December 2014 Legal Briefs

December 15, 2014

Disparate impact – Why this case is important
Tit. 42 O.S. §§ 91 and 91A amended
FinCEN, the OCC, MSBs and Regulatory Risk

Disparate impact – Why this case is important

By Andy Zavoina

The Supreme Court of the United States (“SCOTUS”) is scheduled to hear arguments on disparate impact January 21, 2015. I want to quickly visit what this is and why the case is important to your bank.

You may have also heard this referred to as the “effects test.” It is when a bank applies what appears to be a neutral policy equally to all credit applicants, but the policy disproportionately excludes or burdens certain persons on a prohibited basis. For example, if your policy is to make no mortgage loan less than $100,000, what homes, areas, or borrowers does that exclude from your loan base? In most areas, it begins to exclude older neighborhoods occupied by a more minority population and those with lower incomes. And this is where the fair lending issues arise because, in effect, you limit loans to minorities regardless of the policy’s intent.

Disparate impact does not require there be any intent to discriminate, nor does it even require a conscious knowledge that it may be happening. In many respects disparate impact is a theory that indicates discrimination has or could have taken place without substantive proof. In most cases it is a numbers game where dots are connected that point toward discrimination or the likelihood that it could occur. An old adage is “figures don’t lie, but liars figure.” Some believe that holds true here.

During the Obama administration disparate impact has been used to collect hundreds of millions of dollars in fair lending settlements while it was difficult to prove conclusively that there was illegal discrimination at all or that it could happen. Many lenders say that if any correlation is drawn between income and race, the ability to repay rules are fundamentally flawed and disparate impact could be claimed in many enforcement actions where lenders are simply trying to follow new underwriting rules. Defending a lender’s policy here is expensive, draws tremendous resources that are already stretched, and settling such cases is the business decision of choice. Regulatory agencies and law enforcement bodies use disparate impact as a tool in enforcement actions while many experts in the field claim it has no basis. HUD, however, has maintained that it does under the Fair Housing Act (FHA).

Two cases involving legal challenges to disparate impact have previously been set for hearing by SCOTUS: Magner v. Gallagher and Township of Mount Holly v. Mt. Holly Garden Citizens in Action, Inc., but settlements were reached prior to hearing. Texas Department of Housing and Community Affairs v. The Inclusive Communities Project is set for hearing in January. The administration has a lot to lose if the court determines disparate impact does not exist under the FHA. The CFPB has also used disparate impact to enforce the Equal Credit Opportunity Act. The decision will affect past, present and future enforcement actions. SCOTUS will only consider the issue of whether the FHA allows disparate impact claims, not what standards apply for such claims to go forward. Not all questions will be answered, but the ruling on this case could greatly change the direction of lending, especially mortgages.

Tit. 42 O.S. §§ 91 and 91A amended

By Pauli D. Loeffler

The lien provisions in Title 42 O.S. §§ 91 and 92 were amended last legislative session. The amendments for covered liens were effective November 1, 2014. This article will look at coverage, requirements, and changes made by the amendments; however, provisions under these statutes concerning a lien claimant who has provided a service to the owner by furnishing materials, labor or skill furnished, or arrangement for storage or rental space where the property has been removed from the lien claimant’s possession without consent or by payment which is dishonored is not included. A thorough discussion regarding those provisions may be found in the October 2006 OBA Legal Briefs.

Title 42 O.S. § 91

Coverage. This section covers any vehicle, ATV, utility vehicle, manufactured home, motorcycle, outboard motor or trailer (collectively, "vehicles") having a certificate of title issued by the Oklahoma Tax Commission or a federally recognized tribe in the State of Oklahoma (i.e., it does not cover vehicles registered in other states). § 91 excludes "farm equipment," defined and covered by § 92.1, vehicles with no lien on the title, or vehicles with a lien entry dating back more than 15 years. If a manufactured home is involved, the “more than 15 year old” exclusion from § 91 does not apply.

Even if there is an active lien, § 91 will not apply if no certificate of title has been issued. Vehicles in salvage pools are also excluded from § 91 coverage.

The amendments to § 91 provide two new exclusions from coverage:

A vehicle impounded and/or towed at the direction of law enforcement or a government agency
A vehicle left on property without permission for at least 48 hours and towed under the provisions of Title 47 O.S. § 954A.

§ 91 is amended to cover consensual tows by an AA wrecker service unless one of the exclusions applies. Vehicles excluded from coverage under this section will be covered either § 91A or § 92.1

Notice of Possessory Lien. As amended, the claimant is required to mail a notice of lien to all interested parties residing at separate locations by both regular, first class mail, and by certified mail, return receipt requested. Timing has not changed: it must be done no later than 60 days after the first services are rendered, or 60 day period for services provided primarily for storage (e.g., boat storage, mobile home lot rental and the like) that commences on the first day of the first period or partial period that rental or storage charges pursuant to an agreement remain unpaid. Repair shops cannot accrue storage charges prior to mailing the Notice of Possessory Lien. Most repair shops will do so within 30 days to get the repair bill paid and get the vehicle off the lot.

The Notice of Possessory Lien must be signed by the claimant, and the claimant’s attorney, if applicable. If the claimant is a business, the name of the contact person representing the business must be included. The claimant’s signature must be notarized.

The Notice must contain:

A statement that the notice is a notice of possessory lien;
The complete legal name, physical and mailing address, and telephone number of the claimant;
The complete legal name, physical and mailing address of the person who requested the claimant provide the service to the owner by furnishing materials, labor or skill furnished, or arrangement for storage or rental space, or the date the property was abandoned if the claimant did not provide any other service;
A description and photograph of the vehicle, with the complete physical and mailing address of the location of the vehicle;
An itemized statement describing the date(s) the labor or services were performed and materials furnished, and the charges claimed for each item. The total of these shall equal the total compensation claimed;
A statement that the materials, labor or skill furnished, or arrangement for storage or rental space was authorized by the owner and was in fact provided or performed;
The claimant must provide written proof of the authority to perform the work, labor or service, or that the vehicle was abandoned by the owner if no other service was rendered, and that the storage or rental fees will accrue as allowed by law.

Inspection of property and retrieval. Before sale, any interested party is permitted to inspect and verify the services provided during normal business hours. Effective November 1, 2014, the lienholder is allowed to retrieve the vehicle without first obtaining a “repo title” upon providing proof of the lien and paying the claimant lawful charges when the claimant has complied with the requirements of the statute (i.e., authority to make repairs, a storage/rental agreement, etc.). Release of the vehicle to an insurer or its representative exempts wrecker operators from all liability for any losses or claims of loss.

Notice of Sale. The lien may be foreclosed by sale. The number of public postings of the Notice of Sale made in the county where the sale will take place has been reduced from three to two. The Notice of Sale must be posted and mailed to all interested parties by both first class and certified mail, return receipt requested, at least 10 days prior to the sale. The sale is required to occur not later than 60 days from the certified mailing of the Notice of Sale. The following italicized language in the amended statute attempts of clarify the time frame: "[F]oreclosure… shall be commenced no sooner than ten (10) days and no later than thirty (30) days after the Notice of Possessory Lien has been mailed as evidenced by certified mail."

The Notice of Sale must be signed and notarized–this may be done electronically–and must contain at a minimum:

A statement that the notice is a Notice of Sale;
The names of all interested parties known to the claimant. If the item of personal property is a manufactured home, notice shall also be sent by certified mail to the county treasurer and to the county assessor of the county where the manufactured home is located;
A description of the property to be sold, including a new photograph if the condition of such property has materially changed since the mailing of Notice of Possessory Lien;
A notarized statement of the nature of the work, labor or service performed, material furnished, or storage or rental of space, and the date thereof, and the name of the person who authorized the work, labor or service performed, or the storage or rental arrangement, and written proof of authority to perform the work, labor or service, or that the property was abandoned if the claimant did not render any other service;
Itemized charges which shall equal the total compensation claimed;
The date, time and exact physical location of sale;
The name, complete physical address, mailing address and telephone number of the party foreclosing such lien;
If the claimant is a business, then the name of the contact person representing the business must be shown.

Claimant must strictly comply with the statute. The special possessory lien provided under this section will have priority over any perfected liens (e.g., lien entries and other lien claimants), ONLY if the lien claimant strictly complies with ALL applicable provisions of § 91. Any failure to comply will result in denial of any title application and result in the lien being subordinate to other perfected liens. The applicant is entitled to one resubmission of the title application within 15 business days of receipt of the denial. "Failure to Comply" includes:

Failure to timely provide additional documentation or verification of any entry on forms submitted to the Tax Commission upon its request including the return receipt for certified mail or its electronic equivalent
Failure to provide documentation of “lawful possession” as defined in the statute
Claimant or agent of the party is not the individual who provided the service giving rise to the lien
Claimant is not in actual or constructive possession of the property as defined by the statute.
Notice of Possessory Lien does not comply with the provisions of the statute
Notice of Sale and the sale proceedings do not comply with the provisions of the statute

Damages and penalties. Failure to comply with any of the requirements of the statute permits any interested party to sue for damages including conversion if the property has been sold to a good faith purchaser. If the notice or notices required by this section are shown to be knowingly false or fraudulent, the interested party is entitled to treble damages. The prevailing party is entitled to costs and attorney’s fees. Further, if a person knowingly makes a false statement of material fact or uses the statute to foreclose an owner or lienholder’s interest knowing any statement made in the proceeding is false, he may be found guilty of a felony.

Stay of sale by the Tax Commission. The statute now provides: "[T]he Tax Commission shall cause the sale process to be placed on hold" upon receipt of a notice of the commencement of legal proceedings. The sale is stayed until the court proceedings are resolved. If the notice of commencement of court proceedings is not filed, the sale process may continue.

Title 42 O.S. § 91A

Coverage. This section has broader coverage than §91. It covers not only vehicles excluded from § 91 coverage but all personal property with no certificate of title such as appliances, furniture, equipment, industrial machinery, jewelry, computers, and musical instruments. This is the “catch-all” category statute. Farm equipment covered under § 92.1 is excluded from coverage under this section.

Notice of Possessory Lien. Unless the property is released to an interested party before the Notice of Possessory Lien must be mailed, the timing and procedures for mailing the Notice of Possessory Lien have to be followed. These requirements are more onerous and complicated for the claimant than those under § 91.

Within 5 business days of performing any service or work, the lien claimant must contact the Tax Commission or appropriate license agency for information regarding the name and address of the current owner of the property and any lienholder. The Motor Vehicle Division of the Tax Commission or appropriate license agency shall respond within 10 business days of receipt of the request either in person or by mail.

Within 7 business days of receipt of the requested information from the Oklahoma Tax Commission or other license agency, the claimant must provide a notice of the location of the property to the owner(s) and any lienholders at the addresses provided. This period does not begin to run until the earlier of: a) release of the property if towed to a law enforcement facility, or b) when the claimant starts charging storage. If a state of emergency has been declared in the county where the property is located, the claimant shall have an extension of 10 business days to send the Notice of Possessory Lien.

While § 91 requires the notice to be mailed by both certified and first class mail, § 91A does not: The notice is only required to be sent by certified mail, return receipt requested. If the notice is timely sent, the lien claimant may charge $20.00 for processing plus postage. If the VIN is missing or altered and prevents the lien claimant from meeting the time requirements, the claimant shall diligently proceed to obtain the proper VIN, and once it is obtained, meet the time requirements. In the event the claimant has to send additional notices due to a change in ownership or in lienholders after having previously complied with the timing requirements, provided the additional notices are sent within 7 business days of date of discovery of the new owners or lienholders, the claimant will remain in compliance.

The contents of the Notice of Possessory Lien under § 91A are the same as those for § 91 set out above EXCEPT:

a photo of the vehicle/property is not required
in the case of a law enforcement tow, the logbook entry prescribed in OAC 595:25-5-5 or the tow ticket as defined by the Corporation Commission is required to show written proof of authority

Salvage pools are not subject to these Notice of Possessory Lien requirements.

Inspection of property and retrieval. Before sale, any interested party is permitted to visually inspect and verify the services rendered by the claimant, just as provided under § 91, but § 91A goes further and has procedures to allow the inspection:

If the claimant fails to allow any interested party to inspect the property, the interested party shall mail a request for inspection by certified mail, return receipt requested, to the claimant. Within three (3) business days of receipt of the request for inspection, the claimant shall mail a photograph of the property, by certified mail, return receipt requested, and a date of inspection within five (5) business days from the date of the notice to inspect.

The lienholder shall be allowed to retrieve the vehicle without first obtaining a “repo title” by providing proof of the lien and paying the claimant for lawful charges where the claimant has complied with the requirements of this statute. Release of the vehicle to an insurer or its representative, exempts wrecker operators from all liability for any losses or claims of loss.

When any law enforcement agency has had the property impounded, the party wishing to inspect or photograph the property is required to obtain permission from the law enforcement agency before inspecting or photographing.

Notice of Sale. The number of public postings of the Notice of Sale in the county where the sale will take place has been reduced from three to two. The Notice of Sale must be posted and mailed to the owner and any other party claiming an interest by certified mail, return receipt requested at least 10 days prior to the sale. If the item of personal property is a manufactured home, notice shall also be sent by certified mail to the county treasurer and to the county assessor of the county where the manufactured home is located. The notice of sale shall not be mailed until at least 30 days after the lien has accrued. Note there are special provisions allowing sale within 5 days for junk vehicles (more than 10 years old with a NADA cost of less than $300.00 towed and stored by class AA wreckers).

If the jurisdiction of titling for a vehicle, ATV, motorcycle, boat, outboard motor or trailer 5 model years old or newer, or a manufactured home 15 model years old or newer, cannot be determined by ordinary means, the claimant, his agent or attorney shall make a written request to the Oklahoma Tax Commission Motor Vehicle Division to ascertain where the vehicle or manufactured home is titled. The Oklahoma Tax Commission Motor Vehicle Division shall respond within 14 days of receipt of the request. If it is unable to provide the information, it will provide a notice that that the record is not available.

If Oklahoma law requires the vehicle to be titled, and the record owner of the property is unknown, and the jurisdiction of titling and owner of record cannot be determined, then the Notice of Sale may be foreclosed by publication notice. The notice must include a description of the property by year, make, VIN (if available), the name and telephone number of the individual who may be contacted for information or the address where the vehicle is located. The publication notice must be published for 3 consecutive weeks. The first date of publication may occur even if the special lien has not accrued for over 30 days.

If the property does not have a certificate of title and is not required to be titled under Oklahoma law (this would include smaller trailers with a consumer use and ATVs acquired before July 1, 2005, that have not transferred since that date), the Notice of Sale must be sent to: all owners; any secured party who has an active financing statement on file with the county clerk of Oklahoma county listing one or more of the owners; and any other person claiming an interest of whom the claimant has actual notice.

If the property has a certificate of title issued by any jurisdiction, the Notice of sale must be sent to: all owners as indicated by the certificate of title; lien debtors, if any, other than the owners; any lienholder whose lien noted on the face of the certificate of title; and any other person having any interest in the property, of whom the claimant has actual notice. This applies to all vehicle with certificates of title issued by other states, as well as those issued by the Tax Commission, and federally recognized tribes in Oklahoma that either have no lien on the title and vehicles, other than manufactured homes, with the liens more than 15 years old.

The Notice of Sale must be signed and notarized–this can be done electronically–and must contain:

The names of owner and any known party or parties interested in the property. If the item of personal property is a manufactured home, notice shall also be sent by certified mail to the county treasurer and to the county assessor of the county where the manufactured home is located;
A description of the property to be sold, including a visual inspection or a photograph if the property is a motor vehicle, and the physical location of the property (this language is new, and I suppose “a visual inspection” other than a photograph might be a link to a website with photos of the exterior and interior);
The nature of the work, labor or service performed, material furnished, or the storage or rental arrangement, and the date thereof, and written proof of authority to perform the work, labor or service provided. In the case of a law enforcement directed tow, the logbook entry prescribed in OAC 595:25-5-5 or the tow ticket as defined by the Corporation Commission, shall serve as written proof of authority;
The time and place of sale;
The name, telephone number, physical address and mailing address of the claimant, and agent or attorney, if any, foreclosing the lien. If the claimant is a business, then the name of the contact person representing the business must be shown; and
Itemized charges which must equal the total compensation claimed.

Claimant must strictly comply with the statute. Except for a Class AA wrecker towing charge, the special possessory lien provided under this section and will have priority over any perfected liens (e.g., lien entries and other lien claimants), ONLY if the lien claimant strictly complies with ALL applicable provisions of § 91A. Any failure to comply will result in denial of any title application and result in the lien being subordinate to other perfected liens. The applicant is entitled to one resubmission of the title application within 15 business days of receipt of the denial. "Failure to Comply" includes:

Failure to timely provide additional documentation or verification of any entry on forms submitted to the Tax Commission upon its request including the return receipt for certified mail or its electronic equivalent
Failure to provide documentation of “lawful possession” as defined in the statute
Claimant or agent of the party is not the individual who provided the service giving rise to the lien
Claimant is not in actual or constructive possession of the property as defined by the statute.
Notification and proceedings not accomplished in accordance with the statute

Salvage pools are NOT subject to these requirements.

Damages and penalties and Stay of sale by the Tax Commission. The provisions under this statute are identical to the provisions under § 91, above.

FinCEN, the OCC, MSBs and Regulatory Risk

By John S Burnett

Has “regulatory risk” become too risky for a bank to include in its list of reasons for not seeking out or even avoiding certain types of business? Recent communications from the Financial Crimes Enforcement Network (FinCEN) and the OCC certainly suggest so.

FinCEN’s statement

On November 10, FinCEN issued a statement on “Providing Banking Services to Money Services Businesses.”The statement expressed “concern that banks are indiscriminately terminating the accounts of all MSBs, or refusing to open accounts for any MSBs, thereby eliminating them as a category of customers.”

The statement goes on to say, “FinCEN … expects banking organizations that open and maintain accounts for MSBs to apply the requirements of the Bank Secrecy Act, as they do with all accountholders, based on risk. Banking organizations must have appropriately designed policies and procedures to assess an MSB’s money laundering and terrorist financing risks…. The levels of risk will vary; therefore, MSBs should be treated on a case-by-case basis. FinCEN and its regulatory colleagues will continue to monitor trends with respect to the provision of banking services to MSBs and are committed to taking steps to address the wholesale de-banking of an important part of the financial system.”

OCC’s Bulletin 2014-58

On November 19, the OCC followed with a Bulletin supporting FinCEN’s position and disclaiming any OCC pressure on banks to avoid doing business with MSBs. The Bulletin states, “As a general matter, the OCC does not direct banks to open, close, or maintain individual accounts, nor does the agency encourage banks to engage in the termination of entire categories of customer accounts without regard to the risks presented by an individual customer or the bank’s ability to manage the risk.”

In closing, the OCC Bulletin noted: “In keeping with the OCC’s mission and commitment to ensuring all customers have fair access to financial services, the agency expects OCC-regulated banks to assess the risks posed by each MSB customer on a case-by-case basis and to implement appropriate controls to manage the relationship commensurate with the risks associated with each customer.”

Analysis

The term “regulatory risk” is usually understood to mean the risk of regulatory criticism or citation in an examination report. That could include a perception that a bank’s regulator is currently looking negatively at particular practices or actions, either as specific regulatory violations or as potentially unsafe or unsound banking practices. For example, regulatory risk was perceived by many banks in connection with the Justice Department’s Operation Choke Point and a related communication by the FDIC that included examples of what it called higher-risk businesses (later reissued without the list). Regulatory risk can be perceived in the context of a regulator’s communication with financial institutions.

It’s also clear that banks have seen regulatory risk in various enforcement actions taken against institutions that have failed to control their dealings with MSBs. What’s sometimes overlooked is that those enforcement actions are taken against egregious cases, often involving a desperate over-reach for income by doing business with MSBs or other businesses without any regard for controls or risk management.

There is nothing in the FinCEN or OCC communications that says a bank must bank MSBs. But a blanket statement in a bank’s policy that says the bank will not take on such business solely due to the regulatory risk such business carries is likely to be criticized (by the OCC, for example) as a failure to provide fair access to financial services and fair treatment of customers. But neither FinCEN nor OCC expects a bank to take on business that brings more risk than the bank is equipped to profitably control and manage.

Simply put, there is no one-size-fits-all answer to the question of banking MSBs. FinCEN and the OCC make it clear, though, that they consider it a “cop out” to have a blanket “no MSBs need apply” policy in an attempt to avoid the need for BSA/AML risk analysis.