August 2021 OBA Legal Briefs

August 16, 2021

Reg Z’s business day definitions
Advance Child Tax Credits and closed accounts
2021 Oklahoma legislation—Part I

Reg Z’s business day definitions

By John S. Burnett

Why Juneteenth caught lenders unprepared

Congress clearly doesn’t know (or care?) that two days’ notice isn’t enough to give lenders when they pass legislation creating a new federal legal public holiday. The kerfuffle that erupted over the addition of the Juneteenth National Independence Day to the list of holidays in 5 U.S.C. 6103(a) may not have ruffled Congress’s legislative feathers, but it raised a lot of questions among lenders, compliance officers, closing agents, investors and, yes, borrowers.

Why? Because it affected many mortgage loans for which closing disclosures had already been provided in the days immediately before the law was enacted on July 17, with closing dates set for early the following week. It also eliminated Saturday, June 19, as a business day for the purpose of counting rescission period days on loans that had closed on June 16 and 17.

In short, some lenders had to postpone closings by a day or more and others had to delay disbursement of loan proceeds, and, of course, borrowers weren’t happy that the new holiday forced those scheduling changes. For lenders who, for whatever reason, were not able to make the right moves, the risk is very real of litigation down the road over technical timing requirements in Regulation Z.

There is talk – or wishful thinking – that the CFPB can “fix” everything with an interpretation or ruling about the impact of the new holiday on mortgage loans closed with unavoidable errors. However, the Bureau can do what it can, but the courts will ultimately decide whether lenders’ concerns are real, and at what cost.

The “business day” definitions

The key to complying with any law or regulations is an understanding of its terms. That’s why there is usually a collection of important definitions, and for regulations, it is usually found in one of the first sections of the rule.

Regulation Z has so many technical timing requirements that include a count of business days that it should be no surprise that “business day” is a defined term in the regulation. In fact, there are two definitions of the term, and which definition applies in a given case depends on which timing requirement in the regulation is in question.

Regulation Z’s definitions of “business day” are found in section 1026.2(a), in paragraph 1026.2(a)(6), which includes two sentences.

The “general” definition. The first sentence of the paragraph reads—

Business day means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions.

What does that sentence mean by “substantially all of its business functions”? Comment 2(a)(6)-1 explains—

Business function test. Activities that indicate that the creditor is open for substantially all of its business functions include the availability of personnel to make loan disbursements, to open new accounts, and to handle credit transaction inquiries. Activities that indicate that the creditor is not open for substantially all of its business functions include a retailer’s merely accepting credit cards for purchases or a bank’s having its customer-service windows open only for limited purposes such as deposits and withdrawals, bill paying, and related services.

So, for example, if your bank’s branches are open on Saturdays for handling deposits, check cashing, withdrawals and other routine teller responsibilities, but there are no staffers who can disburse loan proceeds, handle inquiries about loans or loan rates or open new accounts, your bank is not “open to the pubic for carrying on substantially all of its business functions,” and Saturday would not be a business day for your bank under the business day definition in the first sentence of section 1026.2(a)(6).

But if during your Saturday teller hours there is someone at all or most of your branches to open accounts, make loan disbursements and handle credit transaction inquiries, Saturdays would be a business day for your bank.

The term “business day” appears 72 more times in the text of the full regulation (excluding the Official Interpretations in Supplement I). This general definition — a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions — applies to most of those uses of the term.

However, there are thirteen sections or paragraphs of the regulation in which “business day” is used where the “precise” definition for “business day” is used. Those sections and paragraphs are listed in the second sentence of paragraph 1026.2(a)(6), which reads—

However, for purposes of rescission under §§ 1026.15 and 1026.23, and for purposes of §§ 1026.19(a)(1)(ii), 1026.19(a)(2), 1026.19(e)(1)(iii)(B), 1026.19(e)(1)(iv), 1026.19(e)(2)(i)(A), 1026.19(e)(4)(ii), 1026.19(f)(1)(ii), 1026.19(f)(1)(iii), 1026.20(e)(5), 1026.31, and 1026.46(d)(4), the term means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C, 6103(a), such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, [Juneteenth National Independence Day,] Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

(I added Juneteenth to the list in the regulatory text.)

There are two important lists in that sentence:

The list of sections where the “precise” definition applies
The list of legal public holidays

The affected Regulation provisions: Here’s a list of the affected Reg Z sections with a brief description of each:

1026.15 – Counting the three business days in the rescission period for certain open-end credit extensions for which there is a security interest in a consumer’s principal dwelling
1026.23—Counting the three business days in the rescission period for certain closed-end credit transactions secured by a consumer’s principal dwelling
1026.19(a)(1)(ii)—Counting the presumed three business days by which a consumer is deemed to have received good faith estimate disclosures in connection with a consumer’s application for a reverse mortgage to be secured by the consumer’s dwelling, if the disclosures are mailed to the consumer. The consumer cannot be charged a fee (except for the cost of a credit report) before the consumer receives (or is deemed to have received) the disclosures.
1026.19(a)(2)—Those good faith estimate disclosures must also be delivered in person or placed in the mail not later than the seventh (precise definition) business day before consummation of the reverse mortgage loan. The precise definition is also used in counting three business days before consummation (and the presumed three-day delivery time if sent by mail) that a revised disclosure must be received if the APR in the early disclosures becomes inaccurate.
1026.19(e)(1)(iii)(B)—Counting the seven business days before consummation to determine the latest day the creditor may send a TRID loan estimate (except for loans secured by a timeshare interest).
1026.19(e)(1)(iv)—If a TRID loan estimate is not provided to the consumer in person, counting the three business days until the consumer is considered to have received it after it was delivered or placed in the mail
1026.19(e)(2)(i)(A)—The consumer in a TRID transaction cannot be charged a fee (other that for a credit report) before the consumer has received the loan estimate and has expressed an intent to proceed with the transaction described in the loan estimate. Section 1026.19(e)(1)(iv) just above requires that, if the loan estimate isn’t given in person, the consumer is considered to have received the loan estimate three (precise) business days after delivery or mailing.
1026.19(e)(4)(ii)—Counting the four business days before consummation by which the consumer must receive any required revised loan estimate and counting the three business days after non-in-person delivery by which the consumer is considered to have received a revised loan estimate.
1026.(f)(1)(ii)—Counting three business days before consummation to determine when the consumer is required to have received the TRID closing disclosure.
1026.19(f)(1)(iii)— If the TRID closing disclosure isn’t given in person, counting the three business days after placing them in the mail by which the consumer is considered to have received them.
1026.20(e)(5)—Counting business days for the timing requirements for disclosures involved when closing a consumer’s mortgage escrow account.
1026.31—Counting the three business days prior to consummation or account opening by which the creditor must provide disclosures required by § 1026.32 for a high cost mortgage or by § 1026.33 for a reverse mortgage
1026.46(d)(4)—Counting the three business days after which a required disclosure for a private education loan is mailed to a consumer that the consumer is considered to have received the disclosure.

The public legal holidays. There are now 11 public legal holidays and 52 (or 53) Sundays that are not business days (even if your bank is open for all purposes) when the precise business day definition in Regulation Z applies. Six of those holidays —the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Labor Day, Columbus (or Indigenous Peoples) Day, and Thanksgiving Day—are always weekdays (five Mondays and one Thursday), and have not caused anyone any confusion.

The other five public legal holidays fall on designated dates—January 1, June 19, July 4, November 11, and December 25—that can occur on Saturday or Sunday. When one of these holidays falls on Saturday, it is often observed the previous Friday, especially by federal employees. In those cases, whether or not the Federal Reserve Banks are closed (they normally are open under these circumstances) the observed holiday (Friday) is a business day when the precise business day definition is applied. The actual holiday (Saturday in such cases) is not a business day when the precise business day definition is applied, even if your bank is fully operational.

When one of the five designated dates occurs on Sunday (Juneteenth and Christmas in 2022, New Year’s Day in 2023), it is often observed on the following Monday, especially by federal agencies and offices. In such cases, the actual holiday is not a business day (both because it is one of the 11 public legal holidays and because it is a Sunday); the observed holiday on Monday (June 20 and December 26 in 2022, and January 2, 2023) is a business day when the precise business day definition applies, even though all Federal Reserve Bank offices will be closed.

For those of you who have read comment 2(a)(6)-2 and note that it says nothing about a designated date public legal holiday falling on Sunday, I agree. The Fed, when it added that little clarifying example of July 4 occurring on Saturday, ignored the fact that it also falls on Sundays with a Monday observance (as it did in 2021). In a phone conversation with a CFPB representative on Friday, July 2, I was assured that Monday, July 5 would be a business day.

In that conversation I suggested that the CFPB will probably be issuing an amendment to § 1026.2(a)(6) and comment 2(a)(6)-2 to add Juneteenth National Independence Day to their lists (hopefully they will make those amendments before Juneteenth arrives in 2022), and that when they make those amendments it would be the perfect opportunity to add an example to the commentary of one of the five designated date holidays (Juneteenth would be the perfect example to use) falling on Sunday. We’ll have to wait and see if the powers that be at the Bureau agree with that logical suggestion.

Don’t use the Reg Z definition elsewhere

Some of you may already be anticipating where this is going, and you’re wondering, “What about Regulation CC and its definition of “business day?” And this is the perfect time for the warning: Never “borrow” a definition from one regulation and apply it to a different regulation. It is a recipe for confusion (or worse) to do so.

Regulation CC is the perfect example, since it has its own “business day” definition in § 229.2(g):

Business day means a calendar day other than a Saturday or a Sunday, January 1, the third Monday in January, the third Monday in February, the last Monday in May, July 4, the first Monday in September, the second Monday in October, November 11, the fourth Thursday in November, or December 25. If January 1, July 4, November 11, or December 25 fall on a Sunday, the next Monday is not a business day.

Do you see the differences between this definition and either definition in Regulation Z?

It can never be a Saturday or a Sunday.
It doesn’t matter whether your bank is open for substantially all business (it does matter in the definition of “banking day”).
If one of the designated-date holidays occurs on a Sunday, the next Monday is not a business day (because the Fed isn’t open for check clearing, etc.)

The same list of public legal holidays is included in both regulations. The Fed should be amending the definition at some point to add Juneteenth to that list in Regulation CC (but, given the Fed’s track record on keeping the regulation current, I won’t hold my breath).

Advance Child Tax Credits and closed accounts

By John Burnett

The IRS started sending direct deposits of Advance Child Tax Credits (ACTC) on July 15, 2021. Additional ACTC credits will be sent on August 13, and the 15^th of each month from September through December 2021.

Some of the direct deposits will be directed to accounts that have been closed by the depositor or the bank. This will probably mean that people in some banks will start thinking about “offsets.” But don’t go there!

Treasury regulations require that direct deposits of federal benefit payments directed to closed accounts be returned. The IRS will reissue the payments in check form. A bank cannot legally “reopen” a closed account to accept such a payment, and the payment cannot be diverted to recover on a charge-off. The payments should be returned even if the recipient has another account with your bank.

The IRS has an online tool – the Child Tax Credit Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal — for taxpayers to use to update bank account information.

2021 Oklahoma legislation – Part I

By Pauli D. Loeffler

Legislation was enacted amending two sections in the Oklahoma Banking Code (Title 6) and an entirely new section was added. The effective date for the amendments and the new section is November 1, 2021.

§ 901 – POD beneficiaries.

The amended provisions of this statute are emphasized.

2. A deposit account with a P.O.D. designation shall constitute a contract between the account owner, (or owners, if more than one) and the bank that upon the death of the last surviving owner of the account, and after payment of account proceeds to any secured party with a valid security interest in the account, the bank will hold the funds for or pay them to the named primary beneficiary or beneficiaries if living. If a primary beneficiary predeceases the account owner, the share of that primary beneficiary shall be distributed pursuant to either paragraph 4 or 5 of this subsection, whichever is applicable.

3. Each P.O.D. beneficiary designated on a deposit account shall be a primary beneficiary unless specifically designated as a contingent beneficiary.

4. If there is only one primary P.O.D. beneficiary on a deposit account and that beneficiary is an individual, the account owner may designate one or more contingent beneficiaries for whom the funds shall be held or to whom the funds shall be paid if the primary beneficiary is not living when the last surviving owner of the account dies. If there is more than one primary P.O.D. beneficiary on a deposit account, contingent beneficiaries shall not be allowed on that account.

5. If the sole primary P.O.D. beneficiary is not living and one or more contingent beneficiaries have been designated as allowed by paragraph 4 of this subsection, the funds shall be held for or paid to the contingent beneficiaries who are alive at the time of the account owner’s death in equal shares, and shall not belong to the estate of the deceased primary beneficiary. If neither the primary beneficiary nor any contingent beneficiary is living at the time of the account owner’s death, the funds shall be paid to the account owner’s estate…

7. If only one primary P.O.D. beneficiary has been designated on a deposit account, the account owner may add the following, or words of similar meaning, in the style of the account or in the account agreement:

“If the designated P.O.D. beneficiary is deceased, then payable on the death of the account owner to (Name of Beneficiary), (Name of Beneficiary), and (Name of Beneficiary), as contingent beneficiaries, in equal share.”

8. Adjustments may be made in the styling, depending upon the number of owners of the account, to allow for survivorship rights, and the number of beneficiaries. It is to be understood that each beneficiary is entitled to a proportionate share of the account proceeds only after the death of the last surviving account owner, and after payment of account proceeds to any secured party with a valid security interest in the account. All designated primary P.O.D. beneficiaries shall have equal shares. All designated contingent P.O.D. beneficiaries shall have equal shares as if the sole primary beneficiary is deceased. In the event of the death of a beneficiary prior to the death of the account owner, the share of that beneficiary shall be divided among any surviving beneficiaries or distributed to contingent beneficiaries pursuant to paragraphs 4 and 5 of this subsection, if applicable. If no beneficiaries are alive at the time of the account owner’s death, the funds should be held for, or paid to, the estate of the deceased account owner…

12. Subsequent to the effective date of this act, a bank shall provide a customer creating a P.O.D. account with a written notice that the distribution of the proceeds in the P.O.D. account shall be consistent with the provisions of this section.

What you need to know:

First and most importantly, the changes apply ONLY with regard to POD beneficiary designations made on or after November 1, 2021. They do not apply to existing POD designations, so it is critical to take into account the date the POD designations were made in order to comply with the statute.
If only one natural person is named as POD beneficiary, the owner may name contingent beneficiaries. if a tax-exempt § 501(3)(c) beneficiary or a trust is named as POD beneficiary, no contingent beneficiaries can be named. These statements apply under both the current version of § 901 and the amended version.
If two or more natural persons are named as POD beneficiaries and one of them predeceases the last surviving owner of the account, under the current version of § 901 the funds will be split equally among the living PODs and the estate of the predeceasing POD beneficiary. Under the amended version, only those PODs alive at the time the last surviving account owner dies will receive equal shares.
If there is only one natural person named as POD beneficiary who predeceases the last surviving account owner and contingent beneficiaries are named, the contingent beneficiaries who are alive at the time the last account owner dies will receive equal shares under the amended statute as opposed to the current statute under which the estate of a predeceasing beneficiary would receive a share.
If all primary beneficiaries predecease the last surviving owner, the funds belong to the owner’s estate under the amended statute, Likewise, this is the result if the sole primary beneficiary and all named contingent beneficiaries predecease the owner.

§ 906 – Transfer of deposits or contents of safe deposit boxes to heirs.

Again, I have emphasized the amendments to this statute.

A. 1. When a deposit has been made in a bank or credit union in the name of a sole individual without designation of a payable-on-death beneficiary, upon the death of the sole owner of the account if the amount of the aggregate deposits held in single ownership accounts in the name of the deceased individual is Fifty Thousand Dollars ($50,000.00) or less, the bank or credit union may, without a requirement that heirs open an additional account, transfer the funds to the known heirs of the deceased upon receipt of an affidavit sworn to by the known heirs of the deceased which establishes jurisdiction and relationship and states that the owner of the account left no will; provided, however, that no probate proceedings are pending. The affidavit shall be sworn to and signed by the known heirs of the deceased and the same shall swear that the facts set forth in the affidavit establishing jurisdiction, heirship and intestacy are true and correct. The affidavit may contain a clause indemnifying the bank from any damages related to the release of funds. In the event the account is subject to pending probate proceedings, the release of the deposits in the account shall be determined by the court.

2. Upon the death of an individual who is the sole renter of a safe deposit box in a bank or credit union, the bank or credit union may open the box in the presence of all known heirs and transfer or release the contents to such heirs upon receipt of an affidavit which establishes jurisdiction and relationship to the deceased and states that the renter of the safe deposit box left no will or that the contents of the safe deposit box are the only known assets of the deceased renter. The affidavit shall be sworn to and signed by the known heirs of the deceased and the same shall swear that the facts set forth in the affidavit establishing jurisdiction, heirship and intestacy or that the contents of the safe deposit box are the only asset of the deceased are true and correct. Every known heir shall either be present in person or by a duly authorized agent. If any known heir is unable to be physically present for the opening of the box and transfer of the contents, such heir may appoint an agent by executing authorization in writing in the following form: “I hereby authorize (name of person) to act as my agent at the opening and transfer of contents of safe deposit box (number or other identification) at (name of financial institution).” The authorization form shall be signed and dated by the heir and notarized. The bank or credit union may impose its standard fee for drilling the box if the heirs cannot provide the key for opening.

B. Receipt by the bank or credit union of the affidavit described in subsection A of this section shall be a valid and sufficient release and discharge to the bank or credit union for any transfer of deposits or contents made in good-faith reliance on the affidavit and shall serve to discharge the bank or credit union from liability as to any other party, including any heir, legatee, devisee, creditor or other person having rights or claims to funds or property of the decedent, and include a discharge of the bank or credit union from liability for any estate, inheritance or other taxes which may be due the state from the estate or as a result of the transfer.

C. Any person who knowingly submits and signs a false affidavit as provided in this section shall be fined not more than Three Thousand Dollars ($3,000.00) or imprisoned for not more than six (6) months, or both. Restitution of the amount fraudulently attained shall be made to the rightful beneficiary by the guilty person.

Unlike the amendments to § 901, the amendments should have little or no impact on banks. If a) the aggregate deposits held in sole ownership without PODs do not exceed $50,000, b) the customer died a resident of Oklahoma, and c) did not have a will, the affidavit under § 906 was and is available for authority to disburse the funds. If there is a will, or the customer died a resident of another state, then an affidavit under this section is not an option, but the Affidavit under § 393 of the Oklahoma Probate Code (Title 58) might be used both for deposits and safe deposit boxes, if all conditions of that statute are met. I note that under the probate code the Affidavit requires a statement that there is no pending probate. Unlike an Affidavit submitted under § 393, the bank does not face liability for refusing to accept an affidavit under § 906 of the Banking Code for either deposits or safe deposit box contents.

I am mystified by some of the additional language. For instance, I have no clue why “without a requirement that heirs open an additional account” was added. I assume that some banks or credit unions may have had such a requirement that I didn’t know about. Allowing the bank to include an indemnity clause was not prohibited under the current statute, and in light of the provisions under subsections B. and C, I am not sure this change was needed. I note that charging a drilling fee was not prohibited under the prior version.

§ 909 – Powers of Authorized Signer — Form for Additional Powers

This is an entirely new statute. You may access both the statute and the form here.

A. Unless the deposit agreement states otherwise, an authorized signer on a deposit account shall have the following powers, regardless of whether the account is a consumer or commercial account:

1. Sign checks;

2. Make deposits of checks payable to the account owner into the account;

3. Make cash deposits into the account;

4. Obtain an account balance;

5. View copies of checks he or she has signed; and

6. Obtain deposit slips when making a deposit.

B. If additional authority is not expressly granted in the deposit account agreement, additional powers may be granted in writing by the owner of the account. If the account is an individual account, the owner may execute an additional authorization document. It must be dated and in writing and may be revoked or amended at any time by the account owner. If there are multiple owners, all must execute the additional authorization document. If the account is owned by an entity, the entity must approve the grant of additional powers in the same manner as it appoints authorized signers.

C. A customer may initial next to the additional powers to be granted and line through those that are not being granted, pursuant to subsection D of this section.

Form for Additional Powers for Authorized Signer:

I, the undersigned account owner or duly empowered representative of the account owner, hereby grant and approve the following additional powers for authorized signer(s) on account

# _______________________. Bank name ______________________.

____________ Obtain and use a debit card or automated teller machine card

____________ Obtain copies of statements on the account from the bank

____________ Order checks

____________ Obtain copies of checks or other transactions on the account

____________ Authorize or terminate automated clearing house debits to the account

____________ Complete affidavits of forgery

____________ Initiate a change of address for the account

____________ Withdraw cash up to $___________

____________ Dispute a card transaction on the account

____________ Report a lost or stolen card on the account

____________ Use online banking to view transactions on the account

____________ Set up online bill payments

____________ Use the mobile app to access information about the account.

Important points. The list of powers granted to an authorized signer in subsection A. is not exclusive, and your account agreement may grant powers that aren’t listed in that subsection or restrict powers that are. Additionally, UCC § 4-403 provides that any person authorized on an account may stop payment or close the account and that power exists regardless of the omission from this statute.

There is no requirement that the bank use the additional powers form, and the bank is free to add to or delete powers from the form as it chooses. Please keep in mind that guardians and attorneys-in-fact are governed by other law, so neither the statute nor the additional powers form is appropriate for use in those cases.