January 2013 Legal Briefs

• Out of state, tribal and CFR court orders
• ATM notice relief
• Hot topics for 2013 from the FRB
• COPPA update
• Deposit insurance reminder
• Remittance transfers: a brief reprieve
• Religious headgear and compliance

Out of state, tribal and CFR court orders

By Pauli Loeffler

Recognition v. Enforcement
Close to the top ten most of my frequently asked questions is: Does our bank have to comply with an out of state or Tribal judgment, garnishment or levy? This is an important question because if the bank complies with such an order when it is not legally required to, it will be liable for losses sustained by the customer as well a possible breach of privacy. The vast majority of the time I get one of these questions, the answer is “No, the bank is not subject to the garnishment (or levy),” and I forward the template for a letter I nicknamed “Thanks for Playing.” The gist of the letter is that the court or agency does not have jurisdiction over the bank and has no power to compel the bank to obey the order.

When a bank receives a garnishment, a child support levy, a state tax levy or the like from a court or state agency or similar body outside the state of Oklahoma, or from a tribal court whether based in Oklahoma or not, there are two main elements to be considered. The first is recognition of judgments, orders, and public acts under “full faith and credit.” The second element is enforcement of those judgments, orders and public acts beyond the boundaries of the state or tribe issuing the judgment or order. This second element has to do with “jurisdiction” over the bank. If the bank has a branch in the state where the judgment was rendered or the levy or garnishment is issued, the Oklahoma bank will be subject to the jurisdiction of that state as well as the state of Oklahoma, and must comply without any need for Oklahoma to recognize, or give full faith and credit to the order.

Federal and state courts
The Full Faith and Credit Clause found in Article IV, Section 1 of the U.S. Constitution, states: “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.” Now whether this clause was intended by those attending the Constitutional Convention to allow public records, including judgments to be admitted into evidence in other states, or whether it was intended to give these records conclusive legal effect in other states, remains unclear. However, the Congress in 1790 clarified things by enacting Title 28 U.S.C.A. § 1738. This statute has been amended a number of times since 1790, but has been in the present form since 1948:

The Acts of the legislature of any State, Territory, or Possession of the United States, or copies thereof, shall be authenticated by affixing the seal of such State, Territory or Possession thereto.

The records and judicial proceedings of any court of any such State, Territory or Possession, or copies thereof, shall be proved or admitted in other courts within the United States and its Territories and Possessions by the attestation of the clerk and seal of the court annexed, if a seal exists, together with a certificate of a judge of the court that the said attestation is in proper form.

Such Acts, records and judicial proceedings or copies thereof, so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State, Territory or Possession from which they are taken.

In essence, “full faith and credit” simply means when a valid judgment is rendered by a court having jurisdiction over the parties, the parties having received required notice of the action and the opportunity to be heard, one court system will honor the decisions rendered by other court systems, i.e., state courts must honor each other’s court decisions under the United States Constitution, and federal and state courts must honor each other’s decisions under federal law. This prevents litigants from forum shopping as well as from retrying the same matter in every state where enforcement is sought. However, the method of enforcing the judgment is subject to the law of the state where enforcement is sought which requires the use of that state’s court.

Tribal and CFR courts
There are two different types of courts in Indian Country: Tribal Courts and Courts of Indian Offenses or “CFR Courts”(so called due to their operating under the Code of Federal Regulations). The fundamental difference between the two is that tribal courts are under the direct authority of the tribe, while CFR courts operate under federal law and are subject to the Bureau of Indian Affairs. Judges for the Tribal Courts are either elected by tribal members or appointed by the tribal council. Eligibility for appointment various by tribe, but generally, any adult member who has had no convictions for a serious crime is eligible, and no formal legal qualifications or knowledge of the law is required. The approximately 17 CFR courts are under the formal control of the Secretary of the Interior. The Bureau of Indian Affairs, after consultation with the tribal council, appoints judges for a four year term.

Federally recognized Indian Tribes are considered sovereign nations just like Mexico, Spain and Uzbekistan. What does that mean? It means that like judgments and orders of foreign nations, these will only be are honored through a compact, by treaty, where there is reciprocity or comity since neither the Constitution nor the federal statute that provide full faith and credit have any application to Tribal and CFR Courts. So where does that leave us? It leaves us with Title 12 O.S. §728:

A. This act affirms the power of the Supreme Court of the State of Oklahoma to issue standards for extending full faith and credit to the records and judicial proceedings of any court of any federally recognized Indian nation, tribe, band or political subdivision thereof, including courts of Indian offenses.

B. In issuing any such standard the Supreme Court of the State of Oklahoma may extend such recognition in whole or in part to such type or types of judgments of the tribal courts as it deems appropriate where tribal courts agree to grant reciprocity of judgments of the courts of the State of Oklahoma in such tribal courts.

Sec. 728 is implemented by Title 12 of the Oklahoma Statutes, Appendix, Rules for District Courts of Oklahoma:

Rule 30. Standards for Recognition of Judicial Proceedings in Tribal Courts-Full Faith and Credit

A. Standards
(1) “Tribal Court” means any court or constitutionally established tribunal of any federally recognized Indian nation, tribe, pueblo, band, or Alaska Native village, duly established under federal law or tribal law, including Courts of Indian Offenses organized pursuant to Title 25, Part 11 of the Code of Federal Regulations.

(2) “Judicial Officer” means any judge, justice, magistrate or other officer duly seated and authorized under federal or tribal law to resolve disputes and enter tribal judgments in a tribal court.

(3) “Tribal Judgment” means any final written judgment, decree or order of a tribal court duly signed by a judicial officer and filed in a Tribal Court.

B. Recognition of Tribal Judgments-Full Faith and Credit
The district courts of the State of Oklahoma shall grant full faith and credit and cause to be enforced any tribal judgment where the tribal court that issued the judgment grants reciprocity to judgments of the courts of the State of Oklahoma, provided, a tribal court judgment shall receive no greater effect or full faith and credit under this rule than would a similar or comparable judgment of a sister state.

C. Listing of Tribal Courts Granting Reciprocity
A list of the tribal courts that grant full faith and credit to the courts of the State of Oklahoma shall be maintained by the Administrative Office of the Courts. Any tribal court may provide the Administrative Office of the Courts a copy of the tribal ordinance, statute, court rule or other evidence that demonstrates that the tribal court grants reciprocity to the courts of the State of Oklahoma.

D. Filing of Tribal Judgments
A copy of any tribal judgment authenticated in accordance with the applicable act of Congress or of the statutes of this state or the law of the tribe may be filed in the office of the district court clerk of any county of this state. The district court clerk shall treat the tribal judgment in the same manner as a judgment of the district court of any county of this state which may be enforced or satisfied in like manner…

In other words, if a judgment meets the requirements of Rule 30 AND the Tribal or CFR Court is on the list of courts granting reciprocity to the courts of the State of Oklahoma, the Oklahoma Courts will recognize and permit enforcement under Oklahoma law. Below is the most recent list of Tribal Courts supplied to me by the Administrative Office of the Courts:

FULL FAITH AND CREDIT OF TRIBAL COURTS
(Updated Sept.2, 2010)

Tribe                                                    Date Received
Creek (Muskogee Nation)               June 21, 1994
Seminole Nation                              Dec. 22, 1994
Kiowa Tribe                                       April 6, 1995
Comanche Tribe                              April 6, 1995
Apache Tribe                                     April 6, 1995
Wichita Tribe                                     April 6, 1995
Caddo Tribe                                      April 6, 1995
Delaware Tribe                                 April 6, 1995
Fort Sill Apache Tribe                      April 6, 1995
Ponca Tribe                                       April 6, 1995
Tonkawa Tribe                                  April 6, 1995
Cherokee Nation                              May 26, 1995
Osage Nation                                    Dec. 4, 1995
Citizen Band Potawatomi Nation   Nov. 21, 1996
Chickasaw Nation-Court of Indian Offenses       Sept. 2, 1999
Kaw Nation- Supreme Court           Feb. 17, 2004
Ho Chunk                                            Aug. 11, 2004
United Keetoowah Band of Cherokee Indians In Oklahoma       Nov. 12, 2008
Choctaw Nation of Oklahoma         Feb. 11, 2010
Kickapoo Tribe of Oklahoma           March 29, 2010
Quapaw Tribe of Oklahoma            June 16, 2010
Iowa Tribe of Oklahoma                   Aug. 20, 2010
Peoria Tribe of Indians of Oklahoma         Aug. 27, 2010

ATM notice relief

By Andy Zavonia

Since 1999 the Electronic Fund Transfer Act and its implementing Regulation E has required a duplicative disclosure which has been a thorn in the side of many banks. Section 1005.16 was added to inform consumers about fees for use of an ATM (often called “surcharges”), largely as a reaction to various attempts to prohibit such fees. In what many bankers have considered disclosure over-kill, there is a required notice to be posted on the machine itself, and a second notice on the screen or on a paper notice. But 13 years ago ATM screens were generally smaller and had lower resolution, and consumers were less familiar with ATMs and the fees that were being charged to use one. Congress believed in 1999 the second notice was warranted, but that attitude has changed, prompted largely by banks and litigious consumers and their attorneys.

Some banks have suffered through lawsuits or settled with consumers who went to ATMs and used them, then documented that the notice on the machine was either removed or was in a place that was inconspicuous and therefore not readily observed. Banks were going to extra efforts to verify that the notices placed on the machines were being replaced when they disappeared, often mysteriously. With H.R. 4367, Congress recognized that “the EFTA’s physical disclosure requirement has become obsolete, [and] the requirement exposes banks, credit unions and retailers to frivolous lawsuits and unnecessary costs.” Congress was convinced these lawsuits and unnecessary costs could drive up ATM fees and passed the bill to eliminate the duplicative disclosure.

H.R. 4367 eliminates the requirement that the fee notice be displayed on the machine, allowing the disclosure requirement to be met if the notice appears only on the ATM screen. The bill was signed by the President on December 20, 2012. It is unknown if this change to the EFTA will affect existing lawsuits, but it will stop future suits.

Hot topics for 2013 from the FRB

On Dec. 4, 2012, the Federal Reserve Board presented a webinar on “Consumer Compliance Hot Topics.” The agencies do not stand alone when it comes to compliance issues, so regardless of which agency is your institution’s prudential regulator, the Fed’s list should be reviewed. This is a short recap of the key topics and provisions that were discussed.

Regulatory Updates:

1. Remittance Transfer Rule – We have written on this in the Legal Briefs. On November 27, 2012 the Consumer Finance Protection Bureau (CFPB) announced it would delay the implementation date to February 7, 2013 and it released tweaks to the Reg E changes on December 21. Details on those changes are in this issue, written by John Burnett.

2. Mortgage Proposals – Ten mortgage proposals are in the wings with six due in January and the remaining four without due dates.

a. Mortgage Loan Originator Rule
– No-point, no loan fee option
– Interest rate reduction with upfront points and fees
– Adjustments to existing loan originator compensation rules
– MLO qualification and screening standards
– Restrictions on arbitration clauses and credit in- surance financing

b. Improved Consumer Access to Appraisal Re- ports
– Require creditors to inform consumers within 3 days of applying for loan to right to receive a copy of appraisal reports and home value estimates
– Require creditors to provide appraisal reports to consumers 3 days before closing
– Prohibit creditors from charging consumers fees for obtaining the report copies (can still charge for conducting appraisals)

c. Appraisals for Higher Risk Mortgages. New in- teragency requirements include:
– Require creditors to use licensed or certified ap- praisers
– Require written appraisal report based on physi- cal inspection of the interior of the property
– Require disclosure of information about the purpose of the appraisal
– Require lenders provide a free copy of any ap- praisal report
– Require additional appraisal if seller acquired property for lower price in prior six months to address fraudulent property flipping

d. Mortgage Loan Servicing Amendments
– Monthly mortgage statements
– Notice of interest rate adjustments
– Force-placed insurance protections
– Early outreach for delinquent borrowers
– Prompt crediting of payments
– Accurate information management
– Error resolution and information
– Direct and ongoing access to servicing personnel
– Evaluation of alternatives to foreclosure

e. High-Cost Mortgages and Homeownership Counseling Amendments
– Expand types of mortgages subject to protec- tions of HOEPA
– Prohibit certain types of higher risk features
– Prohibit and limit certain types of fees
– Add restrictions on HOEPA mortgages, includ- ing a pre-loan counseling requirement
– Impose additional requirements related to homeownership counseling

f. Ability to Repay – New Data and Info Ability to Repay Rule (transferred from the FRB to the CFPB)
– Require lenders assess consumer’s ability to re- pay mortgage loans before extending them credit
– Define “Qualified Mortgages” (QMs)
– Potentially establish relationship between ability to repay and underwriting variables

g. Integrated Mortgage Disclosures
– New Loan Estimate and Closing Disclosure forms
– Loan Estimate – replaces GFE and early Truth in Lending Disclosure and incorporates new DFA disclosures
– Closing Disclosure – replaces HUD-1 and final Truth in Lending Disclosure
– APR Changes

h. Credit Risk Retention

i. Escrow Proposal
– Lengthen the time for which mandatory escrow accounts for higher-priced mortgage loans must be maintained
– Implement Dodd-Frank Act disclosure require- ments regarding escrow accounts
– Exempt certain loans from statute’s escrow re- quirements –primarily loans extended by credi- tors in rural or underserved areas that meet cer- tain prerequisites
(“g,” “h,” and “i” have no due date)

3. Biggert Waters Flood Insurance Reform Act – We have also written about these changes in prior editions. One recent change in the works is a clarification to define that the escrow provisions in the Act apply to residential properties only. That limitation was omitted from the Act, so that the escrow provisions could be read to apply to commercial and residential property loans. The Senate passed the amendment to add the limitation; the House still needs to vote on the issue.

4. Servicemembers Civil Relief Act – The “Honoring America’s Veterans and Caring for Camp Lejeune Families Act of 2012” was signed into law on August 6, 2012. This amendment extends foreclosure protections from 9 months to 12 months after end of military service. While the extension is not in effect until February 2, 2013, banks would be wise to adopt it now. This provision expires at the end of 2014.
(Separately, we are hearing from bankers that the SCRA will be a focal point in compliance exams in 2013. Examiners will want to review policies, procedures and practices pertaining to these loans. Some banks who are not near military posts mistakenly believe the rules will not apply to them.)

5. Reg Z and M Updates – The threshold for exempt consumer credit and lease transactions is increased to $53,000 for 2013. These exemptions do not apply to private education loans and loans secured by real property (or personal property used or to be used as the consumer’s primary dwelling). The CFPB also adjusted the HOEPA fee trigger, increasing it from $611 in 2012 to $625 in 2013.

6. Supervisory Hot Topics included:

a. Banks need to complete due diligence thor – oughly as they introduce new products, services and fees. Many banks are making such changes as they try to make up for lost revenue.

b. Banks need to look closely at products and ser- vices they are offering from both a fair lending and an Unfair, Deceptive or Abusive Acts or Practices (UDAAP) perspective.

c. Banks need to have effective and well defined change management procedures in place. As we begin to experience the massive changes coming from the Dodd-Frank Act, banks need to veri- fy that the changes implemented are in fact working as planned.

COPPA Update

The FTC recently updated its Children’s Online Privacy Protection Act (COPPA) rule, which does apply to banks. While most banks will have no issues with COPPA, knowing what to avoid or how to address the requirements can keep it that way.

COPPA imposes certain requirements on your bank’s website and online services if they are directed at children under 13 years of age. If you have actual knowledge that you are collecting personal information online from a child under 13 years of age, you are required to provide a notice to the parents and obtain verifiable parental consent prior to collecting, using, or disclosing personal information from the child. COPPA also requires that you secure the information collected and prohibits you from conditioning children’s participation in activities on the collection of more personal information than is reasonably necessary. We have not heard of banks having violations under COPPA but an aggressive child/student savings program could fall into these requirements.

The recent amendments to the COPPA Rule include an update and specifically address smart phones and apps used on them. These changes include:

• Modification of the definition of “personal information” that cannot be collected without parental notice and consent, clarifying that this category includes geo-location information, photographs, and videos.
• Offering companies a streamlined, voluntary approval process for new ways of getting parental consent. In the past a credit card was a common verification technique. Now banks may use electronic scans of signed parental consent forms, video-conferencing, use of government-issued identification, and alternative payment systems, such as debit cards and electronic payment systems, provided they meet certain criteria.
• Closing a loophole that allowed kid-directed apps and websites to permit third parties to collect personal information from children through plug-ins without parental notice and consent.
• Extended coverage in some of those cases so that the third parties doing the additional collection also have to comply with COPPA.
• Extended the COPPA Rule to cover persistent identifiers that can be used to recognize users over time and across different websites or online services, such as IP addresses and mobile device IDs.
• Strengthened data security protections by requiring that covered website operators and online service providers take reasonable steps to release children’s personal information only to companies that are capable of keeping it secure and confidential.
• Requires that covered website operators adopt reasonable procedures for data retention and deletion.
• Strengthens the FTC’s oversight of self-regulatory safe harbor programs.

The COPPA Rule changes will be effective July 1, 2013.

Deposit insurance reminder

By John Burnett

We aren’t sure of the source of the misinformation, but we’ve heard a lot of chatter among bank customers related to the recent end of the temporary unlimited deposit insurance coverage for non-interest bearing transaction accounts. Apparently, some customers aren’t aware that the standard maximum deposit insurance amount (SMDIA) was permanently increased to $250,000 by section 335 of the Dodd-Frank Act (the increase from $100,000 to $250,000 was first made on a temporary basis in October 2008). There is also an inflation adjustment mechanism in the Federal Deposit Insurance Act, with the next review due in 2015.
Make sure your customer contact personnel are aware that some depositors may be unnecessarily concerned by the old $100,000 limit, and do a quick check of your deposit insurance signs to ensure that they’ve all been updated to read “Each depositor is insured to at least $250,000” above the big “FDIC” graphic.

Remittance transfers: a brief reprieve

As we noted last month, the CFPB decided that some of the provisions of the Foreign Remittance Transfers rule, set to become effective on February 7, 2013, needed some “fine tuning.” The Bureau announced a proposal to make three substantive changes to the rule, all of them designed to make compliance less burdensome to providers of remittance transfer services. The effective date of the rule will also be delayed a bit.

Foreign taxes and institution fees

If a remittance transfer provider does not have specific knowledge regarding variables that affect the amount of foreign taxes imposed on the transfer, the current rule permits a provider to rely on a sender’s representations regarding these variables when estimating such taxes. The proposal would add separate permission to estimate by disclosing the highest possible foreign tax that could be imposed with respect to any unknown variable.

Similarly, if a provider does not have specific knowledge regarding variables that affect the amount of fees imposed by a recipient’s institution for receiving a remittance transfer in an account, the proposal would permit a provider to rely on a sender’s representations regarding these variables. Separately, the proposal would also permit the provider to estimate by disclosing the highest possible recipient institution fees that could be imposed on the remittance transfer with respect to any unknown variable, as determined based on either fee schedules made available by the recipient institution or information ascertained from prior transfers to the same recipient institution. If the provider cannot obtain such fee schedules or information from prior transfers, the proposal would allow a provider to rely on other reasonable sources of information.

Elimination of sub-national taxes

There was significant concern about transfers to locations where regional, local or other taxes might be imposed, and the difficulties involved in obtaining and maintaining current information on such taxes. The proposal would eliminate the requirement to disclose foreign taxes at the regional, state, provincial or local level (only taxes imposed by a country’s central government would have to be disclosed). Providers would be permitted, but not required, to disclose any sub-national taxes of which they are aware.

The big concern: Wrong account information from sender

At the top of remittance transfer providers’ lists of concerns with the Rule is the error resolution provision involving situations in which a Sender provides incorrect account number information for a recipient’s account, and the funds are credited based on that misinformation, and incapable of being recovered by the remittance transfer provider. Under the current rule, the provider would be responsible for replacing the funds, even though the error was caused by the erroneous information from the sender.

Under the proposal, where the provider can demonstrate (1) that the sender provided the incorrect account number and (2) that the sender had notice that the sender could lose the transfer amount, the provider would be required to attempt to recover the funds but would not be liable for the funds if those efforts were unsuccessful. The Bureau also proposes to revise the existing remedy procedures in situations where a sender provides incorrect or insufficient information other than an incorrect account number to allow providers additional flexibility when resending funds at a new exchange rate. Under the proposed rule, providers would be able to provide oral, streamlined disclosures and need not treat the resend as an entirely new remittance transfer.

Postponed effective date

Rather than have the Remittance Transfers Rule go into effect on February 7 without the proposed changes and have the changes added once the regulatory proposal steps have been completed, the Bureau is also proposing to delay the implementation date of the entire Rule to 90 days after the proposal is finalized. That will allow some time for providers to make any needed changes in their forms, disclosures or software to adapt to the revisions to the Rule.

Comment deadlines

If you want to comment on the Bureau’s proposal to postpone the effective date of the Remittance Transfers Rule, get your thoughts together quickly. Comments on just that aspect of the proposal are due by January 15, 2013. We think that the postponement is a “done deal,” though. If you have something to offer on any of the other proposed changes, the deadline is January 31, 2013.

Religious headgear and compliance

By Mary Beth Guard

Why would you possibly care about what’s on the head of someone inside your bank? In another article in this edition of Oklahoma Banker, Elaine Dodd discusses security implications. Here, let’s talk about compliance.

Two aspects of compliance come into play: your Red Flags Identity Theft Prevention Program and the Customer Identification Program (CIP) requirements from the USA PATRIOT Act. If someone is attempting to perform a transaction on your customer’s account, you need to confirm it’s really your customer in order to comply with the Red Flag rules. And when someone is opening an account, the CIP rules require you to be able to form a reasonable belief that you know the true identity of the individual.

If someone came in with a ski mask to cash a check or open an account, you wouldn’t hesitate to tell them they would need to remove it so you could take a gander at them, but when the headcovering is worn for religious purposes, a more sensitive approach is required.

As a result of an incredibly informative recent meeting at the OBA, I have a much better understanding of religious headcoverings worn by Muslim women, so I can fill you in on what you need to know. There are three types. Typically, each is worn as a sign of devotion to the Lord and as a way to be humble before him. The choice is up to the Muslim woman; she may choose to wear any of these.

The above referenced meeting was with representatives from the ACLU, Council on American-Islamic Relations and the Oklahoma Conference of Churches. All three indicated a willingness to help banks with religious diversity training. Feel free to contact Elaine or Lea Ann at the OBA for contact information on this.

The Hijab is a headcovering that covers all or part of the hair and is draped around the neck. It should not interfere with your ability to match the person to a photo I.D. and there should be no reason to ask the customer to remove it.

The Niqab fully covers the body, but only partially covers the face. It leaves a narrow opening for the eyes. You cannot fully confirm the identity of a person wearing a Niqab. In connection with opening an account or doing some other transaction where you need to ascertain identity, a female bank employee should ask that the Niqab be lifted in order to allow viewing of the face. This should be done as discreetly as possible and it should be done in an area where the viewing of the face will not be witnessed by males (unless they are related to the individual).

The third type of headcovering is the Burqa. It covers the head, as well as fully covering the body. The major distinguishing feature between the Burqa and the Niqab is that the Burqa has a window made of netting covering the eye area. The netting allows the wearer to see out, but prevents anyone from seeing in. As with the Niqab, it is necessary for you to request that the Burqa be lifted in private so that a female bank employee can view the woman’s face. Obviously, there is no way for you to form a reasonable belief that you know the true identity of the individual when fabric completely obstructs your view of them.