed the maximum interest rate. Invariably, the banker will tell me they have manually calculated the interest rate, and it does not exceed the alternative non-blended 21% rate allowed under 3-508A. Generally, the reason the system provided the warning regarding usury is Section 3-511. Loan amounts under this section are subject to annual adjustment. Here is the section with the dollar amount adjustment for loans made on and after July 1, 2014 incorporated. The italicized portion of the statute is nearly always the reason for the warning regarding excessive interest rate.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $4,900.00 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 $1,470.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1470.00 or less.

If the loan principal loan principal loan amount is $4,900.00 or less, the warning is generally triggered because the note does not provide for monthly installment payments (e.g., quarterly or semi-annual payments and the debtor does NOT have seasonal or irregular income), or the note provides monthly installments of interest only with a balloon.

Lenders should always keep in mind Sec. 3-402:

With respect to a consumer loan, other than one pursuant to a revolving loan account, if any scheduled payment is more than twice as large as the average of earlier scheduled payments, the debtor has the right to refinance the amount of that payment at the time it is due without penalty. The terms of the refinancing shall be no less favorable to the debtor than the terms of the original loan. These provisions do not apply to the extent that the payment schedule is adjusted to the seasonal or irregular income of the debtor.

If you have an interest-only loan subject to the U3C, the loan will be “evergreen” under 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 $4,800.00, and increases to $4,900.00 on July 1, 2014.

SSNs and ITINs

By Seth A. Sloan, OCU Law Student

Seth served as a law student extern for the OBA Compliance team, Spring, 2014.

When opening an interest-bearing deposit account for an individual, IRS requires your bank to obtain the proper taxpayer ID number for that individual for interest reporting purposes. If there is not a correct match between the name and the TIN, the IRS will send you notification and may, at some point, require backup withholding and impose penalties. The purpose of this article is to help explain when an individual is eligible for a Social Security Number, and when the individual merely qualifies for an ITIN.

Q: If a person is neither a citizen of the US or a permanent resident alien (green card holder), can they receive a social security card?

A: Maybe, as described in bullet point 3 below. A person who is not a US citizen or permanent resident alien may be able to receive a social security card that would be a social security card issued to a person who is admitted to the US without work authorization from DHS, but with a valid non-work reason for needing a SSN, or in an instance where the person needs a SSN because federal law requires them to get one for a benefit or service.

Essentially, there are three (3) types of Social Security Cards that can be issued:

1. One shows your name and Social Security number and lets you work without restriction.These are issued to: U.S. citizens and people lawfully admitted to the United States on a permanent basis (aka green card holders).

2. The next one shows your name and number and notes, “VALID FOR WORK ONLY WITH DHS AUTHORIZATION.” The Social Security Administration issues this type of card to people lawfully admitted to the United States on a temporary basis who have Department of Homeland Security authorization to work.

3. The last one is a card that shows your name and number and notes, “NOT VALID FOR EMPLOYMENT.”

The SSA issues this card to people from other countries:

a. Who are lawfully admitted to the United States without work authorization from DHS, but with a valid non-work reason for needing a Social Security number; or

b. Who need a number because of a federal law requiring a Social Security number to get a benefit or service.

Then there is the ITIN – Individual Tax ID Number.

Q: What is the difference between people with ITIN numbers and temporary workers who are issued social security numbers?

A: The IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number from the Social Security Administration . ITINs are for federal tax reporting only, and are not intended to serve any other purpose. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers. An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit.

New implied SCRA requirements

By Andy Zavoina

In May there was an enforcement action announced against Sallie Mae Bank and Navient Solutions. (Navient was formerly known as Sallie Mae before it was branched off.) While the actions centered on violations of the Servicemembers Civil Relief Act (SCRA) the enforcement tool used was one we are becoming more familiar with, Section 5 of the Federal Trade Commission Act, Unfair or Deceptive Acts or Practices (UDAP). There are some very interesting parts to this enforcement order.

This action started as a referral from the Consumer Financial Protection Bureau (CFPB) to the Department of Justice (DOJ) and then included the Federal Deposit Insurance Corporation (FDIC) and the Department of Education (DE). The penalties are huge. We want to examine some of the facts based on the Consent Order and press articles to see what was being done wrong so all lenders can learn from those errors and review the required practices outlined in the Consent Order as these may become “best practices” or at least would be safe and compliant ones for other banks to consider. We note that some actions called for in the Consent Order appear to be more onerous to the bank and favor the servicemember beyond what the SCRA calls for.

First, the penalties. Both Sallie Mae and Navient will pay a $3.3 million civil money penalty for a combined $6.6 million to the U.S. Treasury. A $30 million restitution reserve will be established by Sallie Mae as well as a separate $60 million fund from both entities for restitution to harmed borrowers. These will be used for refunds of charges as well as compensation. This totals $96.6 million but there is also a civil money penalty to the DOJ of $55,000.

In the past, experience taught us that when we were examined, examiners would look back no farther than the last exam. That issue seems moot here. We see UDAP penalties stretch back much further than any exam and, in this case, the penalties apply to practices from 2005 forward. So restitution and account reviews will be on accounts that are nearly ten years old. This in itself may pose unusual problems.

In general terms the problems identified in this enforcement action include:

• Unsafe/unsound banking practices
• Deceptive practices including:
  • o inadequately disclosing to consumers how payments would be applied to their loans, and applying them to maximize late fees;
  • o misrepresenting or inadequately disclosing in billing statements how the consumers could avoid late fees;
  • o appearing to condition receipt of SCRA benefits on the submission of a certification confirming the SCRA-protected active-duty status and an agreement to recertify active-duty status annually; and
  • o advising consumers that SCRA protections apply only to those deployed to receive benefits under the SCRA;
• Violating the SCRA by charging interest in excess of six percent or otherwise failing to provide complete SCRA relief as required; and
• Other violations of law, including the Electronic Fund Transfer Act, and the Equal Credit Opportunity Act. (ECOA and Reg B violations included the use of credit scoring model issues that were discovered in a prior exam.)

Many of the issues discussed below are particular to this Consent Order. They are informational and not necessarily legal requirements for your bank. One item that exemplifies this is the definition of “clear and conspicuous.” The Consent Order provides a definition for the term and it includes oral disclosures. “As to written information, written in a type size and location sufficient for an ordinary consumer to read and comprehend it, and disclosed with language and syntax that would be easily recognizable and understandable to an ordinary consumer. As to information presented orally, spoken and disclosed in a volume, cadence and syntax sufficient for an ordinary consumer to hear and comprehend.” While not an unexpected definition, this could certainly be used elsewhere and it reminds us to watch the “legalese” and both the scripts and the delivery of those talking to customers on the phone and in person.

Items identified requiring corrective actions include:

1) The bank has to identify loans taken out while the borrower was not in the service and ensure it is not accruing interest at more than six percent while the borrower was protected under the SCRA. Remember, this goes back nearly ten years.

2) Training is required so that borrowers are not misinformed about SCRA protections and are not discouraged from invoking any rights they have.

3) Any borrower asking about deferments for military borrowers should be identified as potentially being entitled to SCRA benefits and informed of what those benefits are.

4) Only the basic requirements of the SCRA may be enforced when a borrower requests protections. The SCRA says that to obtain a rate reduction on a loan originated before the borrower entered military service, the servicemember must submit a written request for relief and the must submit a copy of the military orders calling them to military service. The Order says the bank may not impose the use of any specific form or require that a written notice explicitly request benefits.

Interpreting this action as required by the Consent Order is an area that appears to go beyond the SCRA requirements. The order says the bank “shall accept borrowers’ military orders as written notice of eligibility for reduced interest rates pursuant to the SCRA via facsimile, mail, or overnight delivery. The Bank shall also accept borrowers’ requests for a military deferment or forbearance as written notice of eligibility for reduced interest rates pursuant to the SCRA. Within six (6) months … the Bank shall also create an online intake form {and} accept completed online intake forms as written notice of eligibility.” This online request would in the case of Sallie Mae trigger a need for verification with the military using its database of active servicemembers.

The order says the borrower need not explicitly request protections while the law says “the servicemember shall provide to the creditor written notice and a copy of the military orders calling the servicemember to military service and any orders further extending military service.” The difference appears to be what might be in a “written notice” and an “explicit request.” One would think the written request would reference relief and protections under the SCRA, but it could be about anything. In fact, knowledge by the bank whether from a written notice, telephone call, email or even a text message may be deemed sufficient to know that protections are required now. A lesson for banks is to know exactly what you will require in your requests for protection, ensure that you do not impose any requirement beyond what the SCRA allows, ensure that all employees watch for those triggering buzzwords in any contact with customers and that the procedures you have in place will effectively identify the account(s) and protections afforded.

5) There shall be no implication that servicemembers need to re-certify any requests for SCRA protections even if their military orders do not have a specific end-date. The bank cannot require that orders have an end date. In this case the bank will not remove any protections with the exception of the six percent rate and that may be removed only after verification with the military that the servicemember is no longer protected. The military has an online database (DMDC) for this. If the DMDC database has a different end date than the orders the bank has on file, the bank will use the later of the two dates. Prior to increasing the interest rate, the bank needs to provide a thirty day notice and give the servicemember an opportunity to show that continued eligibility rights exist.

On these same lines, the bank may not require that military orders specify the beginning date for military service. When these dates are not specifically known via military orders, the bank needs to provide SCRA benefits beginning on the earliest eligible date provided in the orders or by the DMDC (Department of Defense Manpower Data Center database.) However, if the earliest date provided indicates that the borrower was on active duty at the time the loan was made, the Bank shall notify the borrower and provide a reasonable opportunity to provide documentation showing they were not on active duty at that time. As a general consumer protection rule, the benefit always goes to the consumer. In lieu of a copy of military orders, the bank in this case must accept a letter on official letterhead from a servicemember’s commanding officer.

In any case where protections are requested and the bank cannot use the DMDC database to confirm eligibility or the coverage dates vary from a request, the bank should inform the servicemember that they are not eligible for those benefits unless he or she provides a copy of documents establishing military service.

6) In the case of Sallie Mae, requests for SCRA benefits had to be reviewed and acted. Within sixty days all applicable accounts have to be identified and the rate adjustment made retroactive even if the minimum payment was then below what was called for in their loan agreement. The borrower had to be notified of these actions. If the borrower was not eligible, then within thirty days of the request they must be notified of the reason for denial and given the opportunity to provide additional information.

7) Specific SCRA policies and procedures need to be in place. All applicable employees need to be trained on these requirements and the bank must designate customer service representatives who are specifically trained in the finer points of SCRA protections and how the bank is meeting these requirements. These designated CSRs will also have a designated telephone number servicemembers can call to reach them and address questions and concerns on SCRA protections.

8) File review procedures must be devised to determine since 2005 which accounts, paid or active, were subject to the faults that were found in the examinations. Those identified will then have to have calculations done for specific refunds that were estimated to be $4.5 million and restitution provided to others of an estimated $13.5 million. Those with negative payment histories will have to be corrected as the bank has to contact the three major credit reporting agencies and coordinate this.

Separate from the actions above that address how accounts are handled on a day to day basis, the Consent Order digs deeper into compliance management functions. It imposes requirements that apply to much more than SCRA issues and we find often that banks have not emphasized consumer protection management as much as is now effectively required.

The board itself is required to participate fully in the compliance management system. The bank is now required to have a Compliance Officer who will report directly to the board and who will have the authority and resources to effectively do that job. That authority includes the capability of having deficiencies corrected. That person’s authority must extend to third-party service providers as well. Monthly presentations are required to be given to the board by the Compliance Officer.

To supplement this person, the board will create a Compliance Committee that will have at least three outside directors who are not officers of the bank or any of its affiliates, and at least one member of senior management plus the Compliance Officer. This committee will meet at least monthly and reports of those meetings will be presented to the board. Board minutes will reflect these presentations and when votes are taken, dissenting votes will be identified by name.

At least annually there will be an independent audit of all consumer protection laws. The Consent Order includes specific requirements for the audits such as defining the scope, identifying deficiencies, recommending corrective actions and more.

It is my hope that Compliance Officers will share with their boards some of the details of this enforcement action. Go beyond the monetary penalty and look at what went wrong. This Order emphasizes the need for a sound and functioning compliance management program. These lessons go beyond SCRA compliance. Consider that there were errors traced back nearly ten years. The consequences included:

• The bank had to rewrite policies and procedures and submit them to the DOJ for approval. The board has lost some authority and control.
• Practices that violated laws and regulations had to be identified and stopped both in the bank and with any vendors the bank had assisting it. Things that may be considered “deceptive” are included in this. While it goes without saying that identified prohibited practices would be discontinued, what about “iffy” issues that have come to light? The bank would not review only issues identified in the exam, but would want to protect itself from future criticisms.
• Many of these actions had deadlines affixed to them so the bank could not take its time in meeting these requirements. Consider the payroll expenses needed to meet deadlines and to coordinate actions between departments and vendors.

These are lessons for banks to learn and an opportunity to ensure that your compliance program has the training, staffing and resources necessary to carry out the responsibilities it has. This transcends SCRA and is all that is compliance. Budgets have been stretched, staffing has been insufficient and change has been plentiful. But those cannot be accepted as excuses for any deficiencies.

Last-minute flood insurance guidance

By John S. Burnett

Agencies respond to lender questions

Maybe it took a while for five federal agencies to agree on what to say. Maybe the guidance was completed weeks before, but had to be formally approved by one agency’s board. Whatever the reason for the holdup, the agencies (OCC, FR Board, FDIC, NCUA and the Farm Credit Administration) at the 11th hour (May 30) issued a joint press release to announce key guidance on supervisory expectations concerning the June 1 availability of increased flood insurance coverage. This guidance only applies to coverage for non-condominium residential buildings designed for five or more families (sometimes referred to as multi-family buildings, but in this guidance called “Other Residential Buildings”). If you don’t have any loans in your portfolio secured by that kind of property, read on only if you’re curious.

Under the Biggert-Waters Flood Insurance Reform Act of 2012, the maximum building coverage available for Other Residential Buildings was doubled, from $250,000 to $500,000 per building), effective June 1, 2014. The increased limits are made available in connection with new policies, renewals and existing policies with change endorsements effective on or after June 1.

Under agencies’ regulations on flood insurance, when a lender Makes, Increases, Renews or Extends (MIRE) a loan secured by property with buildings located in a Special Flood Hazard Area, the property must be covered by flood insurance for the term of the loan, in an amount that is at least the lesser of (a) the outstanding principal balance of the loan, or (b) the lesser of the maximum limit on insurance available for the particular type of structure, or the insurable value of the structure. Given those requirements, the doubling of the maximum limit on coverage available for Other Residential Buildings is likely to affect the minimum amount of coverage required for both existing and future loans on buildings of that type.

The agencies expect supervised institutions to take steps necessary to determine whether the property securing a loan requires increased flood insurance coverage if the financial institution gets notification of the increased insurance limits available for an Other Residential Building securing a designated loan.

Because FEMA has instructed insurers that issue NFIP policies to contact the holders of policies covering Other Residential Buildings to advise them of the increased policy limits, and insurers are likely to send a similar notice to any lender listed on those policies, many lenders are receiving notifications of the increased coverage availability. Each such notice triggers the regulators’ expectation that the lender will review the designated loan to see if the property in question will require an increase in coverage, and begin communicating with the borrower concerning the required increase.

Do you need to review your loan files in search of Other Residential Buildings concerning which you have not received a specific notice from the insurer? The agencies have said there is no requirement that a lender perform an immediate full file search of its loan portfolio for purposes of complying with the flood insurance regulations, but a lender may want to review its loan portfolio for safety and soundness purposes. As noted in the Interagency Questions and Answers Regarding Flood Insurance, “… sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio.” Translation: Focus first on any loan on which you’ve received a notice from the insurer, but unless you know there aren’t any other loans in your portfolio secured by these multi-family residential buildings, you should put a full file review on your list of priorities.

And it should go without saying that if, after you’ve communicated with an affected borrower concerning the requirement for increased coverage on an Other Residential Building, the borrower fails to obtain sufficient coverage within the normal 45-day period for notification, you (or your servicer) must force-place the needed coverage.