September 2018 OBA Legal Briefs

• Deposit accounts for minors
• HMDA filing update for small reporters

Deposit accounts for minors

By Pauli D. Loeffler

We get a lot of emails and calls regarding minors as owners on accounts and UTMAs. There are various OBA Legal Briefs articles covering aspects of these accounts in piecemeal fashion, but some of them are not easy to locate, and there are some that pre-date those accessible on the OBA’s Legal Briefs webpage. For your convenience, spawned by my laziness or efficiency depending on your point of view, I decided to cover all aspects of contracting with minors for deposit accounts in this article, and to cover UTMAs in an article in next month’s Legal Update.

Minor’s legal capacity to contract

The Oklahoma statutes governing contracts is found in Title 15, The first thing you need to know is how do you determine when a person ceases to be a minor. This is covered by § 13, which determines who is considered a minor and when the period of minority ends:

• Minors, except as otherwise provided by law, are persons under eighteen (18) years of age.
• The period thus specified must be calculated from the first minute of the day on which a person is born to the same minute of the corresponding day completing the period of minority.

Sections 11 and 12 contain the provisions about capacity to enter into contracts.

15 O.S. § 11

All persons are capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights…

However, § 12 provides: “Minors and persons of unsound mind have only such capacity as is defined by the statutes of this State.” Deposit account agreements, loans, leases, operating agreements, partnership agreements, POD designations, operating agreements for LLCs, and a myriad of other agreements are all contracts. Unless there is a statutory exception granting the minor the legal capacity to enter into the contract, the contract may be unenforceable.

Minor as sole owner

Since July 1, 1997, the Oklahoma Banking Code in Title 6, § 903.1 has provided an exception to the general rules set out above and allows a minor who is the sole owner of a deposit account to have the legal capacity to enter into an account agreement. Note that there is an identical statute in Title 18 that covers Savings Associations (S&Ls). This is what the statute says:

A. Except as otherwise provided by this section, a bank or credit union lawfully doing business in this state may enter into a deposit account with a minor as the sole and absolute owner of the account and may pay checks and withdrawals and otherwise act with respect to the account on the order of the minor. A payment or delivery of rights to a minor who holds a deposit account evidenced by a receipt or other acquittance signed by the minor discharges the bank or credit union to the extent of the payment made or rights delivered.

B. If the minor is the sole and absolute owner of the deposit account, the disabilities of minority are removed for the limited purposes of enabling:

1. The minor to enter into a depository contract with a bank or credit union; and

2. The bank or credit union to enforce the contract against the minor, including collection of overdrafts and account fees and submission of account history to account reporting agencies and credit reporting bureaus.

C. A parent or legal guardian of a minor may deny the minor’s authority to control, transfer, draft on, or make withdrawals from the minor’s deposit account by notifying the bank or credit union in writing. On receipt of the notice by the bank or credit union, the minor may not control, transfer, draft on, or make withdrawals from the account during minority except with the joinder of a parent or legal guardian of the minor.

D. If a minor with a deposit account dies, the receipt or other acquittance of the minor’s parent or legal guardian discharges the liability of the bank or credit union to the extent of the receipt or other acquittance, except that the aggregate discharges under this subsection may not exceed Three Thousand Dollars ($3,000.00).

E. Subsection A of this section does not authorize a loan to the minor by the bank or credit union, whether on pledge of the minor’s savings account or otherwise, or bind the minor to repay a loan made except as provided by subsection B of this section or other law or unless the depository institution has obtained the express consent and joinder of a parent or legal guardian of the minor. This subsection does not apply to an inadvertent extension of credit because of an overdraft from insufficient funds, returned checks or deposits, or other shortages in a depository account resulting from normal banking or credit union operations.

Subsection B above. grants the minor the legal capacity to contract and be bound by the terms of the agreement. It also permits the bank to take legal action to enforce the account agreement contract for overdrafts and charge-offs and report the minor to credit reporting agencies, ChexSystems, etc.  Deposit accounts subject to the statute include DDAs, saving accounts, MMDAs, NOW accounts, and CDs. [Going off topic a bit, but related: A minor CAN have an IRA only if s/he has legitimate earned income in at least the amount of the contribution made to the IRA.]

Note that there is no minimum age for a minor as sole owner of such an account. Most minors are capable of signing the account agreement and signature card by the age of 8, perhaps earlier (but note that a minor who can’t sign the agreement cannot open an account). The bank can determine its own policy on types of deposit accounts a minor as sole owner may have based on the age of the minor.

Subsection C.  gives the parent or legal (“court-appointed”) guardian the ability to restrict transactions by the minor by notifying the bank in writing to require the parent or guardian’s approval of the transaction.  However, this does not mean the parent/guardian is a joint owner or authorized signer on the account who can make transactions. The minor is still the sole owner, and the parent/guardian has no direct access to make transactions on the account.

The relief from the disability to contract due to minority for a deposit account is not all encompassing. The minor cannot designate a POD based on language in subsection D. This restriction makes sense since an unemancipated minor (“emancipation” will be discussed in a subsequent article covering loans to minors) does not have the legal capacity to execute a will to dispose of real and personal property in the event s/he dies. If the minor dies, the bank may pay the parent or legal guardian of the minor an amount not exceeding $3,000 without obtaining an Affidavit of Heirs, and just by obtaining a receipt, the bank is relieved of any liability. If the account(s) held by the minor in sole ownership exceed $3,000, then the Affidavit of Heirs under § 906 of the Banking Code could be used unless the amount exceeds $50,000 or the minor died a resident of a state other than Oklahoma.

The first sentence of subsection E. states that the statute does not cover loans. Since the statute was last amended in 2000 prior to the 2005 Joint Guidance on Overdraft Protection Programs, and because I believe the statute would be narrowly construed by a court, I would not offer a minor as sole owner overdraft protection and certainly not the option to “opt-in” to ODP. I also don’t believe the statute permits the minor to add an authorized signer either. The owner of the account is liable for overdrafts and returned items, but not the signer even if the signer caused the overdraft. We recommend that the bank obtain a guaranty and indemnity agreement from the parent or legal guardian of the minor regarding the account

Another issue with minors, whether the minor is sole owner or not, is issuing a debit card since 1) the statute is silent on whether the minor is relieved of the disability of minority to enter into the debit card agreement, and 2) the statute does not have any effect on Visa/MC age requirements (review your contract).  I suggest that the parent/legal guardian sign the Visa/MC agreement, and guaranty and indemnity agreement of the parent or legal guardian should also specifically cover any debit card issued.

Joint with minor 

I know that most if not all banks offer adult joint with minor accounts, but I really hate them. I regret that a question regarding these accounts instantly makes me ballistic and launch into my standard rant “Why I hate joint with minor accounts: let me count the ways.” Truthfully, there are a lot of issues, but no, they don’t happen frequently. However, the risks and possible liability are real and do happen.

Joint with minor accounts are permitted in Oklahoma under Sec. 901 subsection A. of the Banking Code. Unlike minor as sole owner accounts, there is no statutory provision relieving the minor from the disability of minority allowing the minor to enter into the account agreement nor add authorized signers, PODs, opting into OPD, etc. Further, § 19 of Title 15 provides:

In all cases other than those specified herein, the contract of a minor may be disaffirmed by the minor himself, either before his majority or within one (1) year’s time afterwards; or, in case of his death within that period, by his heirs or personal representatives. Provided, that any minor between the ages of sixteen (16) and eighteen (18) who has paid for any repairing, supplying or equipping on any type of a motor vehicle may disaffirm said contract in like manner only by restoring the consideration to the party from whom it was received.

So, the bank has a contract that is 1) not binding on the minor AND 2) can be voided by a guardian during the child’s minority or disaffirmed by the minor for a year after the minor reaches age 18. For this reason, we recommend the bank always have an indemnity agreement to cover both the period of minority and the one-year period during which the contract may be disaffirmed.

There are also other concerns with this type of account. Let’s say we have a minor who has a job, or is depositing birthday, Christmas, or allowance money into the account. It’s a joint account, and the adult spent the money. Or same situation, but there is garnishment, levy, or attachment against the adult (it is highly unlikely the minor would have creditors issuing these). Poof! The minor’s money is gone. Since the minor lacked legal capacity to enter into a joint account agreement, he could sue the bank if funds he has earned or received as presents are taken by the adult or a creditor of the adult, AND he will have a year after reaching majority to disaffirm the contract and sue the adult and the bank.  Or let’s say the account is overdrawn, and the minor turns 18. Rather than be liable for the overdrafts, he disaffirms the contract. Keep in mind, that because the minor lacked capacity to enter into the joint account agreement, the bank cannot report him to credit bureaus, ChexSystems, etc., or pursue collection of the overdraft.

Now, let’s look at joint with minor accounts from the adult owner’s perspective. The minor as joint owner can withdraw any or all the funds or close the account just as any joint owner can.  The adult has no way to control this other than to close the account before the minor spends all the funds or closes the account. If the account is overdrawn by the minor, the adult’s credit or ability to pass ChexSystems or similar systems will be affected.

But wait there’s more… There are other issues with these joint accounts. Often the adult will request that the minor be the primary on the account, but I recommend the bank’s policy prohibit doing this to prevent the adult, who is the actual source of the funds, from evading taxes. I fully understand that the majority of joint with minor accounts are non-interest bearing and even those that are interest-bearing do not generate much, if any, reportable interest. Usually, the adult is not making the request for an illegal purpose, but I have encountered several instances when the reason for the request is to evade taxes. It is simpler to say, “No, our policy requires the adult be the primary on the account,” rather than discover the MMDA which was opened with a deposit $500 dollars now has a balance of $225,000, or the $5000 CD has over the years been increased at maturity to $400,000, and then having to file a SAR because the bank realizes a crime is being committed.

One question regarding joint with minor accounts that comes up with some frequency is: What should the bank do when the adult dies leaving the minor as sole owner of the account? If the bank offers minor as sole owner of the account, the answer is simple: contact the parent or legal guardian of the minor to get the recommended guaranty and indemnity agreement signed, have the minor sign a new account agreement and signature card, and let the parent or guardian choose whether to restrict the minor’s transactions or not.

On the other hand, if your bank does not offer minor as sole owner accounts, things aren’t quite so simple.  The funds belong to the minor. The same statute that permits joint with minor accounts authorizes the bank to pay the minor. Section 901 provides:

A. When a deposit has been made or shall hereafter be made in any bank in the names of two or more persons, payable to any of them or payable to any of them or the survivor, such deposit, or any part thereof, or any interest thereon, may be paid to either of the persons, whether one of such persons shall be a minor or not, and whether the other be living or not; and the receipt or acquittance of the person so paid shall be valid and sufficient release and discharge to the bank for any payment so made.

The statue says “may be paid…” which indicates that the act is “permitted” rather than “required.” However, the word “shall” is used in the next clause regarding the bank’s liability. In other words, if the bank chooses to pay the minor and minor signs a receipt that s/he has received the funds, the bank IS discharged from any liability for the payment.

Let’s say the surviving minor on the account is old enough to be able to sign his name and the amount in the account is $200. In this situation, I don’t have a problem closing the account and paying the minor in cash or by check. That’s a simple and easy solution for the bank that does not offer minor as sole owner accounts, and the bank is protected by the minor signing the receipt.

On the other hand, let’s say the amount in the account is $25,000, and Jimmy Smith, the minor. is a year or more shy of his 18^th birthday.  Mom shows up at the bank without Jimmy wanting a check. The funds belong to Jimmy, not to Mom. The check will have to be made payable to “Jimmy Smith, a minor,” and Jimmy isn’t there to sign a receipt to protect the bank. You can suggest that rather than having to make Jimmy come in, the bank will be happy to open a UTMA for Jimmy with Mom as the custodian. But let’s say the bank knows Mom has a gambling problem, creditors after her, or has had one or more charged off accounts or loans with your bank, and Mom isn’t likely to comply as a fiduciary and use the funds solely for Jimmy’s benefit. If Jimmy is an older teen and Mom brings Jimmy in to sign the receipt, at least you can advise him that the money is his, not his Mom’s or anyone else’s. In an extreme case, the bank could interplead the funds, and the court would order a UTMA that would restrict any withdrawals without a further order of the court until the minor reached age 18, at which point most such court-ordered UTMAs direct the bank to pay the aged-out minor directly.

I will note this problem also presents itself when a minor is named as POD. One way to avoid this situation is to suggest the account owner include language like the following in the POD designation: “Jane Doe, as custodian for Jimmy Smith under the Oklahoma Uniform Transfers to Minors Act.” It is a good idea to add a successor or alternate custodian using the following language: “If Jane Doe dies, is incapacitated, declines the appointment, or resigns, then William Brown shall be the successor custodian.” In the event, Jimmy is already age 18 when the owner dies, the bank will pay Jimmy directly since a UTMA cannot be created if the person is over the age of 18.

Next month, I’ll address the other major type of account for minors, the UTMA (Uniform Transfers to Minors Act) account.

HMDA filing update for small reporters

By Andy Zavoina

A lot has happened to HMDA filing for small reporters under Section 104 of EGRRCPA, the Economic Growth, Regulatory Relief and Consumer Protection Act (f/k/a S.2155) since June. Section 104 modifies the Home Mortgage Disclosure Act so that a bank originating fewer than 500 closed-end mortgages and fewer than 500 open-end mortgages in each of the last two years with a Satisfactory or better CRA rating won’t need to report the new data fields added for loans and applications with final action dates in 2018. This allows small reporter banks to avoid the in-depth reporting requirements.

Since June the agencies first issued guidance (OCC Bulletin 2018-19) that began to address the Loan Application Register (LAR). The agencies devised an obvious “fix” that many in the industry had overlooked. Instead of two separate LAR formats – one for regular reporters and one for small reporters, new entry codes will be used by the partially exempt filers to indicate the bank is exempt from reporting a field’s data. This was an excellent solution for software vendors and banks alike as the only updates required are field codes.

Two resources all HMDA banks should have are the Guide to HMDA Reporting 2018 edition (https://www.ffiec.gov/hmda/guide.htm) and the latest HMDA Filing Instruction Guide (FIG) which was updated last month, August 2018 (https://s3.amazonaws.com/cfpb-hmda-public/prod/help/2018-hmda-fig-2018-hmda-rule.pdf).

Another key document which should be read and saved is the August 31, 2018, final rule (https://files.consumerfinance.gov/f/documents/bcfp_hmda_interpretive-procedural-rule_2018-08.pdf) issued by the Bureau of Consumer Financial Protection. This 31-page document will clarify the requirements of HMDA revisions made by Section 104(a) of the EGRRCPA.

Bankers have asked about optionally reporting data. While this is permissible, we need to ask “why?” From the final rule, “Accordingly, the HMDA platform will continue to accept submissions of a data field that is covered by a partial exemption under the Act for a specific loan or application as long as those insured depository institutions and insured credit unions that choose to voluntarily report the data include all other data fields that the data point comprises. For example, if a partially exempt institution reports a data field that is part of the property address data point (such as street address) for a partially exempt loan or application, it will report all other data fields that are part of the property address data point (including zip code, city, and State) for that transaction in accordance with the 2018 FIG.”

If a bank has the option to enter the code for being exempted, why take any unnecessary risk that an error will be made when voluntarily reporting data? There is the requirement that more than perhaps just one field must be completed, and this increases the risks of there being an error.

In fact, the final rule clarifies several points in section IV. Permissible Optional Reporting. The Bureau believes some banks may opt to complete the LAR as though it was not exempt as a precaution. Whether a partial exemption applies to a bank’s lending activity for the current calendar year depends on its origination activity in each of the preceding two years and, in some cases, this cannot be determined until just before data collection must begin for the current calendar year. For example, whether a partial exemption applies to closed-end loans for which final action is taken in 2019 depends on the number of closed-end loans originated by the bank in 2017 and 2018. So, the bank might not know until the end of 2018 what information needs to be collected in 2019 for reporting in 2020. Compliance officers will need to work closely with Loan Administration on the current counts of applicable loans and with management as it projects loan volumes for these products in the coming year as well. Before the year end, based on real numbers and projections it may be necessary to train staff proactively for any new reporting requirements through a loss of exemption, unless the bank opts to report voluntarily. So, the choice is yours to accept the risk of errors when reporting voluntarily, or to rush staff into year-end training in preparation for anticipated reporting requirements in the next calendar year.

It should be pointed out here that none of the data points covered by the partial exemption call for information that is normally not available in a mortgage loan file. The real difference in procedures between full filing HMDA reporters and partially exempt small reporters is the extraction of the information for the data points covered by the partial exemption and inserting the information in the HMDA data file.

V. Loans Counted Toward Partial Exemptions’ Thresholds clarifies that only loans and lines of credit which are otherwise HMDA reportable contribute to the threshold exemption count.

Section 104(a) does not define a “closed-end mortgage loan” or an “open-end line of credit.” It does not specify whether these terms include loans or lines of credit that would otherwise not be subject to HMDA reporting. The Bureau believes that the terms “closed-end mortgage loan” and “open-end line of credit” as used in the Act are best interpreted to include only those closed-end mortgage loans and open-end lines of credit that would otherwise be reportable under HMDA. This is information Loan Administration needs in providing Compliance with the contributing loan count mentioned earlier.

VI. Data Points Covered by the Partial Exemptions defines the data points exempted banks will not have to report. There is a table on page 18 of the final rule, linked above, that depicts the applicable and exempt data points. There are 26 data points listed in the first column of the table which fall under the exemption:

• Universal Loan Identifier (ULI)
• Property Address
• Rate Spread
• Credit Score
• Reasons for Denial (except for OCC-regulated banks – see below)
• Total Loan Costs or Total Points and Fees
• Origination Charges
• Discount Points
• Lender Credits
• Interest Rate
• Prepayment Penalty Term
• Debt-to-Income Ratio
• Combined Loan-to-Value Ratio
• Loan Term
• Introductory Rate Period
• Non-Amortizing Features
• Property Value
• Manufactured Home Secured Property Type
• Manufactured Home Land Property Interest
• Multifamily Affordable Units
• Application Channel
• Mortgage Loan Originator Identifier
• Automated Underwriting System
• Reverse Mortgage Flag
• Open-End Line of Credit Flag
• Business or Commercial Purpose Flag

Those data points will still be in the filing format (small reporters will use the same HMDA filing format used by all other HMDA filers), but each of those data points will have a new valid input value – either “Exempt” for alphanumeric fields or  “1111” for numeric-only fields –-  to signify that the reporter qualifies for the partial exemption and is not reporting the data point.

OCC-regulated institutions will be required to complete the data points for Reasons for Denial, even if they qualify for the partial exemption, because the OCC requires that information to be included under its own separate rule.

The 22 data points shown in the second column on page 18 of the final rule are those that are still required to be reported by all reporting banks:

• Application Date
• Loan Type
• Loan Purpose
• Preapproval
• Construction Method
• Occupancy Type
• Loan Amount
• Action Taken
• Action Taken Date
• State
• County
• Census Tract
• Ethnicity
• Race
• Sex
• Age
• Income
• Type of Purchaser
• HOEPA Status
• Lien Status
• Number of Units
• Legal Entity Identifier

The Bureau will still require that each loan be assigned a unique ID number (a Non-Universal Loan Identifier, or NULI) that can’t be reused for any purpose. It isn’t a Universal Loan Identifier and doesn’t have to include the bank’s Legal Entity Identifier or check digits. It can be up to 22 characters long (including any check digit), using letters, numerals or a combination of letters and numerals, but must be unique within the reporting institution, and must not include any information that could be used to directly identify that applicant or borrower (such as name, date of birth, SSN, official government-issued driver’s license or identification number, alien registration number, passport number, or employer or taxpayer identification number). Use of a check digit as part of the NULI is optional.

Partially exempt filers can use the NULI to complete the ULI data point for each loan reported. As noted in the second list above, all reporters, including those with the partial exemption, will still need to use their Legal Entity Identifier to identify themselves (it replaces the Respondent ID in pre-2018 filings).

Disqualification for exemption by CRA ratings

A bank is not eligible for the partial exemption if it has received a rating of “needs to improve” for each of its two most recent CRA evaluations, or a rating of “substantial noncompliance” on its most recent evaluation. Under the Bureau’s interpretive and procedural rule, each institution must check its two most recent CRA ratings as of December 31 of the preceding year to determine whether it can use the partial exemption.

For example, in 2020, the preceding December 31 is December 31, 2019. If the bank received a rating of “needs to improve” during each of its two most recent CRA evaluations that occurred on or before December 31, 2019, the bank is not eligible for the special exemption during 2020.

Similarly, if the bank received a “substantial noncompliance” rating in its most recent CRA evaluation on or before December 31, 2019, it will not be eligible for the partial exemption in 2020.

Effective Dates

The amendments to HMDA made by section 104 of EGRRCPA became effective on enactment, May 24, 2018. The Interpretive and Procedural Rule was effective on publication in the Federal Register, on September 7, 2018.  Despite the May 24 and September 7 effective dates, section 104 of EGRRCPA relieves banks and credit unions that are eligible for a partial exemption under the Act of the obligation to report certain data in 2019 that may have been collected before May 24, 2018. So, a partial exemption covers all applications and loans with final action dates on or after January 1, 2018, for eligible reporters.