October 2015 Legal Briefs

• Amendments to OK Statutes effective 11/1/15
• Welcome Words on TRID

Amendments to OK Statutes effective 11/1/15

By Pauli D. Loeffler

The OBA Compliance team has previously covered some of the legislative changes effective November 1, 2015: in prior:

·         Mary Beth Guard’s article on the amendment to the Uniform Transfer to Minors Act which provides procedures to allow the bank to disburse funds to the minor upon his demand after attaining the age specified in the May 2015 Legal Briefs

·         Pauli Loeffler’s article on repeal of the 12 month repayment term under § 3-508A of the Oklahoma Uniform Consumer Credit Code in the June 2015 Legal Briefs

·         Pauli Loeffler’s covering the correct debtor name to use under Amended Article 9 of the Uniform Commercial Code in the August 2015 Legal Briefs

I want to cover a few other legislative changes before covering the rest of the changes to Article 9.

TIMELY RELEASE OF MORTGAGES  

Title 46 O.S. § 15 Holder Must Release – Penalty This statute requires mortgage holders to release a mortgage after payment of the debt in a timely manner and file the release with the county clerk where the mortgage is recorded. It provides the procedures for the mortgagor to make a written request for release at any time once the statutory period for release passed. The mortgage holder has 10 days from the date of the written request to release the mortgage. If the mortgage holder fails to release the mortgage, the mortgagor is entitled to receive from the holder a penalty of 1% of the principal debt not to exceed $100.00 for each day the release is not recorded after the 10 day period but the penalty cannot exceed 100% of the principal debt.

Multiple amendments were enacted in two versions, both effective November 1, 2015. Under Version 2, the only change involves the time the mortgage holder has to file the release provided in subsection A. The period is reduced from within 50 days of payment to within 30 days of payment.  Version 1 makes no changes to subsection A. but amended subsection B. to allow a title insurance company or its duly appointed agent to bring action on behalf of the mortgagor to recover the penalty, and moved the definition of “mortgagor” to new subsection C.  which also contains a definition for “title insurance company.”

TIMELY RELEASE LIEN ENTRIES ON MOTOR VEHICLE CERTIFICATES OF TITLE

Title 47 O.S. § 1110 Perfection of Security Interest. Subsection B. 1. of this statute requires the secured party to release its security interest within 7 business days of satisfaction of the underlying debt, and either furnish or directly mail the release to the Oklahoma Tax Commission and mail a copy to the last-known address of the debtor within that time period. If the security interest is satisfied by a licensed used motor vehicle dealer, the subsection further requires an additional copy must be mailed to the dealer. If the secured party fails to comply, the debtor is entitled to be paid a penalty of $100 and any loss caused to the debtor by such failure.

Effective November 1, 2015, the failure to furnish the release as required will still make the secured party liable to the debtor for a penalty of $100, BUT if written demand for release is received by the lienholder thereafter, the penalty shall increase to $100.00 per day for each additional business day not to exceed the lesser of $1500.00 or the value of the vehicle plus any loss cause to the debtor for such failure.

AMENDMENTS TO OKLAHOMA’S DURABLE POWER OF ATTORNEY ACT

Title 58 O.S. §1074 Relationship of Court-appointed Fiduciary and Attorney-in-fact – Nominations by Principal The OBA Compliance team often gets the question of whether a guardianship order “trumps” a durable power of attorney executed by the ward before the guardianship. The answer has varied from year to year due to this particular statute and case law.  A walk through a bit of the history behind this part of the law helps put it into perspective.  The original statute effective November 1, 1988 provided:

A. If, following execution of a durable power of attorney, a court of the principal’s domicile appoints a conservator, guardian of the estate, or other fiduciary charged with the management of all of the principal’s property or all of his property except specified exclusions, the attorney-in-fact is accountable to the fiduciary as well as to the principal. The fiduciary has the same power to revoke or amend the power of attorney that the principal would have had if he were not disabled or incapacitated. [emphasis ours]

B. A principal may nominate, by a durable power of attorney, the conservator, guardian of his estate, or guardian of his person for consideration by the court if protective proceedings for the principal’s person or estate are thereafter commenced. The court shall make its appointment in accordance with the principal’s most recent nomination in a durable power of attorney except for good cause or disqualification.

In 2009, the Oklahoma Supreme Court considered a certified question of law from U.S. District Court for the Norther District of Oklahoma (Russell v. Chase Investment Services Corp.212 P.3d 1178), and held that pursuant to the statute, the appointment of a guardian does not revoke the DPOA. This decision sparked two legislative versions amending this statute effective November 1, 2010. Version 1 was similar to the statute above, but Version 2 automatically the durable power of attorney upon the appointment of a guardian. Effective November 2012, Version 1 was repealed, so appointment of a guardian automatically revoked the DPOA.

But hang on!  During the last legislative session, the statute was amended once again. The language is nearly identical to that shown above. On and after, November 1, 2015, when a guardian is appointed, the DPOA does not automatically terminate, but the guardian has the authority to revoke the DPOA.  In other words, the power is in the guardian’s hands to revoke the durable power of attorney, but the guardian may choose not to use the power and instead co-exist peacefully with the attorney-in-fact.

Title 58 O.S. §1075 Effect of Death or Incapacity of Principal Last legislative session, this statute was amended by adding a new subsection C.:

A. Death of the principal revokes and terminates the power of attorney, provided however, the death of a principal who has executed a written power of attorney, durable or otherwise, does not revoke or terminate the agency as to the attorney-in-fact or other person, who, without actual knowledge of the death of the principal, acts in good faith under the power. Any action so taken, unless otherwise invalid or unenforceable, binds successors in interest of the principal.

B. The disability or incapacity of a principal who has previously executed a written power of attorney that is not a durable power does not revoke or terminate the agency as to the attorney-in-fact or other person, who, without actual knowledge of the disability or incapacity of the principal, acts in good faith under the power. Any action so taken, unless otherwise invalid or unenforceable, binds the principal and his successors in interest.

C. If a durable power of attorney is recorded with the clerk in any county of this state, in the event of revocation of such durable power of attorney, notice of the revocation shall be filed in each county or counties where the durable power of attorney was recorded. Until such notice is recorded, any person or entity may rely on the recorded authority of the attorney-in-fact with respect to matters covered by the records of the county clerk, and the acts of the attorney-in-fact shall be binding on the principal or the principal’s successors in interest.

This statute applies to all powers of attorney durable or otherwise whether executed under the Oklahoma Uniform Durable Power of Attorney Act (Title 58), the Oklahoma Uniform Statutory Form Power of Attorney Act (Title 15) or otherwise (Title 58 O.S. § 1072.2 – “ A. A durable power of attorney may be executed in accordance with the following provisions; provided, however, failure to execute a power of attorney as prescribed in this section shall not be construed to diminish the effect or validity of an otherwise properly executed durable power of attorney…” and Title 15 O.S. § 1002 – “The form set forth in this act is not exclusive, however, and other forms of power of attorney may be used…”).

The only time a POA or DPOA must be recorded is in connection with some other recorded document executed by the attorney-in-fact (“AIF”) such as a deed to real estate, a mortgage, etc.  As an attorney, the only plausible reason I could see for recording either a POA or DPOA in any other case might be in order to obtain a certified copy of it if the original is lost or destroyed. I know a few banks require recordation before allowing the AIF to have access or information on deposit accounts or safe deposit boxes of the customer (principal) as a matter of policy, but subsections A and B protect the bank provided it does not have knowledge of revocation, guardianship or death of the principal, and simply requiring the AIF execute an Affidavit of Lack of Knowledge of Termination or Revocation of Power of Attorney under § 1076  gives the bank “belt and suspenders” protection since the Affidavit acts “[A]s conclusive proof of the nonrevocation or nontermination of the power at that time.”

Knowing that some banks require all POAs and DPOAs to be recorded, subsection C concerned me, and I wanted to know why it was enacted.  The reason it was added was to assist title examiners in determining marketable title with regard to guardianships. Guardianships are not public records and do not have to be recorded unless the guardian executes a deed, mortgage, etc., or the guardian wishes to give public notice of the ward’s incapacity (which would terminate a POA that had no durability provisions). When considered in conjunction with § 1074 (above), Subsection C requires the guardian to record revocation of the DPOA by the guardian (or contained in an order by the court) in the county records of all counties where the DPOA has been filed.

If your bank requires all POAs and DPOAs to be recorded in lieu of using the Affidavit under § 1076, and a guardian is subsequently appointed, I suggest providing a copy of the recorded POA/DPOA to the guardian and suggesting s/he discuss the matter with an attorney as to any steps that needed to be taken.

AMENDED ARTICLE 9 – PART II

Revisions to Article 9 of the Uniform Commercial Code (the “UCC”)   were enacted in 2000, effective July 1, 2001.  I will reference the 2000 act as Revised Article 9. In 2010, the ULC provided amendments to Revised Article 9 with a suggested effective date of July 1, 2013. Other than the Virgin Islands where legislation has been introduced, Oklahoma was the last of the 50 states, District of Columbia and other U.S. Territories to adopt Amended Article 9. Finally, we have consistency with the other jurisdictions.  Having covered using the correct debtor name and transition provisions in that regard in the August 2015 OBA Legal Briefs, I will now cover the other significant changes.

§ 1-9-102 Definitions and Index of Definitions.

(a)(7) “Authenticate.” The term is important regarding authorization of the creditor to file the lien pursuant to the security agreement. It still means either (A) “to sign,” but (B) has been amended to more clearly reflect technological advances to include adoption or acceptance of a record by a variety of electronic means and methods

(a)(10) “Certificate of Title.”  A second sentence has been added to the definition. The ULA Comments indicate the reason for this additional definition is that in many states, a certificate of title covering encumbered goods is delivered to the secured party by the issuing authority, and several of these states have revised their certificate of title statutes to permit or require state agencies to maintain an electronic record to evidence ownership of the goods in which the security interest is noted.  At this point, the amendment does not have any applicability in Oklahoma.

§ 1-9-105 Control of Electronic Chattel Paper. Electronic chattel paper is chattel paper stored in electronic medium instead of tangible form. Perfection may be by filing or by control. This section has been amended to properly reflect that it is derived from Title 12A O.S. § 15-116 of the Uniform Electronic Transactions Act (the “UETA”). The changes to (a) reflect that as well as provides the general test for control. The changes to Subsection (b) do not significantly change requirements but mainly clarifies that satisfaction of the requirements under Subsection (b) provides a safe harbor meeting the general test under Subsection (a).

§ 1-9-316 Effect of Change in Governing Law. This section was previously called “Continued Perfection of Security Interest Following Change in Governing Law.  Subsections (a) through (g) cover continued perfection that has already attached to collateral when a debtor changes location and the law of jurisdiction changes. Subsection (a) continues perfections until the earliest of: 1)  the time the perfection would have lapsed in that jurisdiction (meaning the jurisdiction where it was filed), 2)  four months after the a change of debtor’s location to another jurisdiction, or 3) one year period after the collateral is transferred to a person located in another jurisdiction who becomes the debtor. Here are some examples:

1.  The debtor is an individual and grants a security interest in equipment, and his principal residence is in Oklahoma. The lender perfects in Oklahoma on January 10, 2011. Unbeknownst to the lender, on May, 16, 2013, the debtor moves to Texas. The lender remains perfected for 4 months, and continuously thereafter if he perfects in Texas within 4 months of the debtor’s relocation.

2. The facts are the same as above, but the debtor moves on January 9, 2016. The 4 month period to perfect in Texas would not apply since perfection in Oklahoma will have lapsed and the lender will be unperfected, UNLESS the lender timely filed a continuation statement in Oklahoma. If the lender is aware the debtor intends to move to Texas, if he perfects in Texas BEFORE the debtor relocates, the lender will be continuously perfected beyond the date the Oklahoma filing lapsed for a period governed by Texas law regardless of whether a continuation statement is timely filed in Oklahoma.

3. Debtor XYZ Corp. is formed in Oklahoma and has given lender a security interest in equipment. The shareholders decide to “reincorporate” in Texas as New Corp. and merge XYZ Corp. into New Corp. which becomes the debtor. Provided the Oklahoma filing does not lapse within one year of the merger, if lender perfects in Texas within one year following the merger, the security interest remains perfected for the period determined by Texas law

If the lender fails to reperfect in the new jurisdiction before perfection ceases under Subsection (a), Subsection (b) provides that the lender will be unperfected prospectively as purchasers for value (buyers and secured parties).  Using the last example, if New Corp. sold the equipment to a buyer 6 months after the merger, and if the lender does not reperfect within a year of the merger, the lender’s security interest is deemed to have never been perfected against the buyer.

Amended Article 9 has added two new subsections to this statute. As indicated above, temporary perfection under Revised Article 9 only applied to collateral when the lender’s security interest had attached and been perfected at the time of the change in location. The result was that even though the creditor had perfected a security interest in after-acquired property, the security interest in the new collateral only became perfected upon filing in the new jurisdiction. This was also true with respect to a new debtor that is the successor to the original debtor through a merger.

New subsections (h) and (i) have been added to remedy this problem by providing for temporary perfection for 4 months for after-acquired property of the debtor occurring either post-move or merger.

§ 1-9-326 Priority of Security Interest Created by New Debtor. This section determines priority when a new debtor becomes bound by the security agreement of an original debtor and each debtor has a secured creditor. The section has been changed for clarity and to encompass the addition of subsection (i) to § 1-9-316, above, regarding security interest in after-acquired collateral.

§ 1-9-518 Claim Concerning Inaccurate or Wrongfully Filed Record. Revised Article 9 added this section which allows the debtor to file a correction statement when a debtor believes a record is inaccurate or wrongfully filed. It is analogous to providing an explanatory statement to a credit reporting agency under the Fair Credit Reporting Act. Amended Article 9 changes the name from “correction statement” to “information statement.” Amended Article 9 adds two new subsections to allow the secured party to file an information statement when a person files a termination statement or other filing without being entitled to do so. Keep in mind that the filing of an information statement does not affect the effectiveness of an initial filing or other filed record.

§ 1-9-521 Uniform Form of Written Financing Statement and Amendment. The forms have been changed to remove extraneous information and to conform with changes made to other sections under Amended Article 9.

Welcome words on TRID

By Mary Beth Guard

It appears the regulators “get it.”  They understand that despite best efforts, some financial institutions will face major challenges in complying with the TILA/RESPA Integrated Disclosures rule, not because of lack of trying, but because the rule’s complexity has led to significant last minute patches, tweaks, updates by loan origination software companies and there are still some types of TRID-covered transactions that simply aren’t being processed correctly.

The Bureau’s director says the approach for the CFPB’s examinations on TRID compliance for a period of time “will be diagnostic, and corrective, not punitive.”  FDIC has indicated its initial exams for TRID compliance with focus on the institution’s efforts and its compliance management system.

It will take a while for all the kinks to get worked out with the new regime.  It’s a relief to know the regulators will not be looking to pounce on errors in the interim.

Indirect Lending

If your bank engages in indirect auto lending, take a look at the recent disparate impact enforcement action taken jointly by DOJ and CFPB against Fifth Third Bank involving allegations the bank engaged in a pattern or practice of discrimination against African-American and Hispanic borrowers in its indirect auto lending business.

The bank had given dealers significant discretion in markups and the bank failed to discern that the markups were being applied in an apparently discriminatory manner, resulting in African-American and Hispanic borrowers paying more due to their race or national origin and not because of the borrowers’’ creditworthiness or other objective criteria related to borrower risk.

In addition to the assessment of a penalty and restitution (the bank entered into a consent order), the bank agreed to limit dealer markup to 125 basis points for loans of 60 months or less and to 100 basis points for loans greater than 60 months.  Recognizing there is no magic way for a bank to easily determine if the dealers are illegally discriminating, the settlement requires the bank to improve its monitoring and compliance systems, but doesn’t prescribe a particular method for doing so.  Instead, it gives the lender the freedom to experiment with different approaches.

The complaint against the bank alleges that the bank:

·         Did not provide adequate constraints or monitoring across its portfolio of loans to prevent discrimination;

·         Knew or had reason to know that its policy and practice of allowing dealers to mark up consumers’ interest rates created a substantial risk of discrimination;

·         Did not require dealers to document reasons for charging markups;

·         Did not, at all times, monitor whether discrimination occurred through charging markups;

·         Did not, at all times, provide detailed fair lending training to its dealers.

The obvious question is – how would the bank know the discrimination was occuring?  After all, government monitoring information is not only not required on auto loan applications, it is illegal to request it on them.  How would the government know?  Once again, the government assigned race and national origin “probabilities” to applicants, using a proxy methodology that combines geography-based and name-based probabilities from Census Bureau data.   They formed a joint probability using something called the Bayesian Improved Surname Geocoding (BISG) method.

In the summer of 2014, the CFPB issued a report on using publicly available information to proxy for unidentified race and ethnicity.  I think it is a must-read for any institution doing indirect lending of any kind.  The statistical code for the BISG proxy methodology has been made available by CFPB so that an institution can periodically run its own analysis and determine whether there appear to be trouble spots.

Here are our suggestions for action:

·         Examine the extent of markup discretion you give to dealers and determine whether it is appropriate or should be modified;

·         Require dealers to document reasons when they use markups;

·         Find out about the nature and extent of training dealership employees receive on fair lending.  If it is not adequate, figure out how you can supplement it.  Note that this enforcement action appears to indicate it’s the bank’s duty to “provide detailed fair lending training” to its dealers.  Particularly observe the use of the word “detailed” when determining how far to go.

·         Familiarize yourself with the BISG method and the code for running the analysis and give it a test drive to see what it shows.

Are you small?

There are benefits to falling within the definition of “small creditor” in Regulation Z.  The CFPB recently amended the regulation to modify the tests for when an institution will be deemed a small creditor and the result is that some of you may now qualify under the expanded definition.

But first, a little background.  Why do you care if you are a small creditor?

·         Small creditors have the option to obtain QM-level protection from Ability to Repay claims by meeting the requirements for Small Creditor Portfolio Loan QMs under 1026.43(e)(5) and can also make balloon payment QMs under 1026.43(e)(6) until that QM type sunsets, or on a permanent basis under 1026.43(f) if the creditor also meets the rural/underserved test.

·         The threshold under the ATR rule for when a covered transaction is deemed to be a Higher-Priced Covered Transaction (HPCT) is different for small creditors.  Because of the recognition that the cost of funds for small creditors is likely to be higher, a loan is not considered an HPCT if made by a small creditor unless the APR exceeds the APOR by 3.5 or more percentage points.  Why does this matter?  If a covered transaction is an HPCT, you are required to factor in the amount of a balloon payment regardless of when it occurs, for purposes of determining ability to repay.  And if your loan is a QM, but it is an HPCT QM,  it is eligible for a lower level of protection against ATR lawsuits than it would be if it were not an HPCT.  Fewer HPCTs is a good thing, and with a higher trigger before a small creditor is deemed to make an HPCT, fewer will result.

·         Small creditors that also meet the “rural/underserved test” can elect to avoid the mandatory escrows for first lien HPMLs.

Let’s look at the new tweaks that take effect January 1, 2016.  You find them in 1026.35.

Under the amendments, you will be deemed a small creditor you meet a loan volume test and an asset size test.  You are a small creditor if:

During the preceding calendar year you and your affiliates together extended no more than 2,000 covered transactions secured by first liens that were sold, assigned, or otherwise transferred to someone else, or that were subject at the time of consummation to a commitment to be acquired.  (You can actually do a two calendar year lookback for transaction apps received prior to April 1 of a year.)

Let’s parse the words in the test.  When they use the term “covered transaction” they point back to the definition in the ATR rule, so it is only closed end consumer credit transactions secured by a dwelling.  They then further restrict it for purposes of the small creditor coverage test to a) those where you have a first lien; and b) those that were sold, etc. (or subject to a commitment to do so).  Used to be a 500 threshold (and they counted all of them, not just those that are sold, assigned, transferred).  Now it will be 2,000, and you don’t count the ones you are retaining in portfolio.  Big difference!  [Don’t forget to count those originated by your affiliates, if you have any.]

Asset size.  The total asset size limit for the creditor and its affiliates that regularly made first lien covered transactions is $2 billion, combined, adjusted annually automatically based on the CPI.  You don’t count your affiliate’s asset size unless it regularly made such loans.  Under the tweaked language, you get to do a lookback of two years if an app was received before April 1 of a year.

The good news about HPML first lien mandatory escrows is they have tweaked another component of that test, too.  In addition to the new way to determine if someone is a small creditor, for purposes of the escrow four tests must be met (asset size, loan volume, as just described), the rural/underserved test (creditor must have extended more than 50% of its total first lien covered transactions secured by properties located in rural or underserved areas, as before, except you get the expanded lookback period for that, too, any time you are dealing with an app received prior to April 1 of a year).

The fourth component of the test to escape mandatory first lien HPML escrows is that neither the creditor nor its affiliate maintains an escrow account for any consumer credit transaction secured by real property or a dwelling that the creditor or affiliate currently services, except l) in a workout situation or 2) where the escrow account was established for first lien HPMLs on or after April 1, 2010 (which is when the mandatory escrows started) and a subsequent date.  Under the current reg, you had to have stopped escrowing new first lien HPMLs before January 1, 2014.  Some banks got tripped up by that requirement and found themselves unable to avail themselves of the escrow exemption.  Now, there’s a second chance to try for the exemption.  Under the version that takes effect 1/1/16, you simply must stop doing the first lien HPML escrows before that date, January 1, 2016 (and meet the other three components of the test, as tweaked).  This gives you time to make decisions about l) whether you qualify for the exemption 2) whether you want to use the exemption) and 3) when your “stop” date is going to be on new apps and refinances.