May 2006 Legal Briefs

Consumer Loan Dollar Amounts Adjusting on July 1    

•  a. Increased Late Fees  
•  b. “508B” and “508A” Loans  
•  c. Dealer Paper “No Deficiency” Amount  

Money Transmitters Must Register With Banking Department

July 1 Deadline for Continuation Statements for Oil and Gas

Searching UCC-1’s in Only One Filing Office as of July 1, 2006

Duration of Fixture Filings Related to Manufactured Homes

Consumer Loan Dollar Amounts Adjusting on July 1

As of July 1 each year, the Consumer Credit Administrator adjusts for inflation certain dollar amounts found in various sections of Oklahoma’s Uniform Consumer Credit Code (U3C).  

The Administrator has announced a new set of increased U3C dollar amounts (in a chart at the end of this article) that will take effect on July 1, 2006.  (Most amounts have increased by approximately 2.5%, compared to the amounts established on July 1, 2005.)

a. Increased Late Fees.  The fee that banks ask most questions about is the maximum late fee for consumer loans and dealer paper.  As you are probably aware, the maximum permitted late fee has been the greater of $20.00 or 5% of the past-due payment. This formula changes on July 1 to the greater of $20.50 or 5% of the past-due payment.  

Before a bank can charge any late fee, the consumer must agree to it in writing.  If a loan is originated, deferred or renewed on or after July 1, the signing of documents is an opportunity to get the borrower to consent in writing to the new $20.50 portion of the late-fee formula.  However, for loans that are already outstanding and are not being modified or renewed, a bank has no good way to increase the amount of late fee that the consumer has previously agreed to pay.  

Some banks have specifically pegged the “dollar amount” portion of their late fee formula at $20.00 (or lower amounts in earlier years)—and so for existing loans there may be no way to raise the late fee at July 1.  Other banks have used an adjustable formula in the late-fee provision of their loans, allowing for the greater of 5% of the late payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time.  (Banks using a formula that specifically allows for this type of inflation adjustment can now re-set their existing loans to charge the new, higher late fee as of July 1.)  

b. “508B” and “508A” Loans.  Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” and does not have a stated annual interest rate.  The requirements for such loans are outlined in Section 3-508B of the U3C.

The maximum permitted principal amount for one of the small loans just mentioned has been $800.00, but now is adjusting to $820.00 at July 1.  (Note: House Bill 2749, which is currently pending in the Oklahoma Legislature, would further increase this maximum principal amount on one of these loans to $1,230, as of July 1, 2006, if the bill passes.  We don’t know yet whether the bill will pass.)

The specific fees chargeable on one of these “508B” loans depend on where the loan falls within certain dollar brackets stated in the statute.  Both the dollar brackets and the fees chargeable within each bracket are adjustable for inflation, and the revised amounts as of July 1 are set out in more detail in the chart at the end of this article.

The Administrator warns that lenders making “508B” loans should be careful to switch promptly to the new dollar amount brackets, and the new permissible fees within each bracket, as of July 1.  Because of some peculiarities in how the maximum fees for loans are set within each bracket, and the changing of the bracket amounts, using a chart with the old rates after June 30 (without shifting to a revised chart) could result in excess charges for certain loans of $615.00.  

The chart that banks use to determine the “maximum rate of interest” allowable on small loans calculated by the other available finance charge method (under Section 3-508A) will also change somewhat because of adjustments for inflation at July 1.   The maximum consumer-loan dollar amount on which a blended interest rate higher than 21% can be charged by the 3-508A method will increase from $4,000 to $4,100.  At www.americanbanksystems.com/compliance/3508A.pdf there is an online chart showing the maximum interest rate chargeable on “508A” loans of various dollar amounts.  The chart currently available there shows permissible rates as of July 1, 2005, but will probably be revised soon to include the inflation-adjusted amounts that will apply beginning July 1, 2006.

c. Dealer Paper “No Deficiency” Amount.  Based on Section 5-103(2) of the U3C, if dealer paper is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding.  This dollar amount was previously $4,000, and increases to $4,100 on July 1.

Money Transmitters Must Register With Banking Department

The Oklahoma Financial Transaction Reporting Act became effective on April 17 when the Governor signed House Bill 2483.  (This will be part of the Banking Code, Sections 1512 through 1515.)

The Act defines “money services business” for state-law purposes (in Section 1512(5)) to include any “money transmitter.”  This definition can be expanded later by regulation to include other business categories, if the Oklahoma Banking Board decides to do that.   
To begin with, only “money transmitters” will be defined as MSB’s under state law.  Apparently, people have recently been wiring money to Mexico to buy crystal meth that is brought back to Oklahoma for sale.  In other cases, people in Oklahoma have set up basically private “wire” terminals (not available to the general public) to wire suspicious money, outside of the normal scrutiny of banks. The OSBI has been seeking better information concerning wire transactions that currently may be “slipping through the cracks.”

A “money transmitter” under the Act is any person who accepts currency or funds (from others) and wires those funds by or through a financial agency or institution, the Federal Reserve, or an EFT network.  (However, financial institutions and registered securities brokers are exempted from the state definition of MSB, and are automatically exempted from the state definition of “money transmitter.”)

Section 1513 prohibits any person from engaging in the money services business in this state (the business of a “money transmitter”), until that person has filed a registration application with the Banking Commissioner, has paid a fee, and has obtained a license from the Commissioner.  Each separate location requires a separate license.

The act also regulates each “supplier” of money transmitters. This term includes (1) a company like Western Union, that may enter into licensing arrangements with check cashers and grocery stores that will become authorized to wire money, and also (2) manufacturers or other providers of money transmitter equipment, who help a person get set up to wire money.

Each “supplier” must fill out a form, listing for the Banking Commissioner each person in this state to whom it has provided money transmitter equipment.  Thirty days after the end of each calendar quarter, a “supplier” must provide an updated form to the Commissioner, listing additional persons to whom money transmitter equipment has been provided since the previous form was filed.

A money transmitter who fails to register with the Commissioner, or a “supplier” who fails to provide information, can be fined up to $1,000 and punished by up to one year of jail time.  Each day that the violation continues constitutes a separate offense.  The fines and punishment are certainly strong enough to put a wrongdoer out of business.

Section 1514 allows the Commissioner to enter into information-sharing agreements with local, state, federal and foreign law enforcement.  The disclosures made under this authority should definitely help to reduce crime.  Banking Department records resulting from money transmitter registrations, supplier reports, etc., will be confidential and not available for public inspection.

As you are probably know, Oklahoma previously has had no licensing requirement for any type of business that is defined federally as an MSB, except for money order sellers, which are regulated under the “Sale of Checks Act,” found at Section 2101 in the Banking Code.

 Going forward, Oklahoma now will have two categories of licensed MSB’s, as defined under federal law—money transmitters and money order sellers.  Banks doing diligence on their MSB customers will now need to ask whether customers in both of these groups have obtained the required state licenses.  However, very few legitimate money transmitters in Oklahoma are not already licensed to sell money orders.  For a bank’s perspective, in many cases it may only be a situation of an additional type of license required for a business customer that already holds one type of MSB license. 

July 1 Deadline for Continuation Statements for Oil and Gas

If your bank has “oil and gas mortgages” that were filed before July 1, 2001, and those mortgages will remain in place after June 30, 2006, you should go through the loan files carefully to determine whether you need to file a UCC continuation statement in the local county not later than June 30 to preserve your bank’s perfection in “as-extracted collateral” (oil and gas production).  If you do not file a continuation statement between December 30, 2005, and June 30, 2006, you may lose your perfection in oil and gas runs on July 1, if the collateral was perfected by filing a mortgage before July 1, 2001.

(I have written articles on this issue twice before; but the final deadline to take action is now approaching.  If your bank has no “oil and gas” loans, you can skip this topic.)   

UCC Revised Article 9 was enacted in Oklahoma as of July 1, 2001, including Section1-9-705 which provided for a five-year transition period, at the end of which (June 30, 2006) the “new” law’s provisions, instead of the “old” law’s provisions, will determine the effectiveness of any personal-property security interest perfected before July 1, 2001.  

What does this mean in practical terms?  Oklahoma’s “old Article 9” had a “non-uniform” provision at Section 9-402(5), which provided for “oil and gas mortgages” and allowed certain types of personal property collateral to be included in and perfected by filing such a mortgage.  Including any of the permitted categories of personal property in the mortgage caused the lender’s security interest in that personal property to be perfected for the life of the mortgage (10 years, 20 years, etc.), not just for the five-year period that would have applied if a UCC-1 had been filed covering the same categories of personal property.

“Old” Section 9-402(5) provided that a lender taking a mortgage in mineral interests (a real property interest), and including a specific legal description, could also perfect a security interest in the following:  (1) “minerals to be severed from . . . lands” (oil and gas as it comes out of the ground), (2) accounts and proceeds arising from sale of the severed minerals, (3) oil-and-gas-related equipment at that location, and (4) oil-and-gas-related fixtures at the site.  This Oklahoma provision was totally different from what the “uniform” version of the UCC provided in other states.

By adopting Revised Article 9 in 2001, Oklahoma switched to a “completely uniform” version of Article 9, identical to other states.  (In the “uniform” version, a security interest in “as-extracted collateral” (oil and gas runs) can be perfected for only five years at a time, with five-year continuations permitted after that—just like most other categories of personal property. To make a smooth change from “old” to “new” for UCC-1’s already on file, it was necessary to create a five-year “transition period” (running out on June 30, 2006) that ends the old approach and switches any “non-uniform” provisions to the new approach.  

Let’s assume that an “oil and gas mortgage” filed before July 1, 2001, also included “minerals to be severed” (now called “as-extracted collateral” under Revised Article 9).  If the mortgage was executed on February 1, 2000, and had a maturity of ten years, the lender originally expected to be perfected in the collateral (including the oil and gas runs) for a full ten years, until February 1, 2010.  

This example mortgage created a non-uniform perfection period, compared to the later-adopted Revised Article 9’s five-year perfection period for this same category of personal property collateral.  In this situation, the “drop-dead” transition rule in Section 1-9-705 of Revised Article 9 applies to cut off perfection of the lender’s security interest in the collateral as of June 30, 2006 (a date perhaps significantly earlier than the lender is expecting).  

With a firm cut-off date of June 30, 2006 established by statute, the “as-extracted collateral” covered by this mortgage would actually be perfected for an irregular period of six years and five months (2/2000 through 6/2006).  This is longer than five years (the result for “as-extracted collateral” perfected under the new law), but shorter than ten years (which is what the parties anticipated when the mortgage was executed.   

How does a lender avoid losing its perfected position in “as-extracted” collateral” as of July 1, 2006, if the security interest was perfected by a mortgage filed before July 1, 2001, as described above?  The local county filing office continues to be the correct filing office with respect to “as-extracted collateral,” so a UCC continuation statement can be filed in the county with respect to this collateral.  However, to take advantage of the transition provision, this must be done within the six-month period ending June 30, 2006.  (After June 30, a continuation statement can be filed only if the original filing (or an earlier continuation thereof) is not more than five years old.)

On “oddity” is that the original filing may have been in the form of a mortgage including what is now “as-extracted collateral,” and the mortgage’s maturity date has not yet been reached; but the lender’s filing with respect to the “as-extracted collateral” must be continued now—and not at the mortgage’s future maturity date–by filing a UCC continuation statement to avoid loss of perfection.  

Ordinarily, a continuation statement needs to be filed not later than five years after the date of the original filing that is being continued—but in this case the original mortgage might be considerably more than five years old already (on or before June 30, 2006) when the continuation is filed. However, this is a special case, and there is a special statutory provision to cover it.

Section 1-9-705(g) of the UCC allows a secured party to file a continuation statement any time within a six-month period, between December 30, 2005, and June 30, 2006, inclusive, to continue one of these pre-July 1, 2001-mortgages in “as-extracted collateral” that otherwise would “time out” on June 30, 2006 with respect to that particular collateral.

It should be noted that under Revised Article 9 the local county is no longer the correct filing office to perfect a security interest in oil-and-gas-related equipment (which could have been included in one of these earlier “oil and gas mortgages”).  A filing with respect to any type of equipment now must be made in the central filing office. It is not possible to file a continuation statement in the local county to continue the lender’s perfection in oil-and-gas equipment.  In this scenario a lender would remain perfected in the oil-and-gas equipment only until July 1, 2006 by means of the mortgage–it is already over five years old. The lender’s perfection in that collateral would cease on July 1, 2006, unless the lender has already transitioned the filing to the central filing office by filing a UCC-1 “in lieu” financing statement covering the equipment.  A lender that gets cut off by this provision and has not done a transitional filing can always correct the oversight by making a new initial UCC-1 filing in the central filing office.  In this case, perfection would start again currently, and would not tack back to the original mortgage filing in the local county.

It’s still possible to perfect a security interest in “as-extracted collateral” (including oil and gas) by filing a mortgage (or, optionally, a UCC-1 financing statement) in the local county.  However, a lender that has perfected in “as-extracted collateral” by filing a mortgage at any time after June 30, 2001, will be perfected only for five years, after which a continuation statement will be required, even if the term of the mortgage is longer.  Going forward, it may be simpler to perfect in “as-extracted collateral” by filing UCC-1 financing statements (rather than mortgages).  This will make it easier to remember that a continuation statement must be filed before the five-year anniversary of the original filing.

It continues to be possible to perfect a security interest in “fixtures” by filing either a mortgage or a UCC-1 in the local county, and including the appropriate legal description.  Unlike “as-extracted collateral,” a security interest in fixtures that is perfected by filing a mortgage will remain effective for the life of the mortgage. Therefore, even in the case of a mortgage filed before July 1, 2001, oil-and-gas-related fixtures (or other fixtures) that are included will remain perfected until the maturity date of the mortgage.

Searching UCC-1’s in Only One Filing Office as of July 1, 2006

Revised Article 9 of the UCC was adopted effective July 1, 2001, and required a substantial shift from county-based filing to central filing for UCC-1’s.  Categories of UCC-1 filings that shifted to the central filing office for the first time included consumer goods, livestock, crops, farm equipment and oil and gas equipment.   Section 1-9-705 of Revised Article 9 provided that filings of these types that were made in the local county before July 1, 2001, would continue to be effective for a normal period (usually five years) before they lapsed.  

However, Section 1-9-705(f) made clear that filing a continuation statement in the local county (any time after June 30, 2001), would not be effective, if the correct filing office had changed.  Instead, based on Section 1-9-706, before the effective period of each filing made in the local county was about to run out, the lender was required to transition the filing to the central filing office by filing an “in lieu” financing statement.  This transitional filing had to properly cross-reference the previously existing local-county UCC-1 filing in order to retain the original effective date of the UCC-1 that was on file in the local county.  

The switch in proper filing office from the local county to the central filing office made it temporarily more complicated to do a UCC-1 search on certain borrowers.   For the collateral categories listed above, it has been at least possible for the last five years (1) that there may be a UCC-1 on file in the local county that is still effective, and also (2) that there could be a more recently filed UCC-1 on file in the central filing office that is also effective. For these “transitional” categories of collateral, it has been necessary to search both in the local county and in the central filing office.  

An end to this dual-search requirement is finally approaching.  As mentioned earlier, Section 1-9-705 imposes a July 1, 2006, “drop-dead” date, cutting off the effectiveness of any UCC-1 remaining on file in the local county, if (1) the type of collateral now requires a filing to be made in the central filing office, and (2) no transition filing has been made in the central filing office that “tacks back” to a pre-existing filing in the local filing office. For these “transitional” categories of collateral, it will be sufficient, on or after July 1, 2006, to search for UCC-1’s only in the central filing office. If a transitional filing has been made, a search of the central filing office will reveal it; and if no transitional filing exists, nothing on file in the local filing office with respect to these types of collateral will remain effective.

One of the promised outcomes of Revised Article 9 was simplification of the UCC-1 filing process and the UCC-1 search process.  We are finally at the point of enjoying the full benefits.

Revised Article 9 has already resulted in substantially increased efficiency, for collateral categories that were shifted from the local county to the central filing office. The Oklahoma County Clerk’s electronic filing system for UCC-1’s allows lenders to record and release UCC-1’s much more quickly, compared to the previous system of mailed filings and releases.

The central filing office has also created greater convenience by establishing a computerized index of all UCC-1 filings.  Computer access is available at www.oklahomacounty.org/coclerk/default.htm and allows lenders to make direct online searches of UCC-1 filings.  (Caution:  You must use the borrower’s correct legal name.)
 
After the transition from local county filing to central filing is “finished” on June 30, 2006,  the number of potential places where a UCC-1 filing could possibly be on file and be effective with respect to a particular borrower will be reduced from 77 counties to just one central office–except for the categories of personal property discussed below.  

(Under Revised 1-9-501(a) of the UCC only three types of collateral require filing of a financing statement in the county clerk’s office of the county where the related real property is located: (1) “as-extracted collateral” (oil, gas, and other minerals); (2) “timber to be cut”; and (3) “goods that are or are to become fixtures.”  Each of these categories is specific to real estate, and is required to be filed against a particular legal description.

A transitional or “in lieu” financing statement on file in the central filing office “holds the place for” and “tacks back to” a financing statement filed earlier in a local county.  This transitional UCC-1 filed in the central filing office operates as a continuation of what was filed previously in the local county only if two requirements set out in Revised Section 1-9-706(c) are met:  First, the central filing must adequately identify what UCC-1 filed in the local county before July 1, 2001 it is related to, by indicating the filing office and date of filing and file number, if any, for the previously filed UCC-1 and also, if applicable, indicating the most recent continuation statement filed in the local county with respect to that UCC-1.  Second, this transitional filing in the central office must indicate that the initial financing statement on file in the local county remains effective.  Official Comment 2 to Revised Section 1-9-706 states, "These requirements are needed [1] to inform searchers that the initial financing statement operates to continue a financing statement filed elsewhere and [2] to enable searchers to locate and discover the attributes of the other financing statement.”

If a borrower only needs to verify that there is no effective UCC-1 on file, a search of the central filing office with negative results (for collateral categories that are required to be filed there) will be sufficient (on or after July 1, 2006).  However, if a lender has a UCC-1 on file in the local county, which has been transitioned to the central filing office, the central office transitional filing only provides notice to third parties concerning a claimed filing elsewhere, and is not enough, by itself, to prove that a proper filing was made earlier in the local county that would provide continuous perfection since the original filing date.  (A transitional filing will always perfect the lender in the collateral at least from the date of its own filing in the central filing office.) Where two lenders are in a dispute concerning the priority of their security interests, it still may be necessary for a lender to prove what the original local-county filing covered, when it was filed, and that it remained effective at least until it was transitioned.

I would caution you that for all of the filings originally made in a local county that have been transitioned to the central filing office, the local county clerk’s records will suggest that the local county UCC-1 filing has now expired without being continued in the county.  Although the central filing office records will show that there apparently is an original UCC-1 filing in a local county that the transitional filing in the central filing office seeks to continue, the process doesn’t work the other way around:  When a transitional filing is made in the central filing office, the county clerk in the local county has no indication of this.  Based purely on the local county’s own records, the local UCC-1 filing will appear to have lapsed, and the county clerk in that county very well may delete that UCC-1 filing that appears to be no longer effective.

Based on Section 1-9-522 of the UCC, any filing office must maintain a UCC-1 on file for at least one year after it lapses; but after that time the filing can be deleted.  If a lender has UCC-1’s that were originally filed in the local county before July 1, 2001, and the loan (particularly a longer-term commercial loan or agricultural loan) remains outstanding, and the lender has transitioned this filing by means of an “in-lieu” UCC-1 filed in the central filing office, that lender should consider the possibility that the local county clerk could destroy all records of the original local UCC-1 filing before the loan is actually paid off.  If it becomes necessary for the lender to prove continuous perfection in the collateral since a date before July 1, 2001, it will be desirable to have proof of the original local-county UCC-1 filing in the loan file to guard against the possibility that the county clerk’s records may get deleted.  

Duration of Fixture Filings Related to Manufactured Homes

Loan officers sometimes get into a debate with each other and ask me whether it is necessary or helpful to do a UCC-1 fixture filing in connection with mobile home loans. The answer is, “It depends.”  A bank must analyze where it stands on the particular loan to determine whether a UCC-1 covering fixtures will give the bank some collateral that actually exists and that the bank actually wants.

First, you should recognize that if the bank is also taking a mortgage on real estate, this eliminates the issue. “Fine print” in the mortgage will automatically include fixtures. The lender will be perfected in fixtures (if any exist) for the full term of the mortgage.  

Second, there are cases where a manufactured home is expected to be located on a property semi-permanently, but the lender is not taking a mortgage on the real estate.  This commonly occurs because the real estate belongs to a relative, not to the borrower.

In this situation, a borrower may intend to create a fairly elaborate set-up even if he does not own the land, and the loan officer perhaps can determine in advance that there will be substantial “fixtures” available for pledging. Other lenders may just follow a standard policy of taking a UCC-1 in fixtures, to cover any substantial improvements that are external to the trailer, existing now or later.  

 A UCC-1 filing in fixtures will include external items that are at least semi-attached to the real estate, such as by bolts, nails, wires, or plumbing.  “Fixtures” could include an elaborate deck built around the trailer, a semi-movable storage shed, greenhouse or carport, an above-ground pool, a boat dock, or a replacement heating/cooling unit installed on a concrete pad outside the trailer.  Filing a UCC-1 in fixtures “carves away” the fixtures belonging to the borrower from the underlying landowner’s interest in the real estate.  

Third, for a manufactured home located in an ordinary trailer park, the borrower may not have much extra ground space, and has little intention of locating any “fixtures” outside the trailer.  A UCC-1 covering “fixtures” belonging to the borrower often will not have much benefit in the “trailer park” scenario, unless there are some obvious valuable improvements that belong to the borrower, external to the trailer.  

In contrast to fixtures included in a mortgage (perfected for the life of the mortgage), a UCC-1 filing that covers fixtures will normally lapse five years after the date of filing, unless a continuation statement is filed, etc.

However, for UCC-1 filings in connection with a mobile home loan, a little-known UCC “exception” seems to provide a way that a lender can obtain a perfection period substantially longer than five years.  

Section 1-9-515(b) of the UCC states that an initial financing statement will be effective “for a period of 30 years after the date of filing” if filed in connection with a “manufactured home transaction.”  To achieve a 30-year period of effectiveness, the financing statement must indicate that it is filed in connection with a “manufactured home transaction.”   

In Section 1-9-102(a)(54) of the UCC, a “manufactured home transaction” is a secured transaction (not involving a dealer’s inventory) that either (1) “creates a purchase-money security interest in a manufactured home,” or (2) is one “in which a manufactured home . . . is the primary collateral.”  This does not state that the manufactured home must be listed on the UCC-1 (which would not be effective in Oklahoma anyway). It just says the loan has to be for the purpose of purchasing the trailer, or has to be mainly secured by the trailer.  In this situation, any UCC-1 filed on lesser categories of personal property collateral, taken as part of a mobile home loan, could apparently be perfected for a period of 30 years if the UCC-1 states that it is filed “in connection with a manufactured-home transaction.”  Apparently both a UCC-1 on fixtures, filed in the local county, and a UCC-1 filed centrally in additional categories of collateral pledged in connection with a manufactured-home loan (such as “equipment” or “household furnishings,” or “consumer goods”) could fit the requirements.