February 2023 OBA Legal Briefs

• Signage management
• SCRA and a new best practice recommended?
• The child support levy moratorium is over

Signage management

By Andy Zavoina

As we enter the new year, let’s continue from last month on getting the little things squared away so we can focus on a new year of compliance work. Let’s talk about signage requirements. In our main branch we had a “Fed wall” which was one area which had the federally required (and state, as applicable) notice requirements. It should be in an area that is highly visible to meet the intent of the posted notice requirements. It does no good to put these on the wall behind a door that stays open and prevents viewing them. You will not get credit during an exam for posting them where they cannot be seen. Similarly, when the branch manager thinks your Fed wall is an eyesore and puts the plastic Ficus trees in front of your detailed work – no points. If there was a remodel done and the signage was taken down for maintenance, ensure it goes back up.

As to being unsightly, beauty is in the eye of the beholder. If you put courier font printed pages in a $2 frame and nailed it to the wall, that is what it will look like. What we did was to lay out all the applicable disclosures and we bought one large frame, had a mat cut for all these in one space and then everything was accounted for in one space. As a new branch was opened, we ordered another of the same design. This ensured that everything was easily accounted for and posted easily on the wall rather than trying to lay out several frames, especially if those frames were each different giving a hodgepodge appearance. It was also a simple task to pull the frame down, remove the backing and switch out the disclosures when necessary. As a tip, there is a transparent and removable tape that uses the same type of glue as sticky notes have. It will hold your documents to the mat securely yet provide the flexibility to switch them out without destroying the mat or other documents.

Here are suggestions and justifications for your Fed wall and other required signage.

1. Community Reinvestment Act Notice: This is to be posted in each lobby with one version in your main office and another in each branch, other than off premise electronic deposit facilities, the Public Notice described in 12 CFR 345.44 (FDIC), 228.44 (FRB), 25.44 (OCC).
2. Equal Housing Lending Poster: Post in lobby of main office, all branches, and in any other areas where loans are made. Note, this is an 11”x14” poster and unlike most other requirements for signage, the size requirements are specifically stated. 12 CFR 338.4 (FDIC), 24 CFR 110.15 and 110.25 (HUD and OCC) the FRB requirements fall under the Fair Housing Act. .
3. In August 2022 the FDIC made changes to the sign. Refer to Federal Register Vol. 87, No. 151, Page 48079 as the Fair Housing and Consumer Protection Sale of Insurance Rule are both impacted. To improve their efficiency and effectiveness the FDIC consolidated the Consumer Response Center and the Deposit Insurance Section under one organization, entitled the National Center for Consumer and Depositor Assistance. Fair Housing signage and the Sales of Insurance disclosure should refer to, “…National Center for Consumer and Deposit Assistance.” The effective date of the change was August 8, 2022. The OCC has also had changes to its poster. Refer to Bulletin 2021-35, August 5, 2021.
4. Home Mortgage Disclosure Act (HMDA). General notice of availability must be posted in each home office and physical branch offices located in an MSA. 12 CFR 1003.5(e). Non-HMDA banks do not post this notice. First-time filers post it after receiving notice their disclosure is ready after they have submitted their file for the prior year.
5. Fair Credit Reporting Act (FCRA) requires that a consumer be allowed to notify the bank of an error in their consumer report. If a notice is posted informing consumers where to direct their notice, they may not be delivered to just any employee and must be properly directed.  623(a)(1)(C) (Note, this is a recommendation, not a requirement. Not having such a notice does set the bank up for failure as virtually all staff would need awareness training of how to handle such a notice from a customer.)

Additional signage requirements while you are auditing these:

1. Customer Information Program procedures require providing adequate notice the bank is requesting information to verify customer identities prior to opening account. May be given or posted. 31 CFR 1020.220(a)(5)
2. FDIC Deposit Insurance Notices are to be displayed at each station or window (including drop boxes, teller windows, New Accounts, drive-ups) where insured deposits are normally received, excluding automated service facilities such as ATMs, night depositories and POS. These signs must be 3″X7″ in size. 12 CFR 328.2 & FDIC 93-42, 94-17. [Editor’s note: The FDIC has a proposed rule out for comment through April 7, 2023, that could affect this requirement]
3. Funds Availability Policy is for banks routinely delaying availability of any deposited item. Disclosure is required of several items in a conspicuous place in each location where deposits are accepted. This includes abbreviated text on ATMs but excludes drive-ups.  These disclosures are contained in our Facts About Funds Availability brochure that can double as the posted notice.  12 CFR 229.18
4. ATM Surcharge Notice requirements apply if your bank, as an ATM owner/operator, imposes a fee to complete a transaction or inquiry. The bank must disclose on the ATM or ATM screen that a fee may be imposed. 12 CFR 1005.16(c).
5. Rate Board requirements under TISA/Reg DD are that indoor signs are exempt from many advertising requirements. But if a rate is stated it will use the term “annual percentage yield” or “APY” and contain a statement advising consumers to contact an employee for further information on terms and fees. 12 CFR 1030.8(e)(2)

And for employees there are several other requirements.

1. 5-in-1 Employment Poster is required to be visible to job applicants and employees, 42 USC 2000e-10(a).

   This poster should include five parts, and if not in a combined poster, individual signs must be posted in the manager’s office or lobby. The five laws are: Equal Employment Opportunity Act, Fair Labor Standards Act, Employee Polygraph Protection Act, Family Medical Leave Act, and OSHA’s Plain Language “It’s The Law”. Refer to 29 USC 201, 29 USC 2003, 29 CFR 825.300, and 29 CFR 1903.2(a)(3)

2. Notice of Employee Rights has two requirements; 1) Executive Order 13496 is a Notice of Employee Rights under the National Labor Relations Act, the primary law governing relations between unions and employers in the private sector. See 29 CFR Part 471. Banks need to follow this for various reasons including due to FDIC insurance, savings bond transactions, TTL accounts and government contracts. Post the notice conspicuously in offices where employees covered by the NLRA perform contract-related activity, including all places where notices to employees are customarily posted both physically and electronically. 2) Employee Rights under the NLRA See section 7 of the NLRA, 29 U.S.C. 157

SCRA and a new best practice recommended?

By Andy Zavoina

The Servicemembers Civil Relief Act (SCRA) has been around a very long time. It has existed under several names and can trace its origins to the Civil War. Prior versions were enacted and would terminate, but the Soldiers’ and Sailors’ Civil Relief Act has been in force since 1940. It was modified and became the current SCRA in December 2003.

The premise of the law has not changed. The intent of Congress was to give peace of mind to the servicemember by granting special protections to their rights and property interests while they are in the service of our country. The provisions of the SCRA allow servicemembers to have their legal rights secured until they can return from the military to defend themselves, when necessary, and to better afford existing debt which may be more difficult to service with a reduced income from military service.

Many banks misunderstand the SCRA and believe it is a wartime protection, but the SCRA is in effect at all times – not just when the country is at war. Many SCRA protections affecting the banking relationship your customer has with you apply to debts incurred prior to military service. That is the 6 percent maximum rate many bankers are aware of.

You will find the actual law at 50 U.S.C. 3901 and it is conveniently located in the “Other / Misc Regulations” section of the BankersOnline Regulations pages. There is no implementing regulation. Often when looking for guidance a banker should review the SCRA workpapers of its overseeing agencies, court cases, and enforcement actions published by any of the banking agencies. There are also guidance documents that may be issued. The agency with “key” enforcement powers is the Consumer Financial Protection Bureau (CFPB). Although it is responsible for the larger banks (with assets over $10 billion) it is very connected to the SCRA and even has a department dedicated to servicemembers. This department provides many updates each year about the treatment of servicemembers, although each of the prudential agencies has oversight as well. In fact, most have established rigorous exam schedules to ensure the SCRA is being adhered to, and it is not uncommon to read of enforcement actions by any of them. These may be for repossessions that were not following SCRA requirements, and also for violating that six percent rule. That rule is what this article is really about as the CFPB has issued its opinion that may be read as guidance, and practically requires banks to be proactive on providing the interest rate reduction even when a servicemember does not request it. In a nutshell, it is recommended that banks seek out possible opportunities to reduce interest rates and do so at any indication that there may be SCRA protections available.

Servicemembers do receive training on the availability of these protections and in many cases I have read that there are articles and training available periodically to remind them of this law. In fact, recruiters “sell” the rate reductions as a benefit of military service. But as I have studied the law and its evolution, I understand that it was intended to offer the thanks of a grateful nation for their service. This six percent interest rate reduction was offered (read – required) by law but at the expense of lenders, not taxpayers. That is what politicians call a win – win.

Here is an example. Assume your customer has a civilian occupation earning $63,000 annually. This person has an annual debt service requirement of $42,000 which yields a debt ratio of 67 percent. Now let’s have your customer called up for active duty. He is an E-6 with over six years of service. His annual income is now $44,544 for 2023 and his debt service jumps to 94 percent. It seems like he might benefit from an interest rate reduction.

This reduction in income is not always the case. When the law originated there was a draft and military pay was not competitive with the same jobs’ civilian counterparts. There was an article in 2006 that cited a RAND National Defense Research Institute study which revealed 72 percent of servicemembers surveyed were making more money in the service than as civilians. The original law’s intent was to assist a servicemember when needed and it was not an automatic protection. It was to be requested based on a lower income due to military service. A classic example is Gene Autry, the Singing Cowboy in the 1940s. He enlisted to serve in WW II. His income went from $400,000 a year to $1,008.

Where did the six percent rate originate? I honestly do not know how Congress arrived at that number in 1940, but that was it. The rate allowed does not fluctuate and is not adjusted with the cost of living. The prime rate in 1940 was 1.5 percent so there was a margin of 4.5 percent. In January 2023 the prime rate is 7.50 percent which with that same margin would yield an SCRA adjusted rate of 12.00 percent – double what is currently allowed.

A general rule of thumb is that a person being paid by Uncle Sam is “in the military.” The recent high school graduate who enlists in the military is being paid by the military the day they report for basic training. This is an easy and clear-cut test but there are always other possibilities. Based on definitions in the SCRA, a servicemember (reservist) being called up is afforded protections upon receipt of their orders.  Further, the definitions tell us that a servicemember is “in the military” when they are employed full-time in this capacity and further, that debts incurred prior to that are subject to SCRA Section 3937, which provides the 6 percent rate cap. These are two different events, the date of being protected, and being “in the military” and paid by the U.S. government (Uncle Sam). When the debt was incurred and when the person was protected can be exclusive of one another. It is possible that a reservist will receive their orders, borrow, and later claim protected status and want a rate reduction. I discussed this with an Army Judge Advocate General officer (JAG attorney) and he said while that was not the intent, it does seem to be the result.

What is happening in theory is a person has that civilian debt ratio and all is fine. There is a national emergency, and this person wants to go into the military and serve their country. Loan rates are reduced, and this makes that government paycheck stretch a bit farther. A servicemember borrowing after they are in the service is not required to be given a rate of no more than 6 percent because they know what their income is now and should borrow responsibly, only when they know they can afford to repay it. This supports my understanding of why this exists and it is not to be a benefit and reason to serve but rather one less inhibitor for those wanting to serve.

The protections under Sec. 3937 apply to debts incurred by the servicemember, or the servicemember and their spouse, jointly. This is a clarification from the old law, the SSCRA. Industry practices then were to apply the protections against any loan on which the servicemember was obligated.  The new law specifies who is covered. As reassuring as this may be, it can also be troubling as there would be reputational risks if you refused to lower the rate on a loan to the servicemember and their parents or children, as an example. The same debt service standards may apply, but the law isn’t written to protect other borrowing relationships.

Pre-service debt is a key factor. The interest rate on a pre-service credit card balance today of a servicemember must be reduced if it exceeds 6 percent. Charges made tomorrow (or at any time during military service) are not pre-service and thus not subject to the cap.

The SCRA made it very clear that a bank’s knowledge alone that a customer was now a servicemember was not sufficient to justify any adjustment to the loan rate. The SCRA required the servicemember to provide a written request for relief and provide a copy of their military orders as well as any extensions of those orders. Keep in mind, however, that the servicemember may invoke their rights under this section at any time up to 180 days after their release from military service. The application of the six percent rate becomes retroactive.  Even if the debt was paid in full before the servicemember invoked their rights, a re-amortization and refund could be owed based on the date they were under protection of the SCRA until their release.

Notification requirements were changed a little by Public Law No. 115-232 on August 13, 2018. The SCRA now says the servicemember shall provide to the creditor written notice and a copy of—

1. military orders calling the servicemember to military service and any orders further extending military service; or
2. any other appropriate indicator of military service, including a certified letter from a commanding officer.
3. a creditor may use, in lieu of notice and documentation under 1 or 2 above, information retrieved from the Defense Manpower Data Center (DMDC) database through the creditor’s normal business reviews for purposes of obtaining information indicating that the servicemember is on active duty.

So, item 2 provides a more flexible notice and a third option was added for, “normal business reviews.” So, a safe harbor was introduced for a creditor that uses the information retrieved from the DMDC with respect to a servicemember if—

a. such information indicates that, on the date the creditor retrieves such information, the servicemember is not on active duty; and

b. the creditor has not, by the end of the 180-day period, received the written notice and documentation required requesting protection. (There is no six percent rate requirement.)

4. A substitute for copies of the servicemembers orders is a certified letter from the servicemembers’ commanding officer. This term, “certified letter” is not defined but in its purest United States Postal Service form would be “a special USPS service that provides proof of mailing via a receipt to the sender. With electronic USPS Tracking, the sender is notified when the mailing was delivered or that a delivery attempt was made.” This is not Registered Mail which has different handling and security features from Certified Mail.

The existing SCRA, 3937(b)(1) already included the 180-day period, but the certified letter from a commanding officer is a new alternative for invoking the rate reduction.

Many banks can verify individual servicemembers as well as batch process requests with the DMDC SCRA database. Many banks adopted the batch processing method and check the bank’s CIF records against it on a monthly or other regular basis. New hits could show active duty status and immediately bank records would be adjusted or a relationship manager would contact the customer and verifications would be initiated or protections would go in effect. They could be reversed later if in error.

In December 2022, the CFPB published an analysis of servicemembers not getting the benefits of interest rate reductions for various reasons. “Protecting Those Who Protect Us” discusses those Guard and Reserve servicemembers who are activated but are not receiving these benefits.

Here are some points brought out in the publication:

• Reserve and National Guard members called to active duty are paying an extra $9 million in interest every year because they are not always receiving the benefit of their right to rate reduction.
• In an odd selection of a time period, the CFPB estimates that between 2007 and 2018, data show fewer than 10 percent of auto loans and 6 percent of personal loans received a reduced interest rate and it is believed this reflects lower numbers than should exist.
• It is estimated the underutilization amounted to $100 million of interest that was paid unnecessarily to lenders for auto and personal loans.

Who is entitled to these protections? The regulators expect banks to use the DMDC database which has proven accurate enough to warrant a safe harbor when used for verifications under the SCRA and the Military Lending Act. (Note, the SCRA has one database, and the MLA has another. You would expect that the servicemembers themselves would be on both and dependents would be on the MLA. So, if you are checking on the servicemember, either should suffice, right? When I spoke to someone at the DMDC they could not explain a servicemember difference but were emphatic to check the respective database based on the purpose of the inquiry. I believe one difference may be that some SCRA benefits extend beyond the period of military service but not for MLA use. The results of the query may include that. The DMDC has a manual that among other things denotes “Title 32 outlines the role of the United States National Guard; normally Title 32 members are not covered under SCRA. Those Title 32 members and others who meet the criteria referenced in Title 50 USC App. §§ 3901 below are accurately represented on the SCRA website.

In order to be considered for SCRA coverage a Title 32 member must be called “…to active service authorized by the President or the Secretary of Defense for a period of more than 30 consecutive days under section 502(f) of title 32, United States Code, for purposes of responding to a national emergency declared by the President and supported by Federal funds.””

The CFPB says in its 39-page publication, “Existing literature suggests that the interest rate reduction benefit is underutilized, and continued enforcement efforts suggest that some creditors continue to violate protections against repossession, despite efforts to increase awareness of SCRA protections and improve information about servicemember eligibility for those protections. There is also limited information on utilization rates, making the development and evaluation of public policy efforts to increase benefit utilization difficult.” The paper indicates servicemembers are not receiving the protections they are entitled to for various reasons, that banks (that is my term as the CFPB refers to financial institutions, creditors, finance companies, etc. but I am writing for banks) are violating the SCRA and that servicemembers must jump through too many hoops to get these protections. Further the CFPB complains that banks are not thorough in retroactively applying the interest rate reductions.

The law is clear that the servicemember can request protections, but the CFPB wants to emphasize option 3 above where banks will voluntarily use the DMDC database. It actually goes further and attacks creditors who insist on following the law’s stated requirements, saying in the publication: “However, creditors could just as easily access a Department of Defense system [the Defense Manpower Data Center SCRA website] that checks any borrower for active-duty status.” This raises two issues bankers need to consider. First, how much would be involved in the bank regularly batch processing its CIF files against the database, and second, would this be a cost-effective use of resources? Positive hits would require additional procedures to verify the status with the customer. That is, a positive hit could be verified before progressing, or the bank could take that positive hit and respond with a  confirmation letter. The bank could explain how it made its discovery, that the customer’s loan has been reduced in rate, the effective date, the reamortization of those applicable payments and the deposit or attached check for the refund of interest that had been paid and is being refunded. The letter will explain the new payment amount as it will be reduced and what to expect if the servicemember’s protections end before the loan is repaid in full. This is also an opportunity to thank them for their service, point out the benefits of internet banking and request a copy of the person’s orders if the bank wants them for their files. The CFPB recommends the best practice is to provide the rate discount without burdening the servicemember with any requests. Your bank needs to determine if it agrees with that. At the very least it is an opportunity to verify the bank has the correct mailing address as we all know it is typically a requirement in account agreements, but typically a completely ignored requirement as well.

I may have downplayed the CFPB’s intention as it actually encourages bank employees to be whistleblowers, “Employees who believe their companies have violated federal consumer financial protection laws are encouraged to send information about what they know to whistleblower@cfpb.gov. To learn more about reporting potential industry misconduct, visit the CFPB’s website.“ This is not in the published document but the online news release. https://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-members-of-the-reserves-and-national-guard-paying-millions-of-dollars-in-extra-interest-each-year/

Here is a takeaway list for banks to consider:

1. Should it be batch checking CIF files?
2. What follow-up if any with the servicemember is desired?
3. Will protections be applied automatically?
4. Procedures should already be to retroactively apply the rate reduction to the date of protected status.
5. When the borrower has one or more loans, the benefits should apply to all.

The SCRA does allow in Section 3937(c) for a challenge to the rate reduction. A court may grant a creditor relief from the limitations of this section (3937) if, in the opinion of the court, the ability of the servicemember to pay interest upon the obligation or liability at a rate in excess of 6 percent per year is not materially affected by reason of the servicemember’s military service. As an example, let’s assume the bank makes a car loan to a college student who is working their way through college on scholarships and delivering pizza. The student is not making a lot of money but enough to survive and make a small car payment. Come graduation day the student graduates and becomes a military officer and doctor, receiving a huge increase in their income. They request a rate reduction because “it is their right.” That was not the intent of the law initially, but it has become so political. The bank has the right to contest the request, but the reputation risk is severe, and the bank could appear unpatriotic.

I believe a challenge to protections would require an extraordinary case and we have yet to see a deserving one. But the CFPB is promoting a new best practice which is not called for in the law. Bankers should understand, what is requested by the CFPB is purely optional and would come at a cost. Banks individually must determine if it is a reasonable cost or not.

The child support levy moratorium is over

By Pauli D. Loeffler

During COVID-19, the Oklahoma Child Support Service (“OCSS”) took a break from issuing levies. The moratorium has ended, and banks are receiving levies again. I covered child support levies in the February 2018 OBA Legal Briefs, which you can access online once you register an account through the My OBA Member Portal. Here are few bullet points to keep in mind.

• The levy is exempt from the Garnishment of Federal Benefits rule.
• The levy attaches to all deposit accounts OWNED by the Obligor/customer whether or not the account number is included on the levy. That includes accounts held in sole ownership, joint ownership, sole proprietorships, grantor trusts, CDs, MMDAs, IRAs, retirement, annuities, 401Ks, and HSAs. It will NOT reach accounts owned by an LLC (even if it uses a sole member’s SSN), a corporation, partnership, a limited partnership, IOLTA, insurance premium trust account, etc.
• The levy is effective for 60 days after receipt and subsequent deposits will be captured. The bank may cash “on-us” checks payable to the account owner but should not cash checks drawn on other financial institutions.
• A copy of the levy will be mailed to the account owner by OCSS, so the bank does not mail a copy. The bank is free to let the owner know of the levy as soon as it locks the account down.
• OCSS may release or partially release the levy prior to 60 days. The release must be signed by an attorney.