November 2018 OBA Legal Briefs

• Revocable trusts deposit insurance
• Complaints update
• The loan estimate and “no cost” loans

Revocable trusts deposit insurance

By Pauli Loeffler

A bit over a decade ago, the FDIC made changes to its deposit insurance coverage for trusts. Charles Cheatham wrote about the changes for the October 2008 OBA Legal Briefs, and there have really been no changes since then. However, bankers often have difficulty in knowing whether a particular trust is fully covered, so this article will revisit the topic.

The general rule. So what is the formula for calculating the deposit insurance coverage for trusts? The general rule is that the amount of FDIC insurance is: number of grantors (or owners for informal trusts) times the number of beneficiaries times $250,000 (the Standard Maximum Deposit Insurance Amount or SMDIA). NOTE: NEVER use the number of trustees in determining deposit insurance. For instance, Georgia Brown is the grantor of the George Brown Revocable Trust, but both she and her husband are trustees. The trust has three beneficiaries, so the amount is 1 (grantor) x 3 (beneficiaries) x $250,000 = $750,000 deposit insurance.

Formal and informal trusts. A formal trust is one is evidenced by a written document generally prepared by an attorney for estate planning.  A formal trust, such as the one used in the example above, does not require that the beneficiaries be named in the bank’s records but must be made available by the trustee if the bank fails. The rule is different for informal trusts (POD, ITF, and Totten Trusts) where there is no actual written trust. With informal trusts, the PODs must be in the bank’s records.

Aggregation. Formal and informal trusts are subject to aggregation. Jim and Margaret Anderson are the grantors of the Anderson Family Trust, and their three children, Betty, Bud, and Kathy a/k/a Princess are the beneficiaries of the trust account at your bank. Jim and Margaret also are joint owners of an account and the three children are PODs on that account. The funds in the two accounts will be aggregated in determining deposit insurance coverage. The maximum amount would be 2 x 3 x $250,000 = $1,500,000, as provided under the general rule.

Exception to the general rule. An exception to the general rule comes into play with regard to how the coverage limit is determined when the aggregate amount in revocable trusts exceed five times the SMDIA ($1,250,00) and there are more than five beneficiaries. If there are multiple grantors, the five times SMDIA will be multiplied by the number of grantors/owners. For instance, If there are two grantors/owners the exception will apply when: the aggregate amount in revocable trusts exceeds 10 times the SMDIA ($2.5 million) and there are more than five beneficiaries. Note that both criteria must be met for the exception. For instance, if Fred Flintstone is the grantor of the Fred Flintstone Family Trust which has six beneficiaries, and the amount in the trust is $1,000,000, the exception does not apply since the aggregate amount does not exceed $1,250,000 (five times the SMDIA), so you follow the general rule. Or Jackie, Tito, Jermaine, Marlon and Michael Jackson are the owners of an account with a single POD beneficiary. The exception would not apply since the number of beneficiaries does not exceed five, so again, the account would be subject to the general rule. When the exception does come into play, then you must know the amount each beneficiary is to receive in order to determine whether the entire deposit is covered by FDIC insurance.

Who can be a beneficiary. There is an additional problem in calculating deposit insurance coverage, since who qualifies as a beneficiary for FDIC insurance purposes is different from who can be named as a POD beneficiary under Sec. 901 of the Oklahoma Banking Code. For FDIC insurance, a beneficiary must be a natural person or a charitable or other non-profit entity (tax exempt) under the Internal Revenue Code. On the other hand, Oklahoma allows not only natural persons and charitable/non-profits, but also trusts, to be PODs. If John Smith names his revocable trust as POD, this is fine under Oklahoma POD provisions, but the account will not be considered an informal trust account for purposes of FDIC coverage. If John Smith names Jimmy Jones, Roger Simms, and his revocable trust as POD beneficiaries, it will be an informal trust under state law, but only insured for a maximum of $500,000 rather than $750,000 since the trust is not counted for coverage purposes.

The situation gets even more complicated if the exception to the general rule comes into play because the bank will need to know how much each beneficiary will receive in order to calculate deposit insurance coverage. When there are multiple POD beneficiaries named, Sec. 901 of the Banking Code requires that all beneficiaries receive equal shares, e.g., if there are four beneficiaries, each will receive 25%, so this is simple. However, a formal trust is not subject to the same constraints, and beneficiaries may receive different amounts or percentages.

EDIE. FDIC’s Electronic Deposit Insurance Estimator can be accessed here. In most cases, EDIE will do the math for you and provide the answer, but if the exception discussed above applies, it isn’t designed to calculate coverage. You will have to work it out on paper.

Finally, if one of multiple grantors die, and the trust becomes irrevocable, it remains subject to this section rather than the one covering FDIC insurance for irrevocable trusts. However, the amount of deposit insurance will decrease as a result of the death of a grantor. This will also be true if one of the beneficiaries dies. Sec. 330.3 provides:

(j)  Continuation of insurance coverage following the death of a deposit owner. The death of a deposit owner shall not affect the insurance coverage of the deposit for a period of six months following the owner’s death unless the deposit account is restructured. The operation of this grace period, however, shall not result in a reduction of coverage. If an account is not restructured within six months after the owner’s death, the insurance shall be provided on the basis of actual ownership in accordance with the provisions of § 330.5(a)(1).

The FDIC rule for deposit insurance coverage for trusts as well as other account categories can be found in 12 CFR 330. You should be aware that the FDIC has the final word on coverage. For very complex situations, we recommend the customers contact the FDIC for a determination.

Complaints update

By Andy Zavoina

Complaints from your customers can act as a barometer for their satisfaction with your products and services, as well as the fees you charge for them. Complaints can be an early warning to poor or illegal practices within your bank and this is especially critical when the bank has a third-party vendor selling to the bank’s customers. For these reasons, you have to implement a procedure to recognize and respond to complaints and inquiries as well as keep certain records of them as well as supporting documentation.

Just as the bank keeps records of the complaints it receives, so does your regulator. The Bureau of Consumer Financial Protection (Bureau), which regulates the larger banks and others in our industry is the only one regularly preparing an analysis of these complaints and distributing them to the public. This is important, because it not only allows your bank to compare itself to other banks in the country, but it allows you to compare yourself to other banks in your state. You have the capability to access the Bureau’s database and extract tons of data that you can filter in many, many ways.

Then there are times when the Bureau produces a recap and saves you all that trouble of filtering data. The Bureau recently released its latest update, the October 2018 “Complaint snapshot: 50 state report.” As is typical of the Bureau, it is less focused on a specific and recent period such as 12 or six months of history and instead starts off with the period of January 1, 2015 through June 30, 2018.

This is a high-level overview, but it is an excellent recap of complaints the Compliance Department can use both for information and as a model to present your data and comparisons to the bank’s management and the board. Remember, these are excellent benchmarks for comparison in addition to your own statistics from the prior year or years, and a prior period within the last year. In case you are already wondering, for the period of this Bureau report Oklahoma saw 7,663 complaints. Those of you with banks to the north may be interested in the 5,776 complaints for Kansas or the whopping 92,530 complaints in Texas. Yes, if you have expanded to the Lone Star state you may need more than an Excel spreadsheet. Texas, California and Florida and the three states with more than 100,000 complaints. If you want to handle the fewest complaints, Wyoming is the place to be with only 978 complaints on record. That is just over 23 complaints per month for Wyoming, 2,199 for Texas and a manageable 182 for Oklahoma. Of course, you already see a pattern – the greater a state’s population, the greater its share of the complaints lodged with the Bureau.

Nationwide there were 495,000 complaints in this 42-month period. That is an average of more than 27,000 per month and the same issue is still leading the most popular category, debt collection. Even though the 2016 to 2017 trend shows this declining 4 percent, it still has the largest volume with more than 302,000 complaints.

The biggest issue with debt collections is not the frequency of calls or the rude person demanding money, but about debts not owed. For those collecting debts of third parties, the Fair Debt Collections Practices Act requires a confirmation of the debt or the consumer’s ability to at least contest it. That appears to not be happening as much as it should.

Earlier reports from the Bureau indicate several concerns pertaining to debt collections. In the May 2018 spotlight on debt collections it was noted that 39 percent of the complaints were on debts the consumer said were not owed. There may be some crossover to the second issue below on credit reporting, as many consumer complaints involved debts showing on a credit report that the consumer was not aware of. They often indicated that neither the creditor nor the amount owed were familiar to them. Some consumers said the credit reports were generated before there was any debt confirmation and others said they asked for confirmation but received no response. And then there were those complaints about the communication tactics used. Frequent and repeated calls before 8 a.m. and after 9 p.m. were not uncommon, even after requests were made to not use the telephone for contact any longer.

Even if the bank is not directly subject to the Fair Debt Collections Practices Act, there are many parts of the Act that can be followed as a best practice. It may not be necessary to confirm every debt when the bank knows its borrower, but if the collector is not familiar with the person and the lender cannot provide verification, in this age of identity theft a confirmation is a good foundation for collecting money owed the bank. If a consumer requests that they not be called at a particular place or time, when can they be contacted by phone? If they refuse telephone contact, how else can the bank contact them? In the “olden days” a collector may have been hesitant to give up telephone contact without a fight, but with number blocking a click away for the consumer, this may be a demand the bank yields to quickly today. Sometimes it’s best to get back to the basics, contact the consumer, figure out the cause of the delinquency, determine if those conditions still exist, get a collection application to negotiate repayment terms, and from there see if those terms can be met or if collateral repossession is an option.

Fair Credit Reporting Act issues are now involved in a larger number of complaints per year than debt collections (31 percent as compared to 26 percent) at the Bureau. They have not only overtaken debt collection issues; from 2016 to 2017 they increased by 12 percent. Almost 274,000 complaints filed with the Bureau since 2015 involve incorrect information on a credit report.

Some consumers believed the inaccurate credit reports are a result if identity theft. There were many reports in the 2017 recap alleging consumers contacted the credit bureau and/or the creditor before contacting the Bureau to complain about mis-information on a credit report. In some instances, the proper reports were filed including police reports, but the issues remained. After that, the consumer went to the Bureau, which indicated a good success rate with the credit bureau following standard procedures and correcting errors. There were also complaints about credit scores, as it seems many consumers believe there is one credit score for them. When what they hear from a creditor differs from what they thought they had based on a credit report or an app on their phone, they tend to occasionally complain as well. This category also rose after the Equifax data breach. These related not only to the breach itself, but the confusion over credit freezes, the cost of those credit freezes (these pre-dated the now mandatory procedures we detailed in last month’s Legal Briefs) and the lack of customer support from Equifax.

The third major complaint category includes mortgages. There were 155,000 martgage complaints made since 2015, and 12 percent of the 2017 complaints involved mortgage loans (down from 18 percent the year prior). Making the mortgage payment was the issue 40 percent of the time so this partially relates to the Collections discussion above in addition to servicing issues.

Contacting mortgage servicers was difficult for consumers. They claimed they could not reach a point of contact they were directed to, and that servicers simply do not respond to them, or when they do, inaccurate or incomplete information is provided. Sometimes the servicer simply cannot answer the consumer’s question. Modifying loans through a servicer is problematic and draws complaints, especially when the account is handed from one point of contact to another and there is unclear guidance and documentation concerning requirements for loss mitigation programs.

Loss mitigation programs and collections are typically departments apart from lending. They should have clear policies, procedures and trained personnel. These are typically issues at bigger banks, but similar problems on workout loans can be seen in smaller banks. Training and centralized guidance will help any bank or servicer in this area.

As for credit card accounts, from 2015 through 2017 there were 90,000 complaints and in 2017, they represented 8 percent of total complaints handled by the Bureau. The major problem (22 percent of the time) was with the purchases shown on the periodic statement.

The last major category deals with deposit accounts. Account management was the primary issue 71 percent of the time. Although limited to 88,000 in the three-year period, 8 percent of the 2017 complaints involved deposit products, down from 10 percent in 2016. These problems included unauthorized fund transfers, provisional crediting of accounts, stop payment of preauthorized electronic fund transfers, and resolving errors. Another issue with deposit accounts was the incentive programs often used to capture and retain deposit accounts. When the rules are more detailed and clouded with “if this, then that” decisions than the simple ads made them out to be, consumers are not happy.

A strong Reg E policy and procedures will go a long way to mitigate these complaints. Turnover of bank staff sometimes makes this hard, but training is a key issue followed by easy to follow procedures. As to incentives, following the Keep It Simple method and losing the red tape will help avoid complaints as well as potential Unfair or Deceptive Acts or Practices (UDAP) claims.

Oklahoma followed the national trends with the same five areas of complaints. The following are those areas, the number of complaints from 2015 to 2017, and the percentage of complaints during the last two years:

• debt collection, 2,760 complaints, 33% in 2017, 37% in 2016
• credit reporting, 1,673 complaints, 26% in 2017, 16% in 2016
• mortgages, 930 complaints, 10% in 2017, 14% in 2016
• credit cards, 538 complaints, 7% in 2017, 7% in 2016
• checking/savings, 5 complaints, 33% in 2017, 6% in 2016

Credit reporting was the only area to increase from 2016 to 2017 and that was a 10 percent increase. Part of your internal analysis should be to compare how your bank’s complaints compare to these numbers. That is a question you should be able to answer for management, the board and your examiners.

What can you do with all this complaint data? You analyze it, you discuss it with management, with the board, with different branch locations, business lines and marketing. The bank has within its grasp the ability to read the perceptions customers have of the bank (which may have been shared with the public – your potential customers) in its own complaints data, the Bureau’s database and quite likely on social media. When the bank is aware of these perceived shortcomings, it can counter them with changes when products, services and fees can be improved, or with proactive marketing which counter these perceptions, especially if they are incorrect or incomplete. Lessening the reasons for customer to complain is good customer service and this translates to retention of those customers and a stable income stream, which also allows the bank to sell more accounts and grow. It’s also good for your Community Reinvestment Act program.

The loan estimate and ‘no-cost’ loans

By John S. Burnett

It’s been just over three years since lenders first had to use a loan estimate and closing disclosure to comply with the TILA/RESPA Integrated Disclosure (TRID) rule. Before the October 3, 2015, effective date and since, there’s been a debate over how best (read: compliantly) to prepare the loan estimate for a mortgage loan when the lender is promoting “no-cost” or “low-cost” loans.

Pricing for such loans vary from lender to lender, but the common thread is that the lender waives some or all its own fees and/or pays for common third-party costs, such as the costs of credit reports or appraisals.

Surely, there should be one right way to disclose such a loan! The debate  over whose way is the right way continues. Here are the two approaches that have been advocated:

The minimalist approach. Using the words from § 1026.37(f) and (g) as justification, (e.g., § 1026.37(f)(1):“ …an itemization of each amount…that the consumer will pay to each creditor and loan originator …”), this approach omits from the loan estimate any cost that the lender will not directly impose on the borrower. So, for example, if the lender intends not to charge the borrower for an appraisal, there will be no entry for an appraisal on the loan estimate, although the actual cost of the appraisal will appear on the closing disclosure, either as a specific lender credit or charged to the borrower and offset with a general lender credit.

The ‘costs and credits’ approach. Other lenders are of the opinion that even the costs that the lender will absorb as part of its “no-cost loan” promotions should appear on the loan estimate, so that applicants get the full picture and see costs that are likely buried in pricing for the loan. These lenders also find support for their position in the regulation. The first mention of “no-cost” loans in § 1026.37 or its commentary is in comment 37(g)(6)(ii)-2 (referring to the “Lender Credits” line in Section J of the loan estimate):

2. Credits or rebates from the creditor to offset a portion or all of the closing costs. For loans where a portion or all of the closing costs are offset by a credit or rebate provided by the creditor (sometimes referred to as “no-cost” loans), whether all or a defined portion of the closing costs disclosed under § 1026.37(f) or (g) will be paid by a credit or rebate from the creditor, the creditor discloses such credit or rebate as a lender credit under § 1026.37(g)(6)(ii). The creditor should ensure that the lender credit disclosed under § 1026.37(g)(6)(ii) is sufficient to cover the estimated costs the creditor represented to the consumer as not being required to be paid by the consumer at consummation, regardless of whether such representations pertained to specific items.

When TRID 1.0 was published in 2013, the Bureau offered the following in its discussion on lender credits under section 1026.37(g)(6). You’ll find it in the paragraph starting here.

To merely ignore services that are most likely going to be obtained if a creditor intends to pay for the service would be an unreliable standard for a consumer. Information regarding the services for which the consumer will be likely to pay, either directly or through a higher interest rate, may be useful to consumers when comparison shopping or understanding the nature of the mortgage loan transaction.

Pros and cons of the minimalist approach. Omitting from the loan estimate the costs that the lender intends to pay for the consumer has some positive aspects:

• It’s certainly easier
• It produces a simpler loan estimate
• There’s no concern about providing a larger-than-needed lender credit that can cause problems at closing if costs were overestimated

On the other hand, there is the risk that an examiner will refer to comment 37(g)(6)(ii)-2 and the Bureau’s TRID 1.0 discussion of section 1026.37(g)(6)(ii) and cite the lender for failing to disclose information “regarding the services for which the consumer will be likely to pay, either directly or through a higher interest rate.”

Pros and cons of the “costs and credits” approach. Including on the loan estimate the costs that the lender intends to pay or waive for the consumer avoids the one significant concern about the “minimalist” approach. It may also provide more useful information since the consumer can see how much the lender credits may cost in terms of rate and APR (which may tend to be higher than at competing lenders if costs are “buried” in the loan’s pricing) and may be a more informed shopper for the mortgage loan (to the extent that consumers actually shop).

The challenge when using this approach is to pin down as accurately as possible the costs that will apply to the loan (this is supposed to happen for all loan estimates, anyhow) and to disclose lender credits offsetting the costs to be waived or absorbed without making the credits too high. Some lenders have been known to over-estimate some closing costs to avoid tolerance violations at closing, and when they disclose lender credits to offset those closing costs, have found themselves “hoist on their own petards,” having to honor the estimated lender credit amount, while avoiding tolerance cures on the services themselves. That makes it all the more important to fine-tune the cost estimates and lender credit to avoid cures required from either direction.

Of the two approaches, the “costs and credits” approach is the one supported by the regulation and commentary and is the least vulnerable to being cited by examiners.

Avoiding the lender credits ‘lock-in’

Using the “costs and credits” approach can result in having to honor a high estimate of lender credits if the lender isn’t careful. But lenders don’t have to be “locked in” to their estimated lender credits if they understand that a lender credit estimate can be reduced under certain circumstances. Lenders already know about reducing lender credits in connection with pricing changes, such as the execution of a rate lock, because there is a discussion of those adjustments in comment 19(e)(3)(iv)(D)-1.

Contrary to rumor, a change in interest rate-dependent charges is not the only reason that a revised loan estimate (or closing disclosure) can be used to change the estimated lender credits that will be compared with total actual lender credits at closing to determine good faith tolerance. It happens to be the only example provided in the commentary, but there are other possibilities.

In the prefatory text that accompanied “TRID 1.0” at publication, the Bureau said in its analysis of comment 19(e)(3)(i)-5:

With respect to whether a changed circumstance or borrower-requested change can apply to the revision of lender credits, the Bureau believes that a changed circumstance or borrower-requested change can decrease such credits, provided that all of the requirements of § 1026.19(e)(3)(iv) … are satisfied.

Changed circumstances are enumerated in § 1026.19(e)(3)(iv)(A) and (B), and include:

1. An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
2. Information specific to the consumer or transaction that the creditor relied upon when providing the original [loan estimate] and that was inaccurate or changed after the disclosures were provided;
3. New information specific to the consumer or transaction that the creditor did not relay on when providing the original [loan estimate]; or
4. The consumer is ineligible for an estimated charge previously disclosed because a changed circumstance described in items 1, 2 or 3 affected the consumer’s creditworthiness or the value of the security for the loan.

A borrower-requested change that revises the credit terms or the settlement can cause an estimated charge to increase.

Because lender credits are treated as negative charges to the consumer, a reduction in lender credits is therefore an increase in charges to the consumer. Therefore, if a changed circumstance or consumer-requested change results in a reduced charge for a service that the lender has agreed to pay for with a lender credit, the lender credit can be reduced dollar-for dollar with the cost of the service if the lender provides a revised loan estimate showing the updated costs and reduced lender credit within three business days of learning of the changed circumstance or consumer-requested change.

Here’s an example: The creditor has agreed to pay for the credit reports and appraisal fee in connection with a loan subject to TRID rules. It issues a loan estimate showing a credit report charge of $30 and an appraisal fee of $500, both disclosed costs based on the best information available to the creditor at the time of the loan estimate. A lender credit of $530 was also disclosed. Several days later, the creditor learns that the appraisal will be completed by a new appraiser trying to break into the market at a cost of $400. The creditor provides a revised loan estimate within three business days reflecting the credit report charge of $30 and an appraisal fee of $400, and lender credits of $430. The revised loan estimate successfully adjusts the lender credits amount (which increased the costs to the borrower by $100, to offset the $100 reduction in appraisal costs).

In order to successfully use this method to adjust the estimated lender credits for good faith comparison purposes, the creditor must carefully document that the lender credits on the loan estimate are specific credits for specified costs, document when the creditor learned of the changed circumstance or borrower-requested change that resulted in the reduced specified cost(s), and document when the revised loan estimate was provided.