January 2020 OBA Legal Briefs

• New Home Buyer Savings Account
• CFPB Supervisory Highlights
  • UDAAP & GAP
  • Credit cards
  • Credit reporting (furnishing)

New Home Buyer Savings Account

By Mary Beth Guard

I don’t recall what the last straw was with apartment living, but whatever it was spawned a very strong “we need to get our own house” feeling.  I may or may not have painted the apartment’s dining room a color that horrified our landlord.  It was definitely time to move, but we were young (ish – we were both out of law school) and had no money (we were making spit and had student loans with payments of $139.81 and $264.12 per month – small by today’s standards, but like I said, we were making spit).  We had zippity-doodah saved for a downpayment, so we sought help from Bank of Maternal Parents.  My folks agreed to loan us $5,000 to cover the downpayment and closing costs, paving the way for us to become homeowners.

This trip down memory lane was spawned by studying an amazing new law that went into effect in Oklahoma on January 1, 2020 – the Oklahoma First-Time Home Buyer Savings Account Act.  Oklahoma was one of the first ten states to enact this legislation that provides favorable tax treatment for funds set aside for down payments and/or closing costs, subject to certain parameters.  The best part is that your bank can offer these accounts without taking on a bunch of red tape and you don’t have to police them for compliance with the Act!  Your customers need to know about this tax-advantaged savings vehicle – and you need to know how it all works, so here we go!

First of all, let me just say that the realtor people who pushed this bill through, bless their pointy little heads, did not consult with us on the language.  It appears they used a pre-fab template that was developed in some other state years ago, because the law’s definition of “financial institution” includes entities that don’t exist in Oklahoma, such as “safe deposit company.”  Also, the first state to pass this legislation was Montana, way back in the 90s.  As you may have heard (yes, I am being sarcastic), the laws relating to real estate lending have changed a bit since then.  The text in the bill, however, was not updated to reflect TRID.  Instead of referring to a Closing Disclosure under Regulation Z, it talks about a settlement statement under RESPA!   Nonetheless, I am a huge fan of this new Act.

The law is intended to help first-time home buyers achieve homeownership by providing tax breaks for funds placed in special accounts and ultimately used for downpayment or closing costs by an individual who has never purchased, either individually or jointly, a single-family residence in the State of Oklahoma.  It is codified to Title 46 of the Oklahoma Statutes, Sections 311 through 318.

Before I get into the nitty gritty, let me set your mind at ease about any possible burden on banks from this new law.  There is none!  You don’t have to set up a new type of account for this.  You don’t have to have any new forms to use within the bank.  You don’t need any special wording in your deposit account agreement.  You don’t have to style the account in a special way or worry about whose SSN to use as the TIN.  You don’t have to designate the account as a home buyer savings account in your system or on the contract.  You don’t have to maintain a record of the beneficiary.  You do not need to determine whether the account meets the requirements for a Home Buyer Savings Account.  You have no responsibility for tracking the use of funds in the account or monitoring withdrawals.  You have no reporting obligations under this law.  It’s like this is a behind your back agreement between the taxpayer (account holder) and the Oklahoma Tax Commission.  The Tax Commission is in charge of ensuring the legal requirements are met for the tax breaks to be earned.  How awesome is that?  You simply open an interest-bearing savings account for your customer like any other interest-bearing savings account.  Nothing special from your end.

Your mission, should you choose to accept it, is merely to increase awareness of the new law and its benefits.  Knowing where to point the customer to find the statutes and being able to answer basic questions about the Act will be a great service.

What your customer is going to do is file a form with the Oklahoma Tax Commission, giving that agency all of the necessary information about the account.  The form is Form 588.  It’s an easy one pager.  It can be submitted any time after the account was opened, but no later than April 15 of the year immediately following the calendar year in which the account was opened.  (In other words, it would have to be sent to the Tax Commission by April 15 of 2021 for an account opened this year.)  On the form, they will give information about the account holder(s), when the account was opened, the account number and bank routing number, and the name and SSN of the designated beneficiary.  The form includes a declaration made under penalty of perjury that the information is true, correct, and complete.  The form can be accessed here:  https://www.ok.gov/tax/documents/588-20.pdf  It is a fill-in-the-blank PDF.

There will be other forms (at least one) coming out from the Tax Commission at a later point in time because there is other information that must be provided to the OTC by the accountholder and a form is the most feasible way to handle the submission.  To get the tax breaks, the customer has to submit to the Tax Commission with their Oklahoma income tax return a form that contains detailed information regarding the home buyer savings account.  They will have to list transactions that occurred on the account during the tax year and they will have to furnish a copy of the 1099-INT.  Also, when funds are withdrawn from a home buyer savings account, the accountholder will be required to furnish the OTC a detailed account of the eligible costs toward which the account funds were applied and a statement regarding the amount of any funds remaining in the account.

Funds cannot be withdrawn for any purpose other than eligible costs (again, you do not have to inquire, monitor, track, or worry about this – it’s your customer’s burden).  The customer does have the authority to close a HBSA at one institution and put the money into a HBSA at another institution.

Any individual may establish a home buyer savings account, either as an individual account or a joint account.   The tax breaks go to the account holder.  The account holder may be the person who aspires to be a home buyer themselves, in which case they would name themselves as the qualified beneficiary, or the account holder can instead name someone else as qualified beneficiary.  For example, if this law had been in effect in the ancient time when I was going to buy my first house, my parents could have set up the account and named me as the qualified beneficiary.  That would have given them the tax benefits and provided the funds to me for the eligible costs.  I could have set one up and been both the account holder and qualified beneficiary.  A person may be named qualified beneficiary on more than one account, but the same account holder cannot have multiple accounts for the same beneficiary.

If the account is going to be a joint account, the joint owners must file joint tax returns.  If they file separately, they cannot have a joint Home Buyers Savings Account – they don’t meet the requirements.  Again, that is something the OTC oversees, and is not something you have to ask about or worry with.

Just one qualified beneficiary can be designated on an account.  (That is so smart and it eliminates all kinds of potential problems, such as what would happen if there were two beneficiaries and they got a divorce before the funds could be used to buy a house.  I can imagine all sorts of scenarios where having more than one beneficiary on an account could prove disastrous.)  There is one point in the statute where it refers to multiple beneficiaries, but don’t be misled by that.  It’s in paragraph 5, where it’s talking about all the things a financial institution shall not be required to do.  It says you don’t have to “Designate an account as a home buyer savings account, or designate the qualified beneficiaries of an account…”  The reason it refers to more than one is not because there can be multiple, but because the designated beneficiary can be changed over the life of the account.  Let’s say parents set up an account and name their eldest child, Ted, as the designated beneficiary.  Ted ends up moving to Seattle, so they change the beneficiary designation to their daughter Phoebe who lives here and plans to buy a house here.   There is no limit to the number of times the beneficiary designation can be changed.  There is a space on Form 588 for documenting the change.  Your customer will fill out the form and timely file it with the OTC.  It is totally unlike an authorized signer situation where every time a customer changes an authorized signer you have to be in the big middle of it.

I’ve talked about parents a lot, but let me be clear – anyone can set up this type of account, either for themselves or for any third party.  I helped my niece buy her first house.  If I had another niece or nephew or friend that was going to buy a house in Oklahoma as a first-time home buyer and I wanted to help, this law would give me a powerful incentive to do so by giving me a tax break for my trouble.  .

Looking at the definition of first-time home buyer, several things struck me.  First, the home buyer must reside in this state.  That means that an Oklahoma resident cannot set up this type of account and name a beneficiary who lives outside Oklahoma.

Second, an individual can be a qualified beneficiary if he has never purchased a single family residence.  If he has previously purchased a duplex, triplex, quadraplex, or multi-family dwelling – OR if what he purchased before was not used as his principal residence — he can still be considered a “first-time home buyer.”

Third, previous purchases of a single family residence are only disqualifying if they were in Oklahoma!  If someone lived and owned property in another state previously, it’s the dawn of a new day when they move to Oklahoma.  They could be a qualified beneficiary of a First-Time Home Buyer Savings Account (let’s call it HBSA, okay?) as they begin anew in our state.  In case you’re wondering, the term “single-family residence” means “a single family residence owned and occupied by a qualified beneficiary as the qualified beneficiary’s principal residence, which may include a manufactured home, trailer, mobile home, condominium unit, or cooperative.”  They get a demerit for using the term in the same term’s definition.  Worse than that, because they have tied eligible costs to the settlement statement under RESPA, it is not entirely clear whether the account could be used in connection with the purchase of an unaffixed manufactured home, trailer, or mobile home.  But the question of whether it’s all about the dirt – or not – is not yours to answer.  It’s between your customer and the Oklahoma Tax Commission.  You are not the Home Buyer Savings Account police!

Fourth, the law doesn’t address a situation where two or more people are purchasing property jointly and only one of them would qualify as a first-time home buyer.  I believe the person who meets the definition of first-time home buyer can be a qualified beneficiary of a HBSA, even if their co-purchaser could not be.  Since only one qualified beneficiary is allowed per account, the person who is qualified could be the beneficiary.  Yes, that would inure to the benefit of the other co-purchaser, who is not a first-time home buyer, but that is simply not a problem.

Let’s look at the tax breaks.  There is a deduction and there is an exclusion.  Every dollar contributed to the HBSA (up to $5,000 if the account has an individual owner or up to $10,000 if a married couple filing a joint return owns the account) can be deducted from the account holder’s  taxable income for Oklahoma income tax purposes per tax year.  Interest earned on the account is excluded from the account holder’s taxable income for Oklahoma income tax purposes.

If someone other than the account holder deposits money into the HBSA, that person doesn’t get any tax benefit.

Can this type of account be maintained forever?  No, there is a limited shelf life.  Fifteen years is the maximum.  Any funds in a HBSA that are not expended for eligible cost by December 31 of the last year of a fifteen-year taxable period must thereafter be included in the account holder’s taxable income.

There is also a dollar amount cap on the tax break.  An account holder may claim the deduction and exclusion for an aggregate total amount of principal and earnings not to exceed $50,000.  So, that’s up to $5,000 per calendar year (or $10,000 if it is a joint account), up to a max of $50,000.  For whatever reason, the maximum is the same, whether there are individual accountholders or joint accountholders.

The tax breaks are only earned if the principal and earnings of the account remain in the account until a withdrawal is made for eligible costs related to the purchase of a single-family residence by a qualified beneficiary.  If the accountholder ends up wanting or needing to use the funds for some other purpose – poof goes the tax deduction and exclusion.

What are “eligible costs”?  The down payment and allowable closing costs.  Hmmm.  So what are “allowable closing costs”?  They include any “disbursement listed on a settlement statement for the purchase of a single-family residence in Oklahoma by a qualified beneficiary.”  The term “settlement statement” is a specially defined term.  It means “the statement of receipts and disbursements for a transaction related to real estate, including a statement prescribed under the Real Estate Settlement Procedures Act of 1974, 12 U.S. C. 2601 et seq., as amended, and regulations thereunder.”  What prevents this old moldy reference from being a fatal flaw (in my opinion, and remember that I am not wearing any kind of judicial robe) is that it says “including a statement prescribed under…”  It is an example, an option.  It is not the exclusive document – which is a darn good thing, since RESPA has been displaced as the source for the closing papers.

Can your bank charge a fee for the HBSA?  Yes, and it can be deducted from contributions to the account.

What if the customer dies?  If the accountholder dies, the funds are handled according to the deposit account agreement and law.  If it is a joint account with right of survivorship, the surviving joint tenant becomes the owner by virtue of the survivorship provision in the contract and the account can still be used as a HBSA, but the tax break will max out at $5,000 per year thereafter, rather than $10,000.  Can an account like this have POD beneficiaries?  I see nothing to prevent that because from the financial institution’s standpoint, it is a plain vanilla savings account.  The customer might not even inform you that it is being used by them as a HBSA!  If the customer designates one or more POD beneficiaries, the funds would be paid out to them as normal under Section 901 of the Banking Code.  If the sole accountholder (or sole remaining accountholder) has NOT designated POD beneficiaries, then it’s like any other instance where an individual account owner dies and there are no beneficiaries.  The funds would belong to the estate of the deceased depositor.  It would then either need to go through probate, or if the amount was under $50,000 and the individual did not leave a will, the heirs could get the money after submission of a proper affidavit of heirs under Section 906 of the Banking Code.  If probate is not desired and Section 906 won’t work, the other alternative is for the heirs to see if the other small estate provision – the one in Title 58 of the Oklahoma Statutes, Section 393 – could be applied.

Um, how about the qualified beneficiary if the accountholder is not the beneficiary and the accountholder dies?  Basically, too bad, so sad.  The funds do not pass to the qualified beneficiary.  The funds don’t get held in some sort of limbo waiting for the qualified beneficiary to purchase a house.  They are simply an asset of the dead accountholder’s estate – or property of POD beneficiaries, if there are any.  The Tax Commission takes a hickey, too, to the extent of any tax break the accountholder had already received.  If you know the account is a HBSA and the accountholder is saving the funds for someone else who is a qualified beneficiary, you might want to explain that they have the option to designate the qualified beneficiary (or anyone else) as POD beneficiary.

We think this new account will be very popular!

CFPB supervisory highlights

By Andy Zavoina

The CFPB released its latest Supervisory Highlights in mid-September. This series of documents provides information on enforcement and supervisory actions based on the Bureau’s findings in compliance examinations. The most recent issue covers exam findings between December 2018 and March 2019. Areas of interest included auto loan originations, credit cards, and debt collections. Reviewing the CFPB’s findings is like listening attentively at an exit review after an exam. There are comments on things that were wrong – violations of law – and comments on things that a bank may want to consider twice before doing it again. Often you hear hints about practices that are subjective and sometimes those same practices are major points in the next exam.

UDAAP & GAP

The CFPB expands on the FTC Act’s “UDAP” provisions to add a second “A” for “abusive” acts. The Bureau considers an act or practice abusive if, among other things, the practice takes unreasonable advantage of a consumer’s lack of understanding of the material risks, costs, or conditions of a product or service. In this issue of Supervisory Highlights, the product under discussion is Guaranteed Asset Protection (GAP) insurance, which is often sold but thought by many to be over-priced insurance, especially when compared to a policy purchased directly from an agent rather than as part of a purchase transaction from a vehicle dealer.

GAP coverage is intended to bridge the gap between the collateral’s actual value and the loan amount when the Loan to Value (LTV) ratio is high. Many borrowers have minimal down payments and finance most of the cost of a vehicle. If there is an accident or theft and the vehicle is damaged or stolen, GAP helps pay what the auto insurance does not, based on the value of the vehicle.

What the CFPB found was that lenders sold GAP coverage to borrowers with low LTVs. In these cases, the borrower is paying a high premium for coverage which is not necessary or is of minimal value. By buying this coverage, the consumer is deemed to have demonstrated that “lack of understanding” about a financial product mentioned above. The Bureau felt the lenders took “unreasonable advantage of the consumers’ lack of understanding of the material risks, costs, or conditions of the product.” Yes, this means the financial institutions were found to have violated UDAAP principals. Like an investment professional, lenders need to determine if a product or service is a good fit for the consumer and the loan circumstances warrant the product or service. Some lenders are instead focused on the value of the sale and the income being generated, instead of consumer protections. These lenders have now taken remedial actions to help cure their UDAAP problems – reimbursing consumers for the premiums for GAP coverage they should not have been sold.

What could your bank do to avoid being accused of “abusive” GAP-sales practices? It could ensure lenders are trained to do what is best for the consumer and the bank. Often there is little or no consideration for the consumer as the emphasis is on retail sales. There should be a minimum LTV ratio established below which GAP coverage is not warranted or sold. That’s the message the Bureau sends to the industry with its discussion of overzealous GAP insurance sales, and the lesson to be learned from the mistakes of the lenders whose practices were described in that discussion

Credit cards

Triggering and triggered advertising terms

A basic tenet in compliance is that things like disclosures and advertisements must be “clear and conspicuous.” What the CFPB found in some credit card advertisements were triggered terms that were not clear or conspicuous. This is valuable information for us because we don’t hear a lot of guidance when it comes to advertising, and here the Bureau is discussing enforcement actions.

As a reminder, Regulation Z section 1026.16(b) has triggering terms for advertisement for open-end credit, and the terms that must be disclosed when the triggering terms are used:

When any of the following “triggering” terms is included in an ad—

• The periodic rate used to compute the finance charge or the annual percentage rate;
• A statement of when the finance charge begins to accrue, including the “free ride” period (if any);
• The method of determining the balance on which a finance charge must be imposed;
• The method of determining the finance charge, including a description of how any finance charge other than the periodic rate will be determined; and
• The amount of any charge other than a finance charge that may be imposed as part of the plan.

then the following “triggered” information must also be included—

• Any minimum, fixed, transaction, activity or similar charge that could be imposed;
• Any periodic rate that may be applied expressed as an “annual percentage rate” using that term or the abbreviation “APR;”
• If the plan provides for a variable rate, that fact must be disclosed; and
• Any membership or participation fee.

We are often asked, “can we make the triggered disclosures via a link when using online ads?” The answer is yes. Both Reg DD and Reg Z allow a bank to show the disclosures, clearly and conspicuously, on the ad with the triggering terms, or to have them one-click away. But just as the triggered disclosures must be clear and conspicuous, so must the link to them if that is how they are to be viewed. What the Bureau found was that one or more lenders made consumers click on links that were neither clear nor conspicuous, and then navigate through an online application before being able to see the triggered disclosures. And the application was eight pages long!

When is the last time you reviewed your online advertising?

Offsetting payments

Another credit card issue was offsetting payments. Generally, Reg Z prohibits setoff from a consumer’s deposit account for a credit card debt (See sections 1026.12(d) and 1026.12(d)(2)). Offsets are permitted, but there must be an affirmative agreement with the consumer and it must be in account opening disclosures. Simply saying the bank has the right to setoff will not meet the requirements of the regulation and commentary. For a security interest to qualify for this exception, the consumer must be aware they are granting a security interest, that it is a condition for getting the credit card and they must specifically intend to grant a security interest in the deposit account. This is often done on deposit-secured card accounts.

The Bureau found violations of these requirements. Without proper training and careful labeling of past-due credit card accounts, a collector may believe “he who has the gold, makes the rules,” and that setoff is the right thing to do for a past due account. Have your collectors (and any third-party collectors you use) been trained about the rule against setoff of past due credit card payments? Do you carefully label such accounts so your collectors will know the accounts don’t allow setoffs?

Speaking of secured credit cards, another UDAAP finding was that some secured credit card lenders made false claims that so long as the account was in good standing, after a stated period the secured cards would become unsecured cards. But the card issuers were not releasing their security interests in the accounts.

Yet another credit card issue was found that relates to the “D” UDAAP (for “deceptive”). An act or practice that is “deceptive” includes any practice which “(1) misleads or is likely to mislead the consumer; (2) the consumer’s interpretation is reasonable under the circumstances; and (3) the misleading act or practice is material.” What the CFPB found was that, “…credit card issuer(s) misled or were likely to mislead consumer credit card holders by sending collection letters that suggested that the issuer(s) could repossess consumers’ automobiles, or foreclose on homes, securing loans or mortgages owned by the issuer(s). In fact, the issuer(s) did not repossess any vehicles or foreclose on any mortgages in connection with delinquent credit card accounts, and it was against the policies of the issuer(s) to do so.” So idle threats were made which had no basis of reality and it was a fear tactic which would also violate the Fair Debt Collections Practices Act.

While the UDAAP violations cited in the report involved credit card debt, the principle can apply to other collection activities as well.

Credit reporting (furnishing)

Entities that report information to credit bureaus have certain responsibilities under the Fair Credit Reporting Act. One of those responsibilities is to investigate disputed information. The Bureau found some credit reporters failed to investigate disputes in a timely manner or failed to even complete an investigation.

Remedial action for these violations includes establishing and implementing enhanced monitoring activities, approving policies and procedures that will include compliance with furnisher-specific requirements, and providing validation of all corrective actions.

Summing up

At the end of the day, a bank’s management and compliance officer should ask themselves if any of the issues described in the Bureau’s Supervisory Highlights could apply to their bank and the products and services it offers. Does your bank offer any of the products or services mentioned by the Bureau? Is your bank (or a third party engaged on its behalf) involved in any of the acts or practices cited by the CFPB as a problem? If so, take corrective action before your regulator finds similar problems in an exam.