June 2015 Legal Briefs

• Good news on UTMA accounts
• Article 9 tweaks (finally!)
• FCRA lawsuits
• Expiry date passed on your flood notice
• SCRA – What have we learned recently?
• No changes in U3C late fees, dollar amounts
• U3C Sec. 3-508A amended

Good news on UTMA accounts

By Mary Beth Gaurd

Ah, the joys of the UTMA! Allowing an adult to set up an account for a kid under the Uniform Transfers to Minors Act (UTMA) is an attractive option for several reasons: l) it allows funds to be owned by someone young without the young person having the ability to actually access the funds or do transactions. 2) it gives an adult custodian the authority to perform transactions on the account, so that the funds don’t just “sit there” out of reach while the kid grows up; 3) it puts the adult custodian in the role of fiduciary and says that the funds are to be used only for the use and benefit of the child, so there is protection against misappropriation or misuse, and it gives a right to sue if the custodian breaches his fiduciary duty; 4) that means that, for the most part, the financial institution does not have to babysit the account, it merely needs to watch out for any activity that would put the bank on notice that the custodian is breaching his fiduciary duty. (Details about when you would be on notice of breach of fiduciary duty are found in Section 3-307 of the Uniform Commercial Code over in Title 12A of the Oklahoma Statutes. The UTMA itself is found in Title 58 of the Oklahoma Statutes at Sections 1201- 1225.)

Oklahoma’s version of the UTMA has had a unique twist to it since 1993 when an important amendment was made. Under our Oklahoma twist, for purposes of the UTMA, the term “minor” means an individual who has not attained the age of twenty-one (21) years. For purposes of virtually every other law in our state, a person is an adult once he attains the age of 18. [It is weird to refer to someone who is 20 years old as a “minor,” but when the conversation is about the Oklahoma Uniform Transfers to Minors Act, that is precisely what a person that age would be considered! Just remember not to cross-pollinate over into other areas. That definition is only for UTMA purposes.) As a result of this unique definition of the term “minor” under the UTMA, the law has language that says that the age for release of the funds by the custodian to the kid may be set anywhere from age 18 to 21. The power has been placed squarely and firmly in the hands of the custodian.

Which leads me to an aggravating circumstance that can occur in connection with a UTMA account, and it is one that we have received countless calls about over the years. The kid reaches 21 (or whatever age between 18 and 21 the age for release is set at for the particular UTMA account). The kid waits for the custodian to distribute the remaining funds to him. When it doesn’t happen, he requests the funds from the custodian. When no payment is forthcoming, a very frustrated young person ends up at the bank – asking the bank to give him what he believes he is entitled to.

It is not a fun situation, because the law is clear: it is the custodian who has the duty to release the funds to the minor. I think if I were a banker, there would have been times when I would analyze the situation, taking into consideration the amount, what I know about the parties, likelihood of potential litigation, etc., and then I would make a business risk decision to simply give the kid the money. But, truly, there has been no statutory authority for that course of action and it would not be totally without risk.

We tend to assume the funds all belong to the minor, and that may not be the case. Perhaps, for example, the custodian expended funds on his personal credit card, for convenience reasons, in order to make a purchase on the minor’s behalf. It might even be a large expenditure, like paying a semester’s tuition at a private college, and he is waiting for the credit card statement to come in so he can write a check to reimburse himself and have proper documentation. Maybe the custodian is owed for lots of reimbursements and has just not taken the time to tally them up and obtain repayment and do a final accounting before releasing the reins on the moolah. Whatever the case might be, the point is that you cannot assume all the bucks in the account would/should go to the minor.

Banks have been between a rock and a hard place in these situations. That is where the good news comes in.

We at BankersOnline who serve as your OBA Compliance Team felt your pain and we respect the ability of the OBA government relations team (headed by Adrian Beverage for state issues), to do something about it. We drafted up amendatory language and asked the OBA’s Government Relations Council and the Board to support a quest for a statutory amendment. Once the go-ahead was received, Adrian secured House and Senate authors and laid the groundwork for successful passage.

The bill, HB 1772, was signed by the Governor and becomes law November 1, 2015. It provides a workable solution to this perennial problem by adding a new paragraph C to 58 O.S. Section 1221 to read as follows:

C. To the extent the custodial property consists of deposit accounts held at a financial institution, if the minor reaches the age for release and the custodian does not make a timely transfer of the property to the minor, the minor may make a request for the account-holding financial institution to intervene. The request from the minor shall be signed, dated and in writing, and shall state that the minor has reached the age for release and the custodian has refused to distribute the remaining funds to the minor after being asked to do so by the minor after the minor was entitled to them. Upon receiving the minor’s request, the financial institution may send a written demand to the custodian to transfer to the minor the funds in any Oklahoma Uniform Transfers to Minors Act deposit account. If the custodian does not make the distribution within thirty (30) days from the date of the financial institution’s demand, the financial institution shall have the authority to close the account and pay out the funds directly to the minor without any liability or recourse from any parties.

It provides a new option for you to nudge the custodian off high-center when the kid has asked you to intervene. The procedure for you to use is simple and not time-consuming and the statute protects you against liability.

Mission accomplished!

Article 9 tweaks (finally!)

By Mary Beth Guard

Trust me, you do not even want to know the shenanigans that take place under our beautiful state capitol dome while the session is going on. The saga of the long and arduous multi-year quest to pass amendments to the Uniform Commercial Code Article 9 (which deals with secured transactions involving most collateral, other than real estate and motor vehicles) would be classified as a horror story if it were a movie, but there is finally a happy ending and the good guys have emerged victorious. HB 1774 was signed into law by the Governor and will become law November 1, 2015. Our state is the last in the union to adopt the changes. The bill is 80 pages of fun, but don’t worry: in the July or August Legal Briefs, Pauli Loeffler will tell you what you need to know about these important amendments so that you can assimilate the information and implement it within your bank.

FCRA lawsuits

By Mary Beth Guard

Listen up, senior management! Folks are getting sued and I don’t want it to happen to you. I hope I am preaching to the choir with this article – that you have heard me say this over and over and you know what you have to do and what you can’t do and you stay out of trouble. But just in case someone wasn’t paying attention . . .

The Fair Credit Reporting Act (FCRA) sets the parameters for when a consumer report may be obtained. The term “consumer report” is broad, and it includes not only what we traditionally think of, which would be a credit report, but also background checks and other types of reports. It is any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for certain purposes enumerated under the Act.

Bankers are well aware of the fact that a consumer report may only be obtained in connection with a permissible purpose, which includes any business transaction initiated by the consumer, so that is how you obtain such reports in connection with a consumer’s application for a deposit account or for a loan or credit card.

Less well known, however, is the fact that if you procure such a report for employment purposes (perhaps reviewing such a report in someone who is a Loan Originator under Reg Z to ensure they meet the qualification standards, or obtaining a report on applicants for positions at your institution) there are special requirements you must contend with. You must provide a stand-alone disclosure (clear and conspicuous, in writing, not lumped in with other verbiage – it must be a document that consists solely of the disclosure) to the consumer, telling the person that a consumer report may be obtained for employment purposes – and you must obtain the person’s written authorization for you to procure the report! Section 604 of the Act provides guidance for how to comply when the application for employment is made by mail, telephone, computer, or other similar means, in case you ever use one of those avenues to start the prospective employee screening process.

Once the disclosure is given, the consent you must have may be written in a way that would make it evergreen – such as “I, so-and-so, authorize X Bank to obtain a consumer report on me in connection with employment or possible employment and to periodically obtain consumer reports on me during the period of time I am employed by the bank.”

Also, do not forget the adverse action notice if your decision to not hire (or to not promote, or to terminate) is based in whole or in part upon information contained in a consumer report.

Recent settlements of lawsuits for noncompliance with these FCRA provisions have involved shockingly large sums of money.

Expiry Date Passed on your Flood Notice

By Andy Zavoina

You are probably used to expiration dates coming and going, especially when we talk about flood rules so why would 2015 be any different? The Standard Flood Hazard Determination form (SFHDF 086-0-32) had (note the past tense) an expiration date of May 30, 2015. The past tense is important because that date has come and gone. But here in the present, that is the newest form we have available and to cut to the chase, we recommend you continue to use it.

Now here is the skinny; FEMA was proactive on this and last December posted a request for comment in the Federal Register. There was a clerical error so the original comment period was extended until April 6. It was noted FEMA had received only four comments. Recommendations were that it be made a single page, that FEMA clarify the language of the form, that FEMA offer users a wider variety of suggested information to simplify the form and also allow preparer’s comments; and to direct users to the applicable servicer, lender or regulatory agency for guidance pertaining to use of the form. A few of the comments asked for changes to the form outside FEMA’s authority. That was in the Federal Register last March 5.

We haven’t seen any other notice on a new form as of yet but the form has only recently expired and FEMA is dealing with weather disasters such as the flooding we experienced in Oklahoma. At least we know the issue has been in part, addressed. Until FEMA publishes an updated SFHDF use the current form and if you are selling loans, ensure your investors are in agreement. The last time the form was updated the changes were minor. Based on the few comments received we can’t predict what may change so there is nothing better to use at this time. Recognize that it is due to be updated and we will advise you as soon as we have more information.

SCRA – What have we learned recently?

By Andy Zavoina

Here are four very recent headlines addressing the Servicemembers Civil Relief Act.

“CFPB Orders $3.1 Million In Refunds To Military Servicemembers In Fifth Case Involving Military Allotments”
“Bank Of America Must Pay $30M For Military Relief Law Violations”
“California-Based Storage Company Agrees to Settle SCRA Claims”
“Starter Interrupters Expose Lenders To SCRA Risks”

What should these headlines mean to you? The SCRA is a law that affects banks, but more importantly it is treated as a “right” of those serving our country and violation of the SCRA are often viewed as unpatriotic and they can be costly. There can be monetary penalties and reputational risk. Fortunately, you can learn from the mistakes of others and avoid being in these headlines.

The Consumer Financial Protection Bureau (CFPB) has been leading the charge in enforcement actions defending servicemembers. In the latest of five enforcement actions involving military allotments, Fort Knox National Company (FKNC) and its subsidiary Military Assistance Company (MAC) entered into a consent order to refund $3.1 million to the servicemembers who paid them fees.

FKNC and MAC provide consumer-to-business electronic payment services and is one of the nation’s largest third-party processors of military allotments. Servicemembers who may not have internet banking type services available would use FKNC and MAC to have funds debited directly from their pay and sent to family members or creditors, as two examples. In many cases creditors such as auto lenders would bring these parties together to automate the payment process for payments on a new car loan. The servicemember would have funds deducted from their military pay and deposited into a pooled account at a bank. (The Department of Defense changed the rules on January 1, 2015, to prohibit the use of allotments to repay loans for personal property. MAC was winding down its program in 2014 apparently with this change in mind and as internet banking is much more available than it was when many of these accounts were established.) Mac would deduct funds from that pooled account and send them to the designated party. MAC’s fee for this service was between $3 and $5 per month. In the case of a loan payment, after the loan was paid in full one or more allotments might still be deposited to the pooled funds and the monthly fee or another fee would continue to be charged. It was done in such a way as to be confusing and difficult to track.

The CFPB said the fees charged on the residual balances were neither clearly disclosed as to what would be charged nor why. Fees charged would include $5 to send a letter to the servicemember about the residual fee, $5 to send a letter to a creditor, and fees ranging from $12 to $20 if the residual balance remained for six months or more. If the balance fell below the next month’s scheduled fee amount, it would all be debited. The fees charged were not shown in the online information available and monthly statements were not made available either. The CFPB views these practices as unfair, deceptive, or abusive acts or practices and will contact servicemembers about refunds from the $3.1 million pool.

The Bank of America enforcement relates to improper legal actions taken by the bank against servicemembers with overdraft and credit card debts dating as far back as 2006. The Office of the Comptroller of the Currency (OCC) determined that the problems were in the bank’s risk management systems and led to unsafe and unsound practices which violated the SCRA.

The OCC said it the Consent Order that when the bank directly or through its third party filed action against servicemembers, the employee asserted in affidavits that they had personal knowledge of facts or had reviewed relevant bank records when they did not. Many of the affidavits were filed in court without following the required notary procedures and that the bank did not devote the staff or resources needed to its Collections Litigation processes.

The document also states the bank:

• Failed to have in place effective policies and procedures across the Bank to ensure compliance with the SCRA;
• Failed to devote sufficient financial, staffing and managerial resources to ensure proper administration of its SCRA compliance processes;
• Failed to devote to its SCRA compliance processes adequate internal controls, compliance risk management, internal audit, third party management, and training; and
• Engaged in violations of the SCRA.

As a result of these problems the bank will pay a civil money penalty of $30,000,000 because of problems on 73,000 servicemembers accounts. And based on the bulleted list above, remedial actions will be taken to strengthen the policies procedures used to follow the SCRA and prevent future violations. The bank must ensure that it can properly determine when an account is eligible for SCRA benefits, accurately calculate those benefits and verify the military status of its customers prior to taking legal actions such as default judgments.

And hot off the press, a class action suit was filed against Bank of America June 1, 2015 as three veterans and their spouses claim the bank failed to adjust the interest rate on loans as required by the SCRA. It certainly doesn’t look good coming so soon after the settlement above. We’ll keep you apprised as the case proceeds.

Enforcement actions aren’t always against banks or even those in the banking industry. In San Diego the United States (Department of Justice) entered into a Consent Order with Daniel Homan (President) and Across Town Movers (ATM). This was actually a storage facility that sold the contents of storage lockers without completing the due diligence required to protect themselves from SCRA violations.

The penalty is $170,000 for ten servicemembers. Most of the funds, $150,000, will be paid to one sailor, Thomas E. Ward, a now-retired master chief. Ward was transferred in 2006 to Japan for three years and he had stored vintage original car parts and household items at ATM. Initially the account was the governments but was converted to Ward’s personal storage account in 2012. The Navy had been paying the bill. Ward’s tour in Japan had been extended. ATM however had auctioned off the property in 2011. Just before returning from that tour of duty Ward was told his items had been auctioned off. (We didn’t see that on Storage Wars.) “Storage companies should check the Defense Department’s military database and other resources before conducting any auction to see if the customer is protected by the Servicemembers Civil Relief Act. The Department of Justice is committed to protecting the rights of the men and women who serve in our Armed Forces and we will continue to devote time and resources to make sure that they are given the legal protections they deserve,” said Acting Assistant Attorney General Vanita Gupta of the DOJ’s Civil Rights Division.

The investigation found nine similar cases of sailors’ property being sold outside of SCRA requirements dating back to 2008. Those cases were settled in varying amounts with this one to avoid protracted litigation. This suit was filed in March of this year. As a part of the settlement ATM must develop SCRA policies and procedures and include staffing, training, reporting and recordkeeping.

Some car dealers sell vehicles with starter interrupters installed on them. This allows a creditor to disable the starter so the car can’t be moved, may be repossessed easier, and to get the past due borrower’s attention and motivate them to pay. These have been used for years. But recently these have been questioned from an SCRA perspective. Certainly there can be other risks, but today’s focus is SCRA. Reports are that about two million starter interrupters are in use in the U.S.

Customers complain that these are activated manually when a past due flag is raised or in some cases an automated system does this. The borrower may be in a bad part of town, on a highway, or in some sort of emergency situation when this is triggered and many claim to not be delinquent when it happened to them.

The issue at hand is that the SCRA protections may be deemed as circumvented when a starter interrupter is used. We have seen cases where creditors who repossessed and sold vehicles were wiping the debt clean, repaying the servicemember the equity they had in the car, attempting to replace the car with a like or newer model and paying civil penalties for their actions. I have not seen any cases go to court on SCRA grounds but I have been reading opinions that this is very possible. Many of these devices are installed on car loans in the subprime market and many of these loans are taken out by servicemembers. Because of the aggressive enforcement actions by regulators and DOJ, any lender involved in these practices should ensure that SCRA is considered before a starter interrupter is employed. The risks could be great.

Is there any early warning sign of SCRA problems in a bank? Glad you asked and the answer is Yes. In April the CFPB released yet another review of servicemember complaints. The “A snapshot of complaints received from Servicemembers, Veterans, and their families” is a 38 page review of what has triggered 29,500 complaints. In order of volume these are:

Debt Collection 39%
Mortgage 24%
Credit Reporting 9%
Credit Card 8%
Bank Account or Service 8%
Consumer Loan 5%
Student Loans 3%
Payday Loan 2%
Money Transfers .4%
Prepaid .3%
Other Financial Service .3%

The CFPB report provides details and reminds us of the importance of analyzing complaints received in the bank at all levels, especially on areas that for all practical purposes a protected class.

Regulatory agencies all expect your bank to have a policy and procedures to handle SCRA issues. Some key items to focus on are the handling of interest and other fees as well as judgments, foreclosures and repossessions. While home foreclosures were a hot topic, repossessions of personal property such as cars and motorcycles are in the same category of protection. Ensure these are addressed and trained on. This is one reason you really do need a procedure that has SCRA verifications in place to keep your bank out of trouble. It is why fee schedules need to be clear and conspicuous and that fees not be “trumped up” to deplete balances from escheat-ready accounts, for example. Using the actions cited above, create a list of items to review and see how your bank would fare in an exam today. And based on ATM we can see that these rules reach beyond banks and could reach bank customers. An SCRA penalty could take a good loan to a classified loan if that borrower had a large penalty to pay. After reviewing the headlines and the facts of these cases, it is quite evident that regulators and the courts are ready, willing and able to enforce the SCRA.

No Changes in Late Fees or U3C Loan Dollar

By Pauli D. Loeffler

Under the statutory authority established pursuant to Tit. 14A O.S. Section 1-106, the Consumer Credit Administrator adjusts certain dollar amounts effective as of July 1st each year to provide for inflation. These dollar amounts found in various sections of Oklahoma’s Uniform Consumer Credit Code (U3C) include late fees. This is first time since 2009 that no increase in any dollar amounts have been made. The amounts in effect as of July 1, 2014 and for the tiered rates for Sec. 3-508A which is no longer subject to annual adjustment (see the July 2014 OBA Legal Briefs) will remain unchanged for this fiscal year. You may access the chart directly on the Oklahoma Department of Consumer Credit website: www.ok.gov/okdocc/documents/2015%20dollar%20changes%20FINAL%20adjustment%205-11-15.pdf

Please see the June 2014 OBA Legal Briefs for additional information.

A frequently asked question is “What is the maximum late fee for consumer loans and dealer paper? Since July 1, 2014, the maximum permitted late fee has been the greater of $24.50 or 5% of the past-due payment.
Some banks’ loan documents have specifically pegged the “dollar amount” portion of their late fee formula at whatever amount was in effect when the loan was made. If the late fee is disclosed in this manner, the bank cannot raise the late fee if the amount authorized under the Oklahoma U3C increases UNLESS the loan is refinance, modified, renewed or a payment is deferred by written agreement and the borrower signs an agreement consenting to imposition of an increased late fee.

Other banks have used an adjustable formula in the late-fee provision of their loans, allowing for the greater of 5% of the late payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time. Banks using a formula that specifically allows for this type of inflation adjustment can re-set their existing loans to charge a new, higher late fee when the same is determined by the Consumer Credit Administrator.

U3C Sec. 3-508A Amended

By Pauli D. Loeffler

I covered the changes to Title 14A Sec. 3-508A that became effective August 22, 2915 in the July 2014 OBA Legal Briefs with regard to As noted above, the amounts for the tiered rates remain unchanged (as do the maximum APR for each tier and the alternative “blended” rate). The changes last year were mostly benign or favorable for creditors with the exception of one: imposition of a minimum loan term for loans subject to this section Prior to the amendment, §3-508A did not have any minimum term for loans made under this section, and it was not uncommon for these small dollar loans to be repayable in 4, 6 or 12 months. The amendment prohibited a repayment term of less than 12 months from the date the loan is made. This change prevented many of our member banks from making small dollar loans the way they had in the past.

Due to the efforts of the OBA and its Government Relations Committee, §3-508A has been amended to delete the 12 month repayment requirement. The amendment is effective for §3-508A loans originated on or after November 1, 2015.