January 2016 Legal Briefs

• Privacy Notice Changes
• Gotchas!
  • Settlement Fee May Be a Finance Charge
  • Limits on Releasing Funds of Decedent under Section 906 of the SBC
  • Effect of Divorce or Annulment on POD Accounts
  • Reg O Executive Officer Loan Limits
  • Pulling Credit Reports on Individuals
  • Releasing Customer Records with Authorization
  • Limits on Refinancing Certain Balloon Loans
  • Loans to Non-U.S. Citizens
  • When You Haven’t Got Everyone on the Same Page
  • The TRID Rule’s “Alternate Tables”
  • Reg DD Balance Disclosure Rule, ODP Access
  • Pre-deceasing POD Beneficiaries

Privacy Notice Changes

By Andy Zavoina

Were you aware the annual notice requirements for privacy notices have changed? On December 4, 2015 President Obama signed a new law, the FAST Act – Fixing America’s Surface Transportation Act. Yes, this really is a bill about improving highway and transportation infrastructure but as one bill is attached to another as a rider, we can end up with unrelated topics in a bill, getting passed. This is a reason to read daily compliance briefings as most compliance officers would not otherwise read a highway bill for changes to bank compliance.

Here is the short version of what management needs to know: Public Law 114-94, the FAST Act, is providing an exception to the annual privacy act notice requirement under Gramm-Leach-Bliley. With the revised requirement, if your bank has not changed its privacy policy and does not share nonpublic personal information, meaning an opt-out isn’t otherwise required, you will not have to send annual privacy notices. More details are below.

So here is the longer version with information Compliance Officers need to know. Currently under Reg P (§ 1016.5) the bank sends an annual privacy notice which must accurately describe your privacy policies and practices in a clear and conspicuous manner. For Reg P and the Privacy rules, “annually” means at least once in any period of 12 consecutive months.

The FAST Act was effective when it was signed and there was no delayed implementation period. More on that in a minute. Here is the legal version of the change:

SEC. 75001. EXCEPTION TO ANNUAL PRIVACY NOTICE REQUIREMENT UNDER THE GRAMM-LEACH-BLILEY ACT.
Section 503 of the Gramm-Leach-Bliley Act (15 U.S.C. 6803) is amended by adding at the end the following:

‘‘(f) EXCEPTION TO ANNUAL NOTICE REQUIREMENT.—A financial institution that—
‘‘(1) provides nonpublic personal information only in accordance with the provisions of subsection (b)(2) or (e) of section 502 or regulations prescribed under section 504(b), and

‘‘(2) has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent disclosure sent to consumers in accordance with this section, shall not be required to provide an annual disclosure under this section until such time as the financial institution fails to comply with any criteria described in paragraph (1) or (2).’’.
If these conditions apply to your bank, that is you only share nonpublic personal information with nonaffiliated third parties under an exception that does not require an opt-out agreement to be provided and your bank has not changed its policy or practice since you last provided your privacy notice, then you need not mail or deliver the annual notice to your customers.

If you do make a change, say your bank enters into a marketing agreement and you disclose nonpublic personal information to a nonaffiliated third party after offering an opt-out to your customers, then note – you will need to provide the annual privacy notices again.

While the law has now changed effective December 4, 2015, the regulation needs to be updated, as will examination and audit workpapers. I cannot see an examiner who is aware of this change citing a bank for not sending an annual privacy notice that was due after the December date but have your notes in order if they do. The law should trump the regulation that is intended to implement it. Still, it will be nice to see the Consumer Financial Protection Bureau (CFPB) get this housekeeping issue published.

Last year, on October 20, 2014, the CFPB finalized a rule that enabled a bank to publish its privacy notices on the bank website to meet delivery requirements. Some of this disclosure allowance was in the regulation already and predated E-SIGN so while you must meet certain conditions of acceptance, a complete E-SIGN process including demonstrable consent is not required. (Please reference 1016.9(a),(b)(c) and(e).) Under the October 2014 change, to qualify for the online delivery method the bank must not share nonpublic personal information with nonaffiliated third parties in such a way as to require an opt-out and the bank also must use the model forms in the regulation.

The CFPB cited several benefits of that rule, including:
1.    Providing consumers with constant access to privacy policies;
2.    Creating an incentive for financial institutions to limit their sharing of NPI;
3.    Educating consumers using the easily understood model form; and
4.    Reducing financial institutions’ compliance costs by an estimated $17 million annually.

The changes under the FAST Act will essentially negate this October 2014 change but will still accomplish many of these same benefits, especially number 4. Compliance should notify management of this change if your bank has been delivering notices on an annual basis via the U.S. Postal Service. A few dollars in postage and printing can now be saved so long as your bank meets the two prong test.

https://www.gpo.gov/fdsys/pkg/BILLS-114hr22enr/pdf/BILLS-114hr22enr.pdf

Gotcha’s!

You’ve been around long enough to know that it’s the fine print that can get you into trouble.  Laws and regulations often contain innocuous-sounding phrases that, at first glance, don’t appear to mean much, but may actually pack quite a punch in terms of the impact they have.  When their meaning is explained, we sometimes see bankers’ jaws drop and hear audible gasps. The shocking ramifications become clear as bankers review in their minds situations where they may have unknowingly taken action contrary to what they have now learned the law or regulation requires or allows.  It’s a terrible feeling, and unwinding the misstep can be painful.

We believe in practicing prevention.  Knowing where the land mines are can help you step carefully around them.  We have dubbed these tricky provisions “Gotcha’s” and we devote the bulk of this edition’s Legal Briefs to spotlighting and explaining some of the ones that are most troublesome so that you do not suffer “Gotcha” moments from them.  We’ll hit on additional ones in the future.

Gotcha’s

By Mary Beth Guard

Settlement Fee May Be a Finance Charge

The Commentary to Regulation Z at 1026.4(a)(2)2 states:

Required closing agent. If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the imposition of the charge, or retains a portion of the charge. Fees charged by a third-party closing agent may be otherwise excluded from the finance charge under §1026.4. For example, a fee that would be paid in a comparable cash transaction may be excluded under §1026.4(a). A charge for conducting or attending a closing is a finance charge and may be excluded only if the charge is included in and is incidental to a lump-sum fee excluded under §1026.4(c)(7).

In the past, the fee for the required closing agent was typically included in and incidental to a lump-sum fee excluded under §1026.4(c)(7).  Here is the Gotcha — on TRID-covered loans, it is not permissible to lump that fee together with other title services.  The fees charged by the closing agent must be separately itemized – and since they get separately itemized, the fee (on a TRID loan) gets counted as part of the finance charge if the creditor requires the use of a closing agent or if the creditor retains a portion of the charge.

Limits on Releasing Funds of Decedent under Section 906 of the SBC

One of the best things OBA ever got the legislature to enact, in my opinion, is Section 906 of the State Banking Code, which provides authority for a bank to release funds to the heirs of a deceased customer in certain circumstances, avoiding the need for court action or other more complicated processes.

There are several Gotcha’s, however.  The first is that this statute only applies to funds that were in the single ownership accounts of the individual at the time of death (up to a total, in the aggregate of $20,000).  If a direct deposit or a check made payable to the individual comes after the death, the funds from the later-acquired deposit or check are not eligible for transfer to heirs under Section 906.  Two other Gotcha’s under this law:  It can’t be used to transfer deposited funds if the individual left a will.  (After all, the will may say all the decedent’s assets are to go to entities or individuals other than his heirs, so the will creates a barrier to the use of Section 906(A).  The same is true if the account(s) had Payable on Death designations.  The funds instead go to the POD beneficiar(y)ies.  One more Gotcha:  the bank is only protected from liability if it releases the funds in good-faith reliance on the affidavit.  If you know that it was not signed by all the heirs of the decedent, or you know that any of the facts set forth in it are not true, you haven’t relied upon the affidavit in good faith and you could face liability to a whole host of folks, including creditors of the decedent.

Effect of Divorce or Annulment on POD Accounts

Within the Payable on Death statute at Section 901 of the State Banking Code, paragraph 10 consists of one sentence that doesn’t seem to amount to much.  It says:

No change in the designation of a named beneficiary shall be valid unless executed by the owner of the fund and in the form and manner prescribed by the bank; however, this section shall be subject to the provisions of Section 178 of Title 15 of the Oklahoma Statutes.

It is the last part of the sentence that is the Gotcha.  Section 178 of Title 15 says that if a person enters into a written contract where a beneficiary is designated for the payment of any death benefit (including depository agreements) and the beneficiary is a spouse, if the parties divorce or the marriage is annulled after the designation is made, the provisions in the contract in favor of the decedent’s former spouse are thereby revoked.  That means the POD beneficiary designation is out the window – unless the divorce decree or annulment says otherwise, or the parties get remarried and are married at the time of the account owner’s death, or the account owner renames the former spouse as the POD beneficiary after the divorce or annulment.

If there is any chance that your dead customer’s beneficiary was a spouse at the time designated but subsequently became a non-spouse due to annulment or an ex-spouse, due to divorce, do not pay out the funds without inquiring as to the facts.  You could have  simple form “Application for Pay on Death Benefits” that says “As the payable on death beneficiary of _________________’s account, I am requesting distribution of the funds in the account to me.  I ____ was ______ was not ever married to the deceased account holder.   If the answer to the preceding question is that you were married to the deceased account holder, please state the dates of the marriage.“  Have them sign and date it.  If the person was married to the account holder from 1980 to 2014 and your customer designated them POD beneficiary in 1979, they weren’t married at the time, so the divorce provision doesn’t come into play.  If they were designated POD during the marriage, however, and the marriage ended before the death, then you know there cannot be a payout to the former spouse – unless your records show that the account owner renamed the individual as beneficiary in a writing delivered to you after the divorce or annulment and before the account owner’s death.  If you don’t have that, give the would-be beneficiary a copy of the statutes (6 O.S. 901 and 15 O.S. 178) – and see if they have any other grounds that would overcome the statutory revocation of beneficiary designation (such as language in the divorce decree).  If they can’t overcome the revocation, who do the funds belong to?  The estate of the deceased customer.  And, if there is $20,000 or less, you may be able to utilize Section 906 (mentioned above) to release the funds to the heirs upon receipt of a proper affidavit, because the account will be deemed not to have a POD beneficiary designation if that now-revoked designation of the former spouse is all there was.  Of course, if there were multiple beneficiaries and the former spouse was just one of them, you subtract the former spouse and plump up the shares that will go to the remaining beneficiaries.

Reg O Executive Officer Loan Limits

Sometimes there is a tendency to think in shorthand about different regulatory requirements or limitations.  For example, the strictest insider lending limitations apply to a bank’s executive officers, but there are exceptions for certain education loans and certain residence-related loans.  The Gotchas come in when the bank doesn’t nail down all the particulars to confirm that the type of education loan or residence-related loan being made is eligible for the special provisions.

A bank is authorized to extend credit to an executive officer of the bank in any amount to finance education – but only if it is the education of the executive officer’s children!   We’ve seen banks run afoul of this when they have made loans in impermissible amounts to finance an advanced degree being worked on by the EO himself or herself or to finance educational courses being taken by the EO’s spouse.  Neither would qualify for the “any amount” provision.

Likewise, the ability to loan “any amount” to an EO on residence-related credit will only come into play if certain conditions are met.  First condition is purchase.  The proceeds must be used to finance or refinance the purchase, construction, maintenance, or improvement.  (This “any amount” provision doesn’t apply if the EO is obtaining a loan, using equity in a home, to finance the purchase of a vehicle, for example.)  The second condition is that the proceeds have to be used for one of those purposes in connection with a residence of the executive officer.  Third, the bank must get a first mortgage on the residence.  Fourth, the EO must own the property or take title to the property after the extension of credit.  And if it is a refinancing, the only amounts included within this “any amount” category of credit” are the amounts from the loan used to repay the original extension of credit, together with the closing costs of the refinancing (plus you can add in whatever additional amount from the loan that is going to be used for maintenance or improvement of the residence.”

If an extension of credit to an EO doesn’t fit into the “any amount” categories, it is subject to the very restrictive “other purpose” amount limit.

Pulling Credit Reports on Individuals

If you are pulling an individual’s credit report in connection with employment, you must first get written permission after giving a stand-alone disclosure of the employee’s rights.  Otherwise, Gotcha!  You are in violation of the Fair Credit Reporting Act.

Releasing Customer Records with Authorization

If a federal government authority wants information on your customer and wants to get it without a subpoena, summons, search warrant or formal written request and none of the exceptions in Section 3413 of the federal RFPA appear to apply, your customer can authorize the release.  The Gotcha is that the customer authorization, in order to be effective under the RFPA, has to meet seven requirements set forth in Section 3404.  A mere “Give it to them” with the customer’s signature and date doesn’t cut it.

Gotcha’s

By Pauli Loeffler

Limits on Refinancing Certain Balloon Loans

There is a Gotcha here in that the terms of the refinancing cannot be less favorable than the terms of the original loan.

The Oklahoma Uniform Consumer Credit Code (“U3C”) found in Title 14A of the Oklahoma Statutes provides:

Sec. 3-402

With respect to a consumer loan, other than one pursuant to a revolving loan account, if any scheduled payment is more than twice as large as the average of earlier scheduled payments, the debtor has the right to refinance the amount of that payment at the time it is due without penalty. The terms of the refinancing shall be no less favorable to the debtor than the terms of the original loan. These provisions do not apply to the extent that the payment schedule is adjusted to the seasonal or irregular income of the debtor.

Note that Sec. 2-405 covering credit sales has identical provisions. These sections cover consumer loans and credit sales other than most of those that real-estate secured or that exceed the threshold amount (currently $54,600). A covered loan or credit sale providing for interest-only payments would be “evergreen.”

[Keep in mind, of course, that not all loans that would be a “consumer loan” under Reg Z’s definition would be a “consumer loan” under the U3C.  We have written about what’s covered and what’s not in past Legal Briefs.]

Loans to Non-U.S. citizens

We’re increasingly living in a global economy.  That means that some of the individuals who wish to utilize your products or services may not be U.S. citizens.  One area where this can entail a Gotcha is where you make a loan secured by real estate to an individual who is a non-U.S. citizen due to a provision in the Oklahoma Constitution and and a few sections of Oklahoma statutes, as detailed below.

Article 22 of the Oklahoma Constitution, § 1. Aliens – Ownership of land prohibited – Disposal of lands acquired.

No alien or person who is not a citizen of the United States, shall acquire title to or own land in this state, and the Legislature shall enact laws whereby all persons not citizens of the United States, and their heirs, who may hereafter acquire real estate in this state by devise, descent, or otherwise, shall dispose of the same within five years upon condition of escheat or forfeiture to the State: Provided, This shall not apply to Indians born within the United States, nor to aliens or persons not citizens of the United States who may become bona fide residents of this State: And Provided Further, That this section shall not apply to lands now owned by aliens in this State.

Title 60 O.S. Sections 121-127 were enacted by the legislature governing ownership of property in Oklahoma by non-U.S. citizens.

Sec. 121

No alien or any person who is not a citizen of the United States shall acquire title to or own land in the State of Oklahoma, except as hereinafter provided, but he shall have and enjoy in the State of Oklahoma such rights as to personal property as are, or shall be accorded a citizen of the United States under the laws of the nation to which such alien belongs, or by the treaties of such nation with the United States, except as the same may be affected by the provisions of this act or the Constitution of this state.

Reciprocity with regard to ownership by U.S. citizens of personal property under the laws of the country where the alien is a citizen determines the alien’s rights with regard to ownership of personal property located in Oklahoma. Vehicles, manufactured homes, deposit accounts, etc. are subject to this statute. The main issues with loans to non-U.S. citizens secured by personal property if reciprocity exists are: 1) whether the alien’s visa is valid for the term of the loan, and 2) making sure the personal property remains in the U.S.

Sec. 122

This article shall not apply to lands now owned in this state by aliens so long as they are held by the present owners, nor to any alien who is or shall take up bona fide residence in this state: and any alien who is or shall become a bona fide resident of the State of Oklahoma shall have the right to acquire and hold lands in this state upon the same terms as citizens of the State of Oklahoma during the continuance of such bona fide residence of such alien in this state: Provided, that if any such resident alien shall cease to be a bona fide inhabitant of this state, such alien shall have five (5) years from the time he ceased to be such bona fide resident in which to alienate such lands.

Sec. 123

All nonresident aliens who may hereinafter acquire real estate in Oklahoma by devise, descent or by purchase, where such purchase is made under any legal proceeding foreclosing liens in favor of such alien, may hold the same for five (5) years from the date of so acquiring such title.

Sections 125 through 127 provide procedures to escheat real estate owned by aliens who are not residents of Oklahoma for a period exceeding 5 consecutive years. Sec. 124 also applies to a conveyance of real estate by a nonresident alien to a trust (e.g., any trust of which the nonresident alien or other nonresident aliens who are not Oklahoma residents are the beneficiaries), in order to evade the provisions of this act will be null and void.

To avoid the Gotcha, loans secured by land owned by non-U.S. individuals should contain a covenant that should the alien fail to maintain residency in Oklahoma this will be an event of default.

Gotcha’s 

By John Burnett

When you haven’t got everyone on the same page

Management and Marketing have decided that the bank should provide ATM access to customers who don’t have checking accounts, so the bank starts issuing ATM cards for savings accounts in addition to its standard debit card for checking account customers. The marketing is all about convenience. After a couple of months your customer service call center starts getting complaints about letters the operations area is sending out about excessive transfer activity, with veiled threats of account closure or card cancellation. This is a classic case of the left hand not knowing what the right hand is doing. The Gotcha is that someone forgot that the ATM cards work in a regional ATM network that allows the cards to be used for PIN-based merchant purchases, and customers have discovered just how convenient that can be, not realizing they are butting heads with Regulation D’s transaction limits on savings and MMDA accounts. The result is that the customers will get warning letters and will face account closure if the limits on covered transfers or withdrawals is exceeded.

The lesson, of course, is that there needs to be better participation in marketing decisions like this one.

The TRID rule’s “alternate tables”

The TRID rules provide a couple of alternate versions of tables. There is one version of the “Calculating Cash to Close” table, for example, that can be used for any transaction that’s subject to the TRID rules. It’s complicated because it needs to accommodate loans in which a seller is involved, and the instructions for completing the table are hard to follow. But there is an alternate Calculating Cash to Close table version that can be used if there is no seller involved. This version has fewer lines and is more straightforward, and instructions for its completion are less complex. There are similar tables in the Loan Estimate — one for any loan and an alternative form for loans without a seller.

Here’s the Gotcha: The regular table (the one that can be used for any TRID transaction) can accommodate certain credits and adjustments that can’t be accommodated in the “no seller” alternate table. For example, there’s a line in the regulator table for “Adjustments and Other Credits” that can include family gifts or grants or subsidies related to the transaction from a government agency. But if the lender doesn’t know about such gifts or grants when the Loan Estimate is prepared, the lender might decide to use the “no seller” alternate table for the Loan Estimate. Then when it’s time to complete the Closing Disclosure, the lender wants to “change horses” to use the standard table but runs into the language of 1026.38(e) (Alternative calculating cash to close table for transactions without a seller) which says “For transactions that do not involve a seller and where the creditor disclosed the optional alternative table pursuant to § 1026.37(h)(2), the creditor shall disclose, instead of the table described in paragraph (i) of this section, ….” That prevents the use of the regular table because the alternate table was used on the Loan Estimate. The reason for the restriction is, of course, to make the table from the Closing Disclosure comparable to the table from the Loan Estimate. And that forces the lender to scramble to figure out other ways to complete a compliance disclosure that reflects the special third-party credits the borrower will receive at closing.

The Regulation DD balance disclosure rule for accounts with ODP access

Several ATM networks prohibit network participants from sending more than one balance in response to a cardholder balance inquiry via interchange. Regulation DD section 1033.11(c) requires that when a single account balance is provided via an automated service (such as an ATM or ATM network) it cannot be “padded” to include funds from any forms of overdraft protection. A “padded” balance can only be provided if it is in addition to the unpadded balance, and the padded balance must be labeled to indicate that it “includes overdraft funds,” or words to that effect. The Gotcha is that the combination of network restrictions and the Regulation DD disclosure requirement means that a bank that wants to provide information on the ATM about the cardholder’s ability to access “overdraft funds” can’t do so, except on its own machines.

Predeceased POD Beneficiaries

The Gotcha here is that Section 901 of the State Banking Code specifies a distribution scheme that most customers (and even bankers) would not anticipate.  When a deposit account is set up with a POD beneficiary designation in Oklahoma, if the designated beneficiary dies before the account owner and nothing is done to change the POD designation — the funds end up as part of the estate of the beneficiary! That can be a problem if the beneficiary died long ago and there was no estate opened, or the estate has long since been closed. The law makes bankers have to come up with imaginative solutions to get the remaining funds to the right people (or just let the accountgo to the State Treasurer’s office as unclaimed property and let the state deal with the mess).

The lesson here? When a bank learns of a beneficiary who has died before the account owner, it’s a good idea to contact the account holder to explain the problem and see if the owner wants to change those POD instructions.

One exception is where a customer has specifically designated a primary beneficiary and contingent beneficiaries.  Contingent beneficiaries are only allowed if there is ONE primary beneficiary.  In such a situation, if the primary beneficiary predeceases the owner of the account, when the owner dies (assuming the owner has not made any changes to the POD designations in the interim), the funds automatically go to the contingent beneficiaries, rather than to the estate of the primary beneficiary.  Only if there is an explicit designation of one primary beneficiary and contingent beneficiaries will this be the case.