Legal Briefs

April 2025 OBA Legal Briefs

April 2025

EFS Central Filing
Update on the McGirt decision
Banker Q&As
- Medicaid Income Pension Trust Disclosures
- Advertising free checking
- Who can remove signers on LLC or corporate account?
- IRA contributions, owner in RMD

EFS Central Filing

By Scott Thompson

If you have read one of Adrian’s legislative updates this year will have seen mention of SB 988. This bill moves the central filing system for Effective Financing Statements (“EFS”) from the Oklahoma Secretary of State’s Office to the Oklahoma County Clerk, who already operates the state central filing system for UCC financing statements. However, if you are not an Ag lender, you may not know what this means or why it matters. I want to take this opportunity to discuss what the EFS is, where it comes from, how it works, and why it matters.

Agricultural producers often borrow money from banks or other lenders to operate. The lender takes a security interest in the farm products being financed. A “farm product” means an agricultural commodity, livestock, or products of crops or livestock in their unmanufactured state which are used or produced by a debtor engaged in a farming operation. See 7 U.S.C. § 1631(c)(5). This security interest allows the lender to take possession of and sell the collateralized property if the debt is not repaid. In these situations, the debtor and lender have entered into a secured transaction which is primarily governed by Article 9 of the Uniform Commercial Code (“UCC”). Article 9 is codified in the Oklahoma Statutes in Title 12A beginning at section 1-9-101.

For many years, when a secured creditor had a security interest in farm products and the debtor sold those farm products, the creditor’s security interest followed the products. As a result, the buyer of the farm products might have to assume the risk of paying twice for the goods, once to the seller and once to the secured creditor.

To remedy this issue, the federal government passed the Food Security Act of 1985 (“FSA”). This federal law established a rule known as the federal farm products rule (7 U.S.C. § 1631 (2018)). This rule allows a buyer in the ordinary course of business purchasing a farm product from a seller engaged in farming operations to take the product free and clear of a security interest, even if the interest is perfected and the buyer knows of its existence. Because it is a federal statute, the FSA applies to the entire United States and preempts all inconsistent state laws. Accordingly, when a buyer purchases farm products secured by a creditor’s loan, the FSA will apply rather than §9-320 of the UCC.

In general, if a buyer meets the requirements of the farm products rule, a creditor’s security interest will not follow the farm products purchased unless the creditor put the buyer “on notice” of its interest in the farm product. In other words, whether a buyer of farm products in the ordinary course of business takes the goods subject to a creditor’s security interest primarily depends on whether the creditor complied with the notice requirements under the FSA. When the FSA took effect in 1986, states were given two options. The state could create a centralized filing system or the state could utilize a direct notice system.

Creditors who hold a security interest in farm products risk losing this interest if they fail to provide notice to the farm products purchaser. Oklahoma opted to create a Central Filing System (“CFS”). States operating a central filing system allow a secured creditor to file an “effective financing statement” (“EFS”). In filing an EFS, 7 U.S.C. Sec. 1631(c)(4) requires that creditors include:

-the secured creditor’s name and address;

-the debtor’s name and address;

-the debtor’s social security number or taxpayer identification number;

-a description of the farm products covered by the security interest; and

-any payment obligations imposed on the buyer as conditions for release of the security interest.

The description of the farm products must also include the amount of the products, crop year, and the counties the farm products are produced or located.

Under the FSA, a state could not implement a CFS unless the system was certified by the Secretary of the United States Department of Agriculture (“USDA”). To get certification, the state had to satisfy a few requirements:

-The system has to permit the filing of effective filing statements;

-Allow the state’s Secretary of State to compile every EFS into a master list;

-The Secretary of State must maintain a list of registered farm products buyers; and

-The Secretary of State must distribute this list to all registered buyers.

7 U.S.C. §1631(c)(2). Assuming the state can demonstrate each of these requirements, the USDA certifies the state’s CFS. However, because of these certification requirements, many states did not implement a central filing system. Currently, thirty-three states require direct notice and sixteen states operate a CFS.

In Oklahoma, the Office of the Secretary of State operates the CFS. As previously stated, the purpose of the CFS is to put the buyer on notice of the security interest in the farm products the buyer intends to purchase. If a creditor provides notice in compliance with the FSA, then its security interest follows the farm products after the sale, and the creditor can collect the unpaid money from the buyer. If the creditor did not provide notice that complied with the FSA, then the creditor’s security interest does not follow the farm products after the sale and the creditor cannot receive payment from the buyer. It is therefore paramount that the EFS be filed and filed correctly.

In Oklahoma, the EFS must be filed with the Oklahoma Secretary of State’s office to be effective. A list of debtors whose farm products are subject to a security interest is compiled by the Secretary of State and this list is available to registered farm product dealers and other purchasers. If a creditor correctly files an EFS, and does not waive the security interest, the creditor’s security interest will still be effective after the sale of the farm products, because the buyer has been notified of the interest. Thus, before purchasing farm products in Oklahoma, the buyer is expected to review the list to determine whether the goods are subject to a creditor’s security interest. For this reason, a buyer who is on notice of the security interest will generally add both the seller and the creditor to its check in order to assure that the creditor’s security interest is satisfied.

Courts addressing notice compliance in a CFS have adopted a consistent standard. Under the FSA, a creditor’s EFS will be sufficient even if the notice contains minor errors, so long as the errors are not “seriously misleading.” This is referred to as “substantial compliance.” What constitutes “substantial compliance” is left up to a judge’s discretion. In other words, a judge decides whether an EFS substantially complies with 7 U.S.C. §1631(c)(4). The CFS provision specifically states that a creditor’s EFS does not substantially comply with the statute if it “seriously misleads” a buyer. Thus, in any lawsuit to collect from a buyer because the seller failed to pay the secured creditor, the primary question a judge must decide is whether a creditor’s EFS seriously misled a purchaser of farm products. If a judge determines that the notice has misled the buyer, the EFS is ineffective and the creditor no longer holds a security interest in the farm products.

To determine whether a creditor’s notice seriously misled a buyer, judges must examine the information the creditor included in its EFS. Some courts have determined that vague descriptions of information in the notice can make an EFS seriously misleading. A vague description makes a creditor’s notice seriously misleading if a buyer reading the EFS might not realize that the farm products sought to be purchased are subject to a creditor’s security interest. Additionally, a notice which contains errors can make an EFS seriously misleading. Consequently, a creditor’s security interest will not continue in farm products after being sold if vague descriptions or errors seriously mislead the buyer.

However, not all errors or vague descriptions make a creditor’s notice seriously misleading. An EFS containing vague descriptions or errors is not seriously misleading if it puts a buyer on notice of a security interest in a seller’s farm products. In other words, an EFS will not be seriously misleading if it indicates to a buyer that further steps must be taken to discover whether farm products are subject to a preexisting security interest. Courts agree that once a buyer is placed on notice of a possible security interest in farm products, it becomes the buyer’s duty to investigate whether the farm products are subject to a creditor’s security interest. Therefore, judges will consider the language of the notice and determine whether a buyer could have been seriously misled by the information provided in the creditor’s EFS notice. See e.g., First Bank v. E. Livestock Co., 837 F. Supp. 792 (S.D. Miss. 1993). To avoid the loss of a security interest in the commodities, creditors in Oklahoma must ensure that their EFS notice provides accurate information that makes it unmistakably clear a security interest exists in the seller’s farm products.

That brings us back to SB 988. The current CFS has been a source of frustration to buyers, sellers and creditors. The current CFS at the Secretary of State is antiquated, slow to update and slow to provide notices of releases of liens. It is one of the rare times where it seems everyone is in agreement that something needs to change. The Oklahoma County Clerk already operates the central filing system for Article 9 UCC financing statements. These statements create the liens for which the EFS provides notice. The FSA does not modify the UCC provisions on the creation, perfection, or priority of security interest. Farm Credit Servs. Of Am., PCA v. Cargill, Inc., 750 F.3d 965, 968 (8th Cir. 2014) (citing Battle Creek State Bank v. Preusker, 253 Neb. 502, 513, 571 N.W.2d 294, 302 (1997)). Accordingly, a creditor on a farm products loan will, in most cases, file a UCC-1 with the Oklahoma County Clerk and an EFS with the Secretary of State.

SB 988 moves the EFS filing to the Oklahoma County Clerk so that both the EFS and UCC-1 will be filed in the same system. The Oklahoma County Clerk’s system is more modern and nimbler than the one operated by the Secretary of State and the number of UCC-1s filed each year dwarfs the number of EFS filings, so the capacity to add them is already there. However, the enactment of SB 988 only starts the process.

As previously stated, the CFS must be certified by the Secretary of the USDA. Oklahoma County will undertake that process if the bill is passed and signed into law. We do not know if that process will take a week or a year, but the law will not change during that time. In fact, the effective date for SB 988 is one hundred eighty (180) days from the certification of the new CFS by the USDA. That will allow six months to transition to using the new system. And, although the filing location will change, the filing document will not, nor will the filing fee. This time will also allow the Oklahoma County Clerk to import the existing, active EFS information into the new system.

We will continue to update you on the status of the bill, and if enacted, on the progress toward certification and implementation of the CFS.

[Editor’s note Pauli Loeffler: See also the October 2009 OBA Legal Briefs article “Special Risks Surround Using Farm Products as Collateral” which is accessible online once you register an account through the My OBA Member Portal if you have no done so already.]

**Update on the McGirt decision**

If you read last month’s article regarding the case seeking to extend the U.S Supreme Court’s McGirt decision to prevent civil jurisdiction against Indian defendants on reservation land, you might be interested in some matters that arose after the article.

You may recall reference in the article to Hooper v. City of Tulsa, No. 22-5034 (10th Cir. 2023), in which the court found that Tulsa lacked jurisdiction to issue a speeding ticket to a member of the Choctaw Nation on the reservation of the Muscogee (Creek) Nation. On March 6, 2025, the Oklahoma Court of Criminal Appeals issued a ruling that the City of Tulsa did have jurisdiction to issue a traffic ticket to Keith Stitt, a member of the Cherokee Nation, on the Muscogee (Creek) reservation. Relying on Oklahoma v. Castro-Huerta, 597 U.S. 629 (2022), the court found Tulsa and the Muscogee (Creek) Nation had concurrent jurisdiction. One of the judges noted in a dissent that Castro-Huerta involved a non-Indian defendant, not a tribal member, while a concurrence could be read to infer that the specific tribal membership was important and that had Stitt been a member of the same tribe as the reservation where the infraction occurred, the outcome might have been different. Stitt has said he will appeal.

There was also movement in a case pending in the U.S. District Court for the Northern District of Oklahoma wherein the Muscogee (Creek) Nation has sued the City of Tulsa asking for a declaratory judgment that the City of Tulsa lacks any criminal jurisdiction over any Indian within the bounds of the Muscogee (Creek) Nation and an injunction enjoining the City of Tulsa from exercising criminal jurisdiction over any Indian for conduct occurring within the bounds of the reservation. On March 14, 2025, Governor Stitt moved to intervene in the case. That case should be interesting to watch.

Banker Q&As

By Pauli Loeffler,

Medicaid Income Pension Trust Disclosures

Q. We have been bouncing around a question internally related to bank service charges/fees incurred by Medicaid Income Pension Trust (Miller Trust) accounts, and are seeking additional input to our current research.

The Trust policy, outlined by OHCA with official rules published by the OK Secretary of State Office of Administrative Rules, has language for allowance of “reasonable cost of administering the trust.” However, we are unclear who is allowed to charge fees to the Trust account for such administration. Are banks allowed to collect service charges/monthly service fees from the account for our part in administering/hosting the account? What is considered a “reasonable cost,” if so? Are we required to make a special disclosure of fees at the time of account opening, beyond those required by the typical deposit regulations, to better inform OHCA of these charges? Is it even recommended to charge service fees to Miller Trust/Medicaid Trust accounts?

A. I covered how to set up an Oklahoma Medicaid Income Pension Trust in the October 2024 OBA Legal Briefs. Quite frankly, I had forgotten that these accounts were called “Miller Trusts” from the decision in Miller v. Ibarra , 746 F. Supp 19, D. Colo, 1990). The most recent OK DHS Medicaid Income Pension Trust Form is dated March 23, 2016, and is contained in the Administrative Rules on the Oklahoma Secretary of State’s website.

The bank is permitted to charge its usual account fees which will be disclosed at account opening. The Trustee rather than the bank is charged with administering the Medicaid Income Pension Trust, the trustee may claim a fee of up to three percent (3%) of the funds added to the trust that month as compensation.

Advertising free checking

Q. Please send me the information that governs the use of the words “Free Checking” in bank advertising.

A. The pertinent Section is 1030.8 Advertising:

(a) Misleading or inaccurate advertisements. An advertisement shall not:

(1) Be misleading or inaccurate or misrepresent a depository institution’s deposit contract; or

(2) Refer to or describe an account as “free” or “no cost” (or contain a similar term) if any maintenance or activity fee may be imposed on the account. The word “profit” shall not be used in referring to interest paid on an account.

Now we look to the Commentary in (a)(2) for guidance:

Fees affecting “free” accounts. For purposes of determining whether an account can be advertised as “free” or “no cost,” maintenance and activity fees include:

i. Any fee imposed when a minimum balance requirement is not met, or when consumers exceed a specified number of transactions.

ii. Transaction and service fees that consumers reasonably expect to be imposed on a regular basis.

iii. A flat fee, such as a monthly service fee.

iv. Fees imposed to deposit, withdraw, or transfer funds, including per-check or per-transaction charges (for example, $.25 for each withdrawal, whether by check or in person).

4. Other fees. Examples of fees that are not maintenance or activity fees include:

i. Fees not required to be disclosed under § 1030.4(b)(4).

ii. Check printing fees.

iii. Balance inquiry fees.

iv. Stop-payment fees and fees associated with checks returned unpaid.

v. Fees assessed against a dormant account.

vi. Fees for ATM or electronic transfer services (such as preauthorized transfers or home banking services) not required to obtain an account.

5. Similar terms. An advertisement may not use the term “fees waived” if a maintenance or activity fee may be imposed because it is similar to the terms “free” or “no cost.”

6. Specific account services. Institutions may advertise a specific account service or feature as free if no fee is imposed for that service or feature. For example, institutions offering an account that is free of deposit or withdrawal fees could advertise that fact, as long as the advertisement does not mislead consumers by implying that the account is free and that no other fee (a monthly service fee, for example) may be charged.

7. Free for limited time. If an account (or a specific account service) is free only for a limited period of time–for example, for one year following the account opening–the account (or service) may be advertised as free if the time period is also stated.

8. Conditions not related to deposit accounts. Institutions may advertise accounts as “free” for consumers meeting conditions not related to deposit accounts, such as the consumer’s age. For example, institutions may advertise a NOW account as “free for persons over 65 years old,” even though a maintenance or activity fee is assessed on accounts held by consumers 65 or younger.

Who can remove signers on LLC or corporate account?

Q. Operating Agreements and By-Laws don’t always address signature authority beyond stating that Members or certain Officers have authority to open accounts and conduct transactions on behalf of the business.

Scenario: We have a 2-Member LLC. Both Members sign on the signature card, as well as a non-Member authorized signer. One of the Members is requesting to remove the other Member and the authorized signer from the signature card.

A few questions based on the scenario:

Is 1 Member allowed to remove another Member from the signature card?

If we have a corporation where 3 Officers (Pres, VP, Sec) are signers, can any of those signers request any of the other signers be removed?

Can a Corporate owner (non-signer) request the removal or change of signers?

What, besides the removal request in writing should we require from the signers?

Any additional thoughts?

A. Any member or authorized signer on an LLC can close the account but the check would be made payable to the entity. One member cannot remove another member nor can the authorized signer, but either member can remove the authorized signer.

As far as the corporation is concerned, any signer can close the account the same as the LLC, however in order to change signers, you will need a new resolution signed by the whomever the new officers are and minutes of the meeting.

IRA contributions, owner in RMD

Q. I had a branch call me today on an IRA question. One of the customers is wanting to open an IRA and he is 82 years. I believe he does not have earned income, so I am not thinking he can’t. I understand that this came from an annuity, but the check that was made out to customer was deposited into their regular savings account instead of using this for a rollover IRA.

Can you please clarify this for me?

A. Older workers with earned income including those who’ve already started taking required minimum distributions (RMDs) are still allowed to make contributions to traditional IRAs. The question really is whether it makes sense to do so which the customer needs to discuss with his accountant and his estate planner. You indicate that the customer does not have earned income, in which case, no he can’t make contributions. I will note that unless this is a Roth IRA, the owner would be required to take an annual required minimum distribution (RMD).

March 2025 OBA Legal Briefs

March 2025

Extension of the McGirt decision to civil lawsuits
Beneficial Ownership Information Update
Banker Q&A
- Series LLC
- Updating account from ITIN to SSN
- Providing debit cards to fiduciaries

Extension of the McGirt Decision to Civil Lawsuits

By Scott Thompson

A case pending in the Oklahoma Supreme Court, Paul-Lucas v. Paul, No. DF-122477, could have far reaching ramifications for businesses in Oklahoma, including banks. At the heart of the case is whether Oklahoma courts have jurisdiction over civil disputes involving Native Americans in Indian Country, which now includes most of Eastern Oklahoma. The decision in this case could affect the ability of banks to enforce contracts, sue for default and foreclose mortgages. It could also affect the type of loans lenders may be willing to make. If you just want to know what problems this case could potentially cause, you can skip to the end. If you want to better understand how we got where we are, read on.

McGirt v. Oklahoma, 591 U.S. __ (2020) is a landmark case decided by the U.S. Supreme Court on July 9, 2020. The case centered around Jimcy McGirt, a member of the Seminole Nation of Oklahoma, who was convicted of serious crimes in an Oklahoma state court. McGirt argued that the state lacked jurisdiction to prosecute him because his crimes occurred on land that should be considered “Indian country” under the federal Major Crimes Act. The Major Crimes Act provides that only tribal courts and federal courts have jurisdiction over crimes by Native Americans committed in Indian Country.

The Supreme Court ruled in a 5-4 decision that much of eastern Oklahoma, including the land where McGirt’s crimes took place, remains Indian Country. This decision was based on treaties from the 19th century, which established a reservation for the Muscogee (Creek) Nation. The crimes at issue had occurred within the historical boundaries of this reservation. The Court found that the Muscogee (Creek) Nation reservation had never been disestablished by Congress and, therefore, the area historically reserved for the Muscogee (Creek) Nation was still Indian Country under the Major Crimes Act. Thus, the state lacked jurisdiction over McGirt. The Oklahoma Court of Criminal Appeals subsequently extended this rationale to nine other tribes which means that nearly all of the eastern half of the State of Oklahoma is defined as Indian Country. Crimes committed by Native Americans on this land must be prosecuted by either tribal authorities or the federal government rather than the state.

The decision has significant implications for jurisdiction and sovereignty. While McGirt dealt explicitly with criminal jurisdiction under the Major Crimes Act, the finding that these tribal reservations were never disestablished, is being asserted as a defense in other cases. For example, a Tulsa man received a speeding ticket in Tulsa and paid the fine. After the McGirt decision, the driver, Justin Hooper, sued the City of Tulsa claiming it had no jurisdiction over him since he was a member of the Choctaw Nation and the ticket was written within the confines of the Muscogee (Creek) Nation.

The City of Tulsa disputed Hooper’s claim, arguing that Section 14 of Curtis Act, 30 Stat. 495 (1898), which allowed cities and towns to be incorporated in Indian Territory and apply their laws to all inhabitants without regard to race, granted Tulsa jurisdiction over municipal violations committed by all Tulsa’s inhabitants, including Native Americans. The municipal court agreed with Tulsa and denied Hooper’s application. Hooper then sought relief in federal court. He appealed the denial of his application for post-conviction relief and sought a declaratory judgment that the City of Tulsa did not have jurisdiction over him under Section 14 the Curtis Act. Tulsa moved to dismiss. The district court granted the motion to dismiss Hooper’s declaratory judgment claim, agreeing with Tulsa that Congress granted the city jurisdiction over municipal violations by all its inhabitants, including Native Americans, through Section 14. Hooper appealed to the United States Court of Appeals for the Tenth Circuit.

In Hooper v. City of Tulsa, No. 22-5034 (10th Cir. 2023), the Tenth Circuit reversed the district court, finding that the federal district court erred in dismissing Hooper’s declaratory judgment claim. The Court found that although the City of Tulsa had been established pursuant to Section 14 of the Curtis Act, that it had been reorganized after statehood and established as a political subdivision of the State of Oklahoma. Because Tulsa could not assert jurisdiction over Hooper under the Curtis Act, the question of jurisdiction fell back on McGirt. With a Native American committing an infraction in Indian Country, the court found the City of Tulsa lacked jurisdiction. The U.S. Supreme Court declined to hear the City of Tulsa’s appeal.

While certainly not a “major crime,” Hooper at least involved a criminal or quasi-criminal act. The case pending before the Oklahoma Supreme Court seeks to apply McGirt to wholly civil matters. It is important to understand what McGirt did and did not do. McGirt did not change the law as it relates to Native Americans and tribal lands. There is jurisprudence on those issues going back hundreds of years. What McGirt did was bring that law back into play for most of Eastern Oklahoma, where it had been assumed to be inapplicable for more than a hundred years.

In 2024, a forcible entry and detainer action was filed in the Tulsa County District Court to evict a renter from a single-family residence for non-payment of rent. The renter was a member of the Cherokee Nation and the house was located within the boundaries of the Cherokee Nation reservation. In defense of the eviction, the renter argued that the Tulsa County District Court lacked jurisdiction over the dispute because of McGirt. Since McGirt had clarified that the Cherokee Nation reservation remained established, the law governing jurisdiction over disputes involving Native Americans on reservation land should apply.

The renter relied primarily on two cases from the U.S. Supreme Court to move to dismiss the eviction claim. First, the renter relied on Williams v. Lee, 358 U.S. 217 (1959). In Williams, a non-tribal member operated a general store in Arizona on the Navajo reservation where he sold goods on credit to a member of the Navajo tribe. When the tribal member defaulted, Williams sued in state court. After success in state court, the United States Supreme Court reversed the state court. In doing so, the Court found that the transaction occurred on the reservation with a Native American and that allowing state court jurisdiction over the transaction would interfere with tribal self-government.

The renter also relied on Kennerly v. Dist. Court of the Ninth Judicial Dist. Of Montana, 400 U.S. 423 (1971). The case had similar facts, but occurred on the Blackfoot reservation. Notably, the Court reached the same conclusion despite the fact that the tribal code had a provision that purported to allow such jurisdiction.

The renter also relied on two Oklahoma Supreme Court cases which involved forcible entry and detainer actions such as the one at issue here. In both Ahboah v. Hous. Auth. Of Kiowa Tribe of Indians, 1983 OK 20, 660 P.2d 625 and Hous. Auth. Of the Seminole Nation v. Harjo, 1990 OK 35, 790 P.2d 1098, the court found the state had no jurisdiction over the actions because the subject properties were located in Indian Country. Both these cases are distinguishable from the present case. In Ahboah, the property was on an Indian allotment and in Harjo, the property was a dependent Indian community. While both meet a definition of Indian Country under federal law, they are not the same as reservation land. Moreover, in neither of these cases does it appear the property was owned in fee-simple by a non-Native American, as is true of the present case. It remains to be seen whether these are distinctions without a difference.

Ultimately, the Tulsa County District Court denied the renter’s motion to dismiss and asserted its jurisdiction over the forcible entry and detainer action. It ruled that the district court had concurrent jurisdiction over forcible entry and detainer cases that involve a non-tribal member property owner and a tribal member tenant on reservation land that is within the boundaries of Tulsa County. It found that state court evictions have the same tribal interests and do not deal with the political integrity, economic security, or health and welfare of the tribe. The court determined that it had jurisdiction, because the state court’s concurrent jurisdiction did not impermissibly infringe on the Cherokee Nation’s right to self-govern.

The district court stayed its ruling pending an appeal. The renter appealed and the Oklahoma Supreme Court, on its own motion, retained the appeal for disposition, bypassing the court of appeals which would normally resolve an appeal in the first instance. The briefing cycle has just begun, and it could be a year or more before we see a decision, but we can already theorize about the possible ramifications of a decision in favor of the renter.

Let us assume that the renter is successful and the court rules that state civil courts have no jurisdiction over transactions involving Native Americans within the bounds of a reservation. As previously noted, this would include most of eastern Oklahoma, including the Tulsa metropolitan area. That would leave jurisdiction over all such transactions exclusively with tribal courts, except a small number that might meet federal court jurisdictional requirements.

This outcome raises numerous questions. Remember, both Williams and Kennerly involved non-Native American creditors who were prohibited from pursuing a Native American debtor in state court because the transactions occurred on reservation land. Will lenders want to make loans they clearly know would subject them exclusively to a tribal court? Will they be subject to discrimination claims if decisions are based on avoiding such jurisdictions? Certainly, a lender can refuse to enter into a loan that would require consenting to the jurisdiction of the Texas state courts. Would the same right exist if the jurisdictional issue is created by the race of the borrower, as is the case here?

If a Native American renter cannot be evicted for non-payment of rent, can a Native American borrower be subjected to the foreclosure of a mortgage and the sale of the property? Will lenders want to make loans for multi-family or non-owner occupied housing which is located on these tribal lands? Often the cash flow from renters is part of the borrower’s ability to repay the loan. Will lenders be willing to rely on tribal courts to evict non-paying renters? These questions portend the chaos that could occur.

It might be easy to think banks will avoid these issues because most of our loan documents will have choice of law, venue and jurisdiction clauses. However, it’s not at all clear these will be effective. In Kennerly, the court found no state court jurisdiction despite a tribal code provision expressly allowing it. The court relied on federal statutes which stated concurrent civil jurisdiction by a state was only applicable where “the enrolled Indians within the affected area of such Indian country accept such jurisdiction by a majority vote of the adult Indians voting at a special election held for that purpose.” 25 U.S.C. §§ 1322 and 1326. Thus, clauses in contracts purporting to confer jurisdiction on the state courts may be wholly ineffective in the absence of such votes from the tribes.

At this juncture, we do not know the outcome of the case or whether these concerns will come to pass. Oklahomans have certainly seen the disruption to the criminal court system in the aftermath of McGirt, so a similar disruption in the civil context is not unrealistic. However, even if the court finds in favor of the renter and declares that Oklahoma state courts lack jurisdiction over transactions involving tribal members within the boundaries of these reservations, the tribes and state may work together to establish effective concurrent jurisdiction. That would benefit not only the state and non-tribal businesses, but likely the tribes as well since making it more difficult for tribal members to enter into commercial relationships due to these jurisdictional concerns benefits no one. We will certainly keep you updated when we know more.

Beneficial Ownership Information Update

By Pauli Loeffler

On February 18, 2025, FinCEN provided FIN-2025-CTA1 decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336(E.D. Tex.), means beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) is again back in effect. However, the Department of the Treasury recognized that reporting companies may need additional time to comply with their BOI reporting obligations, and FinCEN is generally extending the deadline 30 calendar days from February 19, 2025, for most companies.

Reporting companies that were given a reporting deadline later than the March 21, 2025 deadline must file their initial BOI report by that later deadline. For example, if a company’s reporting deadline is in April 2025 because it qualifies for certain disaster relief extensions, it should follow the April deadline, not the March deadline.

Banker Q&As

Series LLC

Q. I’m working on a loan for an LLC that has multiple series attached – do these usually have their own EIN or do they use the parent LLC’s info? Thankfully there is only one member/manager for both, but I was curious if there is any other required information to gather.

A. Certainly a series which I refer to as a “cell” or “child” can use the parent’s EIN. It is possible to simply list the name of each child on the parent account if that is what the customer wants. However, one reason to form as a series LLC is prevent a creditor of one series LLC from attaching assets of another series LLC as well as the assets of the parent. While using one master account under the name of the parent is permitted, it does cause an accounting problem for the parent when the account is set up that way. However, that’s the customer or its accountant’s problem rather than the bank’s. You will need to ask whether the cell or child LLC has its own EIN or uses the EIN of the parent. If each has its own EIN, you will set up individual accounts for each series. If cells don’t have individual EINs and use that of the parent, you may set up one account with all cells under the name and EIN of the parent or separate accounts for each cell/child under the name and EIN of the parent.

Updating account from ITIN to SSN

Q. We have had a few customers that currently have ITIN numbers, but they have applied for and received a social security number. What documents do we need in order to get this changed for those customers in our system?

A. The bank needs to update the current accounts to report under the Social Security Number of the customer rather than the ITIN for the existing account. I would suggest the see the actual social security card. In order to avoid a name mismatch now that s/he has an SSN, the customer will need to fill out IRS Form W-9 to have the Tax Identification Number match. If the customer’s address has changed or the photo ID you used has expired, the bank should take this opportunity to update such information.
I will point out that when W-8 BEN uses an ITIN, you need to be aware that ITINs expire. The instructions for that form specifically states:

Expiration of Form W-8BEN. Generally, a Form W-8BEN will remain in effect for purposes of establishing foreign status for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on September 30, 2015, remains valid through December 31, 2018.

Reporting collection, Reg V

Q. I have a question for you about disclosures. Our owner asked me this in the oversight meeting yesterday.

In our disclosures, is it necessary to disclose that while we do not report to the credit bureaus, in the event that the customer defaults, or overdrafts their account into a collection status and it is sent to a collection agency, that the collection agency may or may not report them to the credit bureaus?

We had a customer that was upset that when they were sent to collections, while we told them we do not report to the bureaus, they were reported by the collection agency and called the bank to complain.

A. I have never heard of a bank disclosing that it does not report to credit bureaus. Every bank I know of uses one of the following Reg V forms found in Appendix B of Reg V:

A financial institution may use Model Notice B–1 if the institution provides the notice prior to furnishing negative information to a nationwide consumer reporting agency.

A financial institution may use Model Notice B–2 if the institution provides the notice after furnishing negative information to a nationwide consumer reporting agency.

Model Notice B–1

We may report information about your account to credit bureaus. Late payments, missed payments, or other defaults on your account may be reflected in your credit report.

Model Notice B–2

We have told a credit bureau about a late payment, missed payment or other default on your account. This information may be reflected in your credit report.

The vast majority of banks use the B-1 which is provided at account opening the account as a part of account disclosures. If your bank does NOT use the B-1, you certainly will need to provide the B-2 when you refer overdrawn deposit accounts or loans in default having missed payments.

If your bank provides neither the B-1 at account opening nor the B-2 when reporting, you are in violation of Reg V and cited for violating the Reg.

Follow up Q. Do the disclosures for the savings accounts need to state the B-1 Notice as well? Our “Terms and Conditions of Your Account” is from X software provider, and it doesn’t have the B-1 notice specially, but it does reference the TISA disclosure that does have the B-1 notice. Do we need to add it to the Terms and Conditions or are we good to go with what we have been using?

Response: As long as the bank provided the B-1 Notice at account opening everything is fine. Having done that, there is no requirement you give the consumer any additional notice before reporting to the credit bureau or handing the debt over for collection.
Providing debit cards to fiduciaries

Q. We currently issue debit cards to our customers on trust, estate, and fiduciary accounts. Are there any risks (federal/state law, etc.) associated with that practice that we need to be aware of?

A. I am not sure why the personal representative/executor/administrator would need a debit card. Neither an estate account nor a trust account is covered by Reg E since these are NOT owned by a natural person. Do not provide Reg E disclosures for such accounts. Please read the Bankers Threads at the links below.

On the other hand, a Rep Payee, Federal Fiduciary, or UTMA accounts are owned by a natural person and would be subject to Reg E.

https://www.bankersonline.com/forum/ubbthreads.php/topics/2213653/fiduciary-accounts-reg-e
https://www.bankersonline.com/qa/reg-e-debit-card-trustees-living-trust

February 2025 OBA Legal Briefs

Settlement funds payable to minor – Title 12 O.S. § 83
It’s tax re(fun)d time

Settlement funds payable to minors

by Scott Thompson

Would your bank open up an account solely in the name of a two-year old? I’m guessing probably not. It’s that issue that derailed a statute regarding minor settlements. In 2022, Oklahoma enacted the “Oklahoma Statutory Thresholds for Settlements Involving Minors Act of 2022,” codified as 12 O.S. §§ 86 and 86.1. The goal of the law was to avoid the necessity of filing suits in court in order to approve settlements involving minors that were no greater than $25,000 but greater than $1500. Prior to this statute, the law required a parent who settled a small claim on behalf of the minor to file a suit and obtain a court order even though the defendant and the insurance company had already agreed to a settlement. The new law allowed such small settlements to be handled by the legal guardian of the minor without the intervention of the court. However, the statute explicitly required the settlement funds be deposited into a federally insured savings account solely in the name of the minor.

Let’s go back to my first question. If a guardian brought in an insurance check and wanted to open a new account to deposit it in an account that was solely in the name of a very young minor, would you open that account? Many banks, probably most, would not. While some attorneys argued that the “solely in the name of the minor” language did not preclude a custodial account, the uncertainty caused many banks to err on the side of caution. I personally spoke to a number of attorneys who had clients wanting to open these accounts who told me they had been to numerous banks and were told the bank would not open such an account. The intent of the statute was being thwarted by the “solely in the name of the minor” requirement.

Fortunately, the problem was fixed in the last legislate e session by repealing Sections 86 and 86.1 and amending 12 O.S. § 83 to add minor settlement language with changes to resolve the account ownership issue. Now, settlement funds within the monetary range subject to the statute are deposited in a custodial account like those that banks already frequently open for court-approved settlements involving minors. However, instead of using a court order to open and restrict the account, the account is opened and restricted based on an affidavit. The affidavit should substantially conform to the exemplar set out in the statute:

“I, [Name of Affiant], being of lawful age and after being duly sworn upon oath, state as follows:

1. I am the parent or guardian of [Name of minor child], a minor child.

2. Minor’s date of birth is MM-DD-YYYY.

3. [Briefly state when, where, and how the incident in question occurred.]

4. [Briefly state how minor was injured in the incident, describe his or her injuries, medical care received, if any, and how they are doing today.]

5. As a result of the injuries sustained by XX in the incident in question, I, individually and on behalf of XX, a minor, agreed to settle the claims of XX against [Name of tortfeasor(s)], with their insurer, [if any, provide the name of Third-Party Liability Insurance Carrier(s)], in the amount of $XXXX; and with my UM/UIM insurer, [if any, provide the name of First-Party-Liability Insurance Carrier(s)], in the amount of $XXXX, [add additional tortfeasor or first-party coverages where applicable] for a total settlement in the amount of $XXXX.

6. I understand that all medical expenses, liens and subrogation claims must be paid from the settlement: [List all outstanding medical expenses, liens and subrogation providers and the amounts.]

7. I understand that I (or another parent or guardian of the minor) may be reimbursed from the settlement for medical expenses that I or we have paid for the care or treatment of XX as a result of injuries incurred by XX due to the subject incident as follows: [List all relevant medical expenses of XX, paid for by a parent or guardian, for which reimbursement is sought from the settlement.]

8. I understand that $XXXX will be paid from the settlement to [Name of Firm/Attorney, if any] for attorney fees and costs in securing the settlement pursuant to my contract with [Name of Firm/Attorney].

9. I understand that pursuant to subsection B of Section 83 of Title 12 of the Oklahoma Statutes, the net of Minor’s settlement in the amount of $XXXX must be deposited in a savings account that accrues interest at one or more federally insured banking, credit union or savings and loan institutions; in a trust established for Minor, by a bank or trust company having trust powers under state or federal law; or into a structured settlement, by the terms of which the proceeds of a settlement may be invested in an annuity to be paid to or for the benefit of Minor by an insurance company licensed in this state. All or a portion of the recovered monies may be deposited in an account pursuant to the Oklahoma College Savings Plan Act with Minor designated as a beneficiary of the account.

10. I understand that such funds may not be withdrawn, removed, paid out, or transferred to anyone until Minor is eighteen (18) years of age, except pursuant to court order or upon the minor’s death. When the Minor reaches the age of eighteen (18) years, the funds may be withdrawn, removed, paid out or transferred by the minor without a court order.

11. I understand that I must deposit the funds, secure a Receipt of Deposit from the bank, and if I am represented, to return the Receipt of Deposit to my attorney. I must also advise the minor of the settlement and the location of the settlement funds as soon as the minor has the ability to understand its existence and at the time the minor reaches eighteen (18) years of age.

12. I understand that should I not settle this matter on behalf of the minor, I have the right to ask for a jury trial in this matter, and that a jury may have awarded more, less, or the same amount, but by settling XX’s claims, I am giving up this right to a jury trial.

13. I understand that should I not settle this matter, or pursue a jury trial on behalf of XX, XX would alternatively have a right to bring a cause of action against [Name of Tortfeasor(s)] within the one (1) year between XX’s 18th and 19th birthdays; however, by settling this matter at this time on XX’s behalf, I am waiving his or her right to bring a cause of action at that time, and relatedly his or her opportunity to obtain a verdict through jury trial.

14. I understand that by settling XX’s claims, whether for already known or later-discovered additional injuries from the subject incident and/or if XX requires future medical care, I will not be able to open this claim or bring any future cause of action against [Name of Tortfeasor(s) or their insurer(s)], [Name of Insurance Carrier, if any], to request additional sums of money.

15. I believe this is a fair and reasonable settlement of XX’s claim: that to the best of my knowledge the minor will be fully compensated by the settlement, or there is no practical way to obtain additional amounts from the other party/parties entering into the settlement agreement.

16. I believe this settlement is in the best interests of XX.

17. I understand that this settlement is full and final; I have not been coerced, pressured, or threatened into entering this settlement in any way.

FURTHER AFFIANT SAYETH NOT.
______________________________
[Name of Affiant]

[Address of Affiant]

[Phone Number of Affiant]

I state under penalty of perjury under the laws of Oklahoma that the foregoing is true and correct.

______ ______________________________________
Date Signature of Parent or Legal Guardian of XX

Approved as to form and content by:

[Attorney Name, if any]”

The institution may rely on this affidavit without investigation and has no liability to the minor or guardian if it does so. At the time the account is opened, however, the institution must provide a receipt of the deposit of funds using substantially the following form:

RECEIPT OF DEPOSIT

The undersigned, an Officer of [Name of Bank], does hereby acknowledge receipt of the Affidavit of [Name of Affiant], and that $XXXXX was deposited for the benefit of the minor, XX.

It is understood that the funds so deposited, pursuant to provisions under Section 83 of Title 12 of the Oklahoma Statutes, may not be withdrawn, removed, paid out, or transferred by anyone until XX is eighteen (18) years of age, except pursuant to court order or upon the minor’s death.

When XX reaches the age of eighteen (18) years of age, the funds may be withdrawn, removed, paid out, or transferred by XX without court order.

BY: _____________________________
Signature
_____________________________
Printed Name
_____________________________
Title

Subscribed and sworn to before me this ________ day of ___________, 20.

_____________________________

Notary Public

My Commission Expires:
__________________________

Once set up, the account operates essentially the same as a court-ordered minor account. Access to the funds is restricted without a court order until the minor attains the age of eighteen (18). At that time, the funds shall be released to the former minor. Note that a POD should not be added to this type of account and if the minor dies prior to attaining the age of majority, Section 906 of the Banking Code, if applicable, or the Probate Code, would determine the handling of the funds.

It’s income tax re(fun)d time

By Pauli Loeffler

Each year at this time, I get a variety of questions regarding income tax refunds deposits whether these are made by paper checks or direct deposit. I’ll cover various scenarios.

I covered the 2012 FinCEN Advisory 2012-A005 Tax Refund Fraud and Related Identity Theft in the May 2012 OBA Legal Briefs. On February 26, 2013, FinCEN provided an Update in FIN-2013-A001.

Identifying Tax Refund Fraud
Financial institutions are critical in identifying tax refund fraud because the methods for tax refund distribution – issuance of paper checks, and direct deposit into demand deposit or prepaid access card accounts – often involve various financial services providers.4 The number of tax refunds being distributed via direct deposit has increased significantly over the past several years and continues to increase annually.5 In direct correlation, financial institutions may see tax refund fraud activity increase and related suspicious activity may be connected to direct deposit transactions. To assist financial institutions with identifying potential tax fraud, FinCEN, in consultation with the IRS and law enforcement, has identified the following red flags.6
• Multiple direct deposit tax refund payments, directed to different individuals, from the United States Department of the Treasury (Treasury) or state or local revenue offices are made to a demand deposit or prepaid access account held in the name of a single accountholder.
• Suspicious or authorized account opening at a depository institution, on behalf of individuals who are not present, with the absent individuals being accorded signatory authority over the account. The subsequent deposits are comprised solely of tax refund payments. This activity often occurs with fraudulent returns for the elderly, minors, prisoners, the disabled, or recently deceased.
• A single individual opening multiple prepaid card accounts in different names, using valid TINs for each of the supplied names and having the cards mailed to the same address. Shortly after card activation, Automated Clearing House (ACH) credit(s) from Treasury, state or local revenue offices, representing tax refunds, occur. This is followed quickly by ATM cash withdrawals and/or point-of-sale purchases.
• Business accountholders processing third-party tax refund checks in a manner inconsistent with their stated business model or at a volume inconsistent with expected activity. Similarly, individuals processing third-party tax refund checks through a personal account with no business or apparent lawful purpose.
• Business accountholders processing third-party tax refund checks and conducting transactions inconsistent with normal business practices, which may include:
o A large volume of Treasury refund checks or bank checks being deposited, in contrast to other checks, such as payroll checks;
o A large volume of refund checks bearing addresses of customers who reside in another state;
o Multiple refund checks for the same or almost the same dollar amount;
o Treasury refund checks or bank checks representing electronic refunds with sequential or close to sequential numbers;
o The dollar amount of checks being deposited is not commensurate with the amount of currency being withdrawn to cover the cashing of these refund checks.
• Multiple prepaid cards that are associated with 1) the same physical address [individuals involved in criminal activity may also contact the customer service department requesting to change their address for their permanent prepaid card shortly after opening their temporary prepaid card account on-line]; 2) the same telephone number; 3) the same e-mail address; or 4) the same Internet Protocol (IP) address, which receive tax refunds as the primary or sole source of funds.
• The opening of a business account for a check cashing business at a financial institution, which subsequently processed a high volume of tax refund checks issued to individuals from other states.
• A sudden increase in volume involving the cashing of tax refund checks issued to individuals from across the United States, moving through the account of an existing check cashing service.
• Individuals using bank accounts where the majority of the transactions are ACH federal tax refunds or refund anticipation loans.
• Individuals attempting to negotiate double endorsed Treasury tax refund checks with questionable identification.
• Individuals accompanying multiple parties to the bank to negotiate Treasury tax refund checks. Such items may or may not be double endorsed checks.
• The freezing or closure of a personal or business account due to suspicious activity involving either Treasury tax refund checks or ACH Treasury deposits.
• The signature/endorsement on the back of the check(s) does not match the identification of the individual conducting the transaction.
• The same signature/endorsement is used on multiple checks, with multiple names.
• Employees of financial institutions may also facilitate tax refund fraud by conducting transactions inconsistent with normal activity through the following practices:
o Tellers who regularly process large quantities of Treasury tax refund checks. This may include one or more tellers during a specific time frame.
o Bank employees who open multiple bank accounts that received a large quantity of Treasury tax refund checks.
o Bank employees who did not follow proper identification procedures or accepted apparent fraudulent identification when opening an account.

[Footnotes omitted]

I covered direct deposit of tax refunds in the February 2016 OBA Legal Briefs. The IRS and Treasury Department tout the benefits of direct deposit. Tax payers can receive their tax refunds sooner and more securely using direct deposit to their bank accounts. Taxpayers can even have their refunds deposited into more than one account using IRS Form 8888 or options in tax preparation software. In 2016, the IRS reported that 80% of taxpayers already receive their refunds via direct deposit, and each tax refund that’s sent via direct deposit rather than by check saves the government – and U.S. taxpayers – 90 cents.

Direct deposit is not without its challenges, however. Many direct deposits are sent out for credit to accounts not owned by the taxpayer(s) who are owed. One measure taken by the IRS has started imposing a per deposit account limit of three refund payments.

There is no regulatory requirement that your bank search through its incoming ACH files trying to identify “mismatched” refunds. Treasury and the IRS won’t attempt to recover funds that are deposited as instructed by the IRS if the bank is unaware of the mismatch.

On the other hand, if the bank becomes aware of a mismatched direct deposit from Treasury, including a tax refund, and in time to act on it before it’s posted, Treasury regulations (31 CFR Part 210, section 210.8(d)) require a bank to notify the sending agency (IRS in the case of tax refunds). The rule says that you can notify the agency by sending a Notification of Change (NOC) entry with the correct information (for recurring entries) or return the entry using an R03 (Account not found) code. The IRS will then send the refund in check form.

In the March 2016 OBA Legal Briefs, I covered how to handle federal and Oklahoma income tax refunds when husband and wife filed a joint return but thereafter one of the spouses has died. The information in that article is still correct, and you can view it online once you register an account through the My OBA Member Portal if you haven’t already done so.

I received a call from a banker regarding a direct deposit into an account not owned by the tax payer who was entitled to the refund. The tax payer or her accountant had provided the wrong account number, but the bank was able to track the deposit into an account owned by another customer. Can the bank put a hold on the funds? This sent me to the IRS website. Compared to other government websites, I really like IRS.gov since it is relatively easy to find answers such as when an entity requires a new EIN or what to do when a business changes its name. With regard to this particular situation, I found the following:

Question
What should I do if I entered an incorrect routing or account number for direct deposit of my refund?

Answer
The IRS assumes no responsibility for tax preparer or taxpayer error. Please verify your account and routing numbers with your financial institution and double check the accuracy of the numbers you enter on your return prior to signing and submitting it. You should not request a deposit of your refund into an account that’s not in your own name.

The IRS handles account or routing number errors the same for both split refunds and regular direct deposits.

Scenario:

You omit a digit in the account or routing number of an account and the number doesn’t pass the IRS’s validation check. In this case, the IRS will send you a paper check for the entire refund instead of a direct deposit.

You incorrectly enter an account or routing number and the number passes the validation check, but your designated financial institution rejects and returns the deposit to the IRS. The IRS will issue a paper check for the amount of that deposit once it is received.

You incorrectly enter an account or routing number that belongs to someone else and your designated financial institution accepts the deposit. You must work directly with the respective financial institution to recover your funds.

If the financial institution recovers the funds and returns them to the IRS, the IRS will send a paper refund check to your last known address on file with the IRS.

In this case, the account holder had absolutely no right to the funds. I suggested the bank notify the customer into whose account the erroneous direct deposit was made that the bank was returning deposit to the IRS and put a hold on the amount of the deposit.

The IRS provides additional information to the taxpayer whose refund has gone astray: If you have contacted the financial institution and two weeks have passed with no results, you will need to file Form 3911, Taxpayer Statement Regarding Refund.

This allows the IRS to contact the bank on your behalf to attempt recovery of your refund. Banks are allowed up to 90 days from the date of the initial trace input to respond to our request for information but it may take up to 120 days for resolution.

If funds aren’t available or the bank refuses to return the funds, the IRS cannot compel the bank to do so. The case may then become a civil matter between you and the financial institution and/or the owner of the account into which the funds were deposited.

January 2025 OBA Legal Briefs

Welcome OBA’s General Counsel
BOI deadlines in limbo
Interagency Guidance on Elder Financial Exploitation
Banker Q&As
- Unclaimed property and outstanding cashier’s check
- Monthly payment of flood insurance
- Right of rescission
- Deceased IRA owner, RMD

Introducing the OBA’s new general counsel

By Scott Thompson

I would like to take this opportunity to introduce myself to the membership as the OBA’s newest employee. My name is Scott Thompson and I will be working in the role of General Counsel for the Association. I’m a George Washington Law School graduate and an Oklahoma State University alumnus, where I currently serve as a member of the alumni advisory board for the Political Science Department. I have worked in a variety of government and private sector positions over the last thirty years, including most recently as General Counsel at SpiritBank. A more complete resume was set out in the OBA Update for the “Week of Dec. 2,” so if you are interested in all of my fun and exciting work history or full educational background, you can head over to the OBA Update archives on the OBA website.

On a more personal note, I’ve been married for twenty-eight years. My wife is a Disney fanatic, so Disney World is her happiest place on Earth. I have two boys. One is 22 and the other is 17. The oldest is a musician and currently focused on audio/video production. The youngest is a semester away from graduating high school and is headed to OSU in the Fall. We have two Yorkies. If you know Yorkies, you know they are the bosses, and we live to serve. I’m an OSU Cowboy and Pittsburgh Steelers fan, so you know that I’m very resilient in the face of adversity and disappointment. Fortunately, the Oklahoma City Thunder gives me the opportunity to experience the joy of being a fan of a team that regularly wins.

However, instead of focusing on the past, I want to address the future (mine, not the two aforementioned football teams needing better quarterbacks). Specifically, you might wonder what I will be doing when I come into work every day. That’s a good question! I certainly don’t have a complete answer (it’s my first day in the office as I write this), but they have let me in on a couple of things.

Out of the gate, I will be helping Adrian with legislation and governmental relations work. I’ve already starting reading through the bills filed for the upcoming session. If you’ve ever read through a bunch of legislation, it’s riveting. There are two sides to the legislative coin, helping enact laws that are good for bankers and stopping the ones that are bad. I haven’t yet figured out for certain which will be the bigger task this year, but it’s probably going to be the latter. There are a lot of people who have a legislator’s ear and not all of them want the best for us.

In addition to that work, I will be speaking at Association events, writing some articles, attending meetings with stakeholders like you, and working with my counterparts at the State Banking Department and the ABA to advance the interests of our members. As time passes, I hope to have the opportunity to meet and get to know many of you.

Beneficial Ownership Registration in limbo

By Pauli Loeffler

On December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court’s preliminary injunction entered in Texas Top Cop Shop, Inc., pending the outcome of Treasury’s ongoing appeal of the district court’s order. Treasury immediately issued an alert notifying the public of this ruling and recognizing that reporting companies may have needed additional time to comply with beneficial ownership reporting requirements, Treasury extended reporting deadlines. On December 26, 2024, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Court’s December 23, 2024 order granting a stay of the preliminary injunction. On December 31, 2024, the Department of Justice, on behalf of Treasury, sought a stay of the injunction pending the ongoing appeal from the Supreme Court of the United States.

As of December 26, 2024, FinCEN is complying with—and will continue to comply with— court orders.

Interagency Guidance on Elder Financial Exploitation

by Pauli Loeffler

On December 4, 2024, the federal regulatory agencies issued a Statement and Supervisory Guidance on Elder Financial Exploitation (https://www.fdic.gov/news/financial-institution-letters/2024/agencies-issue-interagency-statement-elder-financialFinancial Exploitation), “the Guidance.” The purpose is to raise supervised institutions’ awareness of, and provide strategies for addressing elder financial exploitation “EFE”). The Guidance is not intended to replace previous guidance issued, interpret or establish a compliance standard, and nor impose new regulatory requirements or new supervisory expectations.

Elder Financial Exploitation (“EFE”) is defined as the illegal or improper use of an older adult’s funds, property, or assets as according to FinCEN’s June 2022 EFE Advisory and the U.S. Department of Justice Elder Justice Initiative. “Older adults” are typically considered individuals aged 60 or older.

EFE consists of two primary subcategories: elder theft and elder scams. The Guidance emphasizes employee training to identify all types of financial exploitation not just those whose victims who are age 60 and older, but places special emphasis on Elder Financial Exploitation (“EFE”) which is critical to identifying all forms of EFE including:

Unauthorized use of an elder’s bank accounts or credit cards
Cashing an elderly person’s checks without authorization.
Identity theft to open credit lines.
Convincing an elder to add the abuser to joint accounts.
Using a power of attorney or Letters of Guardianship for the benefit of fiduciary rather than the principal or ward
Persuading the elder to change beneficiaries on wills, life insurance, or other financial accounts.

Note that EFE is on the rise, with a recent study done by AARP indicating an annual loss of $28.3 billion by elders.

Supervised institutions are encouraged to provide clear, comprehensive, and recurring training for their employees, recommending:
Awareness of red flags to (e.g., identify theft, change of banking patterns, or recent addition of authorized users followed by large withdrawals).
Development of a questionnaire for employees to use if they suspect financial exploitation.
Procedures for employees and managers to respond to and report suspected financial exploitation.
Educate employees as well as supervisors and employees directions to complete a detailed Suspicious Activity Report (SAR) when fraudulent activity is detected/suspected.

Federal law provides that a financial institution and certain employees are not liable in any civil or administrative proceeding for disclosing suspected elder financial exploitation to covered agencies if the financial institution has timely trained its employees on identifying elder financial exploitation.

Trusted contacts.

The Supervisory Guidance suggests that financial institutions may consider the establishing policies and procedures that permit account holders to designate one or more trusted contacts that the financial institution can contact when EFE is suspected. The account holder could provide the name of one or more family members, attorneys, accountants, or other trusted individuals as contacts and authorize the bank to contact that person if the bank is unable to reach the account holder or suspects that the account holder is at risk of financial exploitation. who might identify one or more family members, attorneys, accountants, or other trusted individuals and authorize the supervised institution to contact them if the supervised institution cannot reach the account holder or suspects that the account holder may be at risk of financial exploitation. The authorized contact would not have authority to obtain account information or make transactions unless specifically authorized by the account holder in writing. The problem here is similar to the situation where one joint owner names an agent under a power of attorney and the other joint owner objects.

The guidance recognizes naming a trusted contact will require the bank to set forth clear and effective procedures as to when and how it will disclose to the account holder and trusted contact that one or several transactions indicate elder financial exploitation may be involved.

The CFPB recommends that financial institutions establish procedures for enabling consumers to provide advance consent to sharing account information with a designated trusted third party when the financial institution reasonably believes that elder financial exploitation is occurring, has occurred, has been attempted or will be attempted. GLBA permits disclosure of nonpublic personal information with the consent of the consumer. The CFPB recommends developing a plain language consent form as well as procedures for offering consumers the opportunity to consent at account opening and periodically thereafter.

The CFPB recommends that financial institutions:

Banker Q&As

Unclaimed property and outstanding cashier’s check

Q. When a customer does not cash their Escrow Surplus Check, are we able to apply that to their outstanding loan balance? Also, would we be able to deposit to their checking/savings account if they have one? We also have a customer who no longer has the mortgage loan with us, but has another loan, can it be applied to that loan?

I do know the easiest way would be to escheat the money to the State, however, we would prefer for the money be given to our customers and feel this is a service we owe them because we have a relationship with them.

A. The problem of what to do with outstanding cashier’s checks and unclaimed property is relatively common. Annually, I have at least one banker ask if it is okay to reissue the cashier’s check rather than report and remit the funds once the check has been issued for five years. The bank has no authority to do that nor can it deposit it to an existing account or pay a loan without consent of the customer. The worst-case scenario would be depositing the check without permission and then receiving a garnishment, child support, or IRS levy attaching the funds. I will point out that a cashier’s check never becomes “stale.”

In this case, the funds are ripe for reporting and remitting as unclaimed property under Tit. 60 O.S. Sec. 651.2:

Any sum payable on a check, certified check, cashier’s check, draft, or similar instrument, except those subject to Section 651.1 of this title, on which a banking or financial organization is directly liable, which has been outstanding for more than five (5) years after it was payable or after its issuance if payable on demand, is presumed abandoned, unless the owner, within five (5) years, has communicated in writing with the banking or financial organization concerning it or otherwise indicated an interest as evidenced by a memorandum or other record, on file, prepared by an employee thereof.

To avoid violating the statute, I recommend contacting the customer and suggesting s/he cash the check or deposit the check into an account as “not used as intended.” If she doesn’t want to do that, the bank has satisfied the conditions above, will note the contact and response, and restart the timer for reporting and remitting to the Oklahoma Treasurer.

Monthly payment of flood insurance

Q. With the revision of the National Flood Insurance Program (NFIP) allowing monthly installment payments for flood insurance premiums effective December 31, 2024, does the revision apply to both commercial and consumer purpose loans? If it does apply to commercial purpose loans, does it matter if the borrower is an entity or an individual? Another way to ask the questions, what is the definition of “consumer” in the NFIP rule?

A. Below is the definition found on a web search for consumers, but I can’t find the source of the definition:

”A consumer of the National Flood Insurance Program (NFIP) is a property owner, renter, or business that purchases flood insurance from the program; essentially, anyone residing in a participating community can buy flood insurance through the NFIP, regardless of whether they own or rent their property.”

With the revision of the National Flood Insurance Program (NFIP) allowing monthly installment payments for flood insurance premiums effective December 31, 2024, does the revision apply to both commercial and consumer purpose loans? If it does apply to commercial purpose loans, does it matter if the borrower is an entity or an individual?

Another way to ask the questions, what is the definition of “consumer” in the NFIP rule? Reg Z and its escrow requirements for certain loans apply only to consumer loans made to natural persons except with regard to Trusts. Likewise, Reg X applies to consumers and consumer loans. Reg X covers escrows for consumer loans and only consumer loans.

1024.5—Coverage of RESPA

(b) Exemptions. (1) [Reserved]

(2) Business purpose loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by 12 CFR 1026.3(a)(1) of Regulation Z. Persons may rely on Regulation Z in determining whether the exemption applies.

Reg Z 1026.3 — Exempt transactions.*

(a) Business, commercial, agricultural, or organizational credit. (1) An extension of credit primarily for a business, commercial or agricultural purpose.

(2) An extension of credit to other than a natural person, including credit to government agencies or instrumentalities.

Official Interpretation

3(a) Business, Commercial, Agricultural, or Organizational Credit

Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt. (See comment 3(a)–2, however, with respect to credit cards.)…

Trusts. Credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization. Specifically:

Trusts for tax or estate planning purposes. In some instances, a creditor may extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both). Consumers sometimes place their assets in trust, with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates. During their lifetimes, however, such consumers may continue to use the assets and/or income of such trusts as their property. A creditor extending credit to finance the acquisition of, for example, a consumer’s dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust. Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.

Financial institutions should update their Notice of Special Flood Hazard to include the following new text:

Escrow Requirement for Residential Loans

Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. These premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider.

Loan-Related Exceptions

The rule also excepts several categories of loans from the flood insurance escrow requirement:

loans with a subordinate position to a senior lien secured by the same property for which flood insurance is being provided;

loans secured by residential improved real estate or mobile homes that are part of a condominium, cooperative, or other project development when covered by a flood insurance policy that (a) meets the mandatory flood insurance purchase requirement; (b) is provided by the condominium association, cooperative, homeowners association, or other applicable group; and (c) the premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense;

loans secured by residential improved real estate or a mobile home that is used as collateral for a business, commercial, or agricultural purpose;

home equity lines of credit;

nonperforming loans, which the regulation defines as loans that are 90 or more days past due and remain nonperforming until they are permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, are collected or otherwise discharged in full; and

loans with terms of 12 months or less.

As a general rule, if a lender or its servicer determines during the term of a loan covered by this rule that an exception does not apply, the lender or its servicer shall require the escrow of all flood insurance premiums and fees as soon as reasonably practicable.

The final rule requires regulated lending institutions to offer and make available to borrowers the option to escrow flood insurance premiums and fees for loans secured by residential improved real estate or mobile homes that are outstanding as of January 1, 2016, subject to the exceptions outlined previously. The final rule clarifies that the option to escrow requirement does not apply to an outstanding loan that is already escrowing flood insurance premiums and fees or will be subject to the flood insurance escrow requirement. Furthermore, the rule requires regulated lending institutions that lose the small lender exception to offer the option to escrow to existing borrowers with outstanding loans secured by residential improved real estate or mobile homes. Regulated lending institutions have until June 30, 2016, to provide notice to affected borrowers about the option to escrow.

Right of rescission

Q. We are contemplating a transaction in which there are two borrowers. One borrower does not live in the home, but is on the deed. There is a hypothecator who owns the property, but does not live there. Are we required to have the hypothecator to sign a right of rescission? This will be on a consumer RE loan.

A. Right of rescission only applies when the loan is consumer purpose and the home is the principal residence of the person granting a security interest in the property. In the scenario you provide, neither the person lives in the home, so there is no right of rescission required.

Deceased IRA owner, RMD

Q. We have an IRA owner that recently passed away that was 65. His wife which is the beneficiary is 79. Will she be required to take an RMD?

A. Since the IRA owner had yet to reach his Required Beginning Date for Required Minimum Distribution, the beneficiary wife will not have to take an RMD prior to making it her own IRA or a beneficiary IRA.

Elder Financial Exploitation is the illegal or improper use of an older adult’s funds, property, or assets, according to FinCEN’s June 2022 EFE Advisory and the U.S. Department of Justice Elder Justice Initiative. Older adults are typically considered individuals aged 60 or older. EFE consists of two primary subcategories: elder theft and elder scams. [Footnotes omitted]

Supervised institutions may establish policies and procedures that enable account holders to designate one or more trusted contacts that employees can contact when elder financial exploitation is suspected. For example, an account holder might identify one or more family members, attorneys, accountants, or other trusted individuals and authorize the supervised institution to contact them if the supervised institution cannot reach the account holder or suspects that the account holder may be at risk of financial exploitation. Unless separately authorized by the account holder, a third-party trusted contact typically would not have authority to view account information or execute transactions. If a supervised institution establishes a trusted contact designation process for account holders, it may be beneficial to develop clear and effective procedures for when and how to disclose to the account holder and trusted contact that one or more transactions have indicated that elder financial exploitation may be occurring. Any disclosures to account.

December 2024 OBA Legal Briefs

Check your to do list

By Pauli Loeffler

Let’s review some of your annual compliance chores to ensure they are tidy and cared for.

Security, Annual Report to the Board of Directors § 208.61 – The Bank Protection Act requires that your Security Officer report at least annually to the board of directors on the effectiveness of the security program. The substance of the report must be reflected in the minutes of the meeting. The regulations don’t specify if the report must be in writing, who must deliver it, or what information should be in the report. It is recommended that your report span three years and include last year’s historical data, this year’s current data and projections for the next year.

Similar to compliance reporting to the board, this may include a personal presentation, or it may not. I recommend that it is, as it is an opportunity to express what is being done to control what has happened as well as foreseeable events and why, as that can assist you in getting the budget and assets necessary in the coming year. While the year end is not necessarily the most desirable time to make such a presentation, take whatever time you do get and use it wisely. Annual presentations such as this are better done when the directors can focus more on the message so try to avoid quarter ends, and especially the fourth quarter.

Regulation O, Annual Resolution §§ 215.4, 215.8 – In order to comply with the lending restrictions and requirements of 215.4, you must be able to identify the “insiders.” Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person. Your insiders are defined in Reg O by title unless the Board has passed a resolution excluding certain persons. You are encouraged to check your list of who is an insider, verify that against your existing loans, and ensure there is a notification method to keep this list updated throughout the year.

Fair Credit Reporting Act – FACTA Red Flags Report – Section VI (b) (§ 334.90) of the Guidelines (contained in Appendix J) require a report at least annually on your Red Flags Program. This can be reported to either the Board, an appropriate committee of the Board, or a designated employee at the senior management level.
This report should contain information related to your bank’s program, including the effectiveness of the policies and procedures you have addressing the risk of identity theft in connection with the opening of covered accounts and with respect to existing covered accounts, as well as service provider arrangements, specifics surrounding and significant incidents involving identity theft plus management’s response to these and any recommendations for material changes to the bank’s program. Times change, customers habits change, and importantly criminals change and each may require tweaks to the bank’s program.

Reg E § 1005.8 (b) – If your consumer customer has an account to or from which an electronic fund transfer can be made, an error resolution disclosure is required. There is a short version that you may have included with each periodic statement. If you’ve used this, you are done with this one. But if you send the longer version that is sent annually, it is time to review it for accuracy and ensure it has been sent or is scheduled to be. Electronic disclosures under E-SIGN are allowed here.

This is also a good time to review §1005.7(c) (additional electronic fund transfer services) and determine if any new services have been added and if they were disclosed as required. Think Person-to-Person transfers like Zelle, Venmo or Square. These require disclosure and inaccurate disclosures may affect your claims processing.

Annual MLO Registration § 1007.102 – Mortgage Loan Originators must go to the online Registry and renew their registration. This is done between November 1 and December 31. If this hasn’t been completed, don’t push it to the back burner and lose track during the holidays and then have to join a year-end rush to complete this task. This is also a good time to plan with management and Human Resources any MLO bonus plans. Reg Z Section 1026.36(d)(1)(iv)(B)(1) allows a 10 percent aggregate compensation limitation on total compensation which includes year-end bonuses.

BSA Annual Certifications – Your bank is permitted to rely on another financial institution to perform some or all the elements of your CIP under certain conditions. The other financial institution must certify annually to your bank that it has implemented its AML program. Also, banks must report all blockings to OFAC within ten days of the event and annually by September 30, concerning those assets blocked as of June 30.
Information Security Program part of GLBA – Your bank must report to the board or an appropriate committee at least annually. The report should describe the overall status of the information security program and the bank’s compliance with regulatory guidelines. The reports should discuss material matters related to the program, addressing issues such as: risk assessment; risk management and control decisions; service provider arrangements; results of testing; security breaches or violations and management’s responses; and recommendations for changes in the information security program.

IRAs, IRS Notice. If a minimum distribution is required from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the trustee that held the IRA on the prior year-end must provide a statement to the IRA owner by January 31 of the calendar year regarding the required minimum distribution.

Training – An actual requirement for training to be conducted annually is rare, but annual training has become the industry standard and may even be stated in your policies. There are six areas that require training (this doesn’t mean you don’t need other training, just that these regulations have stated requirements).

– BSA (12 CFR §21.21(c)(4) and §208.63(c)(4) Provide training for appropriate personnel.

– Bank Protection Act (12 CFR §21.3(a)(3) and §208.61(c)(1)(iii)) Provide initial & periodic training

– Reg CC (12 CFR §229.19(f) Provide each employee who performs duties subject to the requirements of this subpart with a statement of the procedures applicable to that employee)

– Customer Information Security found at III(C)(2) (Pursuant to the Interagency Guidelines for Safeguarding Customer Information), training is required. Many banks allow for turnover and train as needed, imposing their own requirements on frequency.)

– FCRA Red Flag (12 CFR 222.90(e)(3)) Train staff, as necessary, to effectively implement the Program;)

– Overdraft protection programs your bank offers. Employees must be able to explain the programs’ features, costs, and terms, and to explain other available overdraft products offered by your institution and how to qualify for them. This is one of the “best practices” listed in the Joint Guidance on Overdraft Protection Programs issued by the OCC, Fed, FDIC and NCUA in February 2005 (70 FR 9127, 2/24/2005), and reinforced by the FDIC in its FIL 81-2010 in November 2010.

Miscellany – Some miscellaneous items you may address internally in policies and procedures include preparation for IRS year-end reporting, vendor due diligence requirements including insurance issues and renewals, documenting ORE appraisals and sales attempts, risk management reviews, records retention requirements and destruction of expired records, and a designation by the bank’s board of the next year’s holidays. And last but not least, has there been a review of those staffers who have not yet taken vacation or “away time” to the five consecutive business days per the Oklahoma Administrative Code 85:10-5-3 “Minimum control elements for bank internal control program”?

Reg Z Thresholds and Updates – These changes are effective January 1, 2025. You should ensure they are available to staff or correctly hard coded in your systems.

§ 1026.3 – Exempt transactions. There are exemptions from coverage by Reg Z under (b) of this section. One such exemption is when the loan amount exceeds the threshold set under in comment 3(b)-3 for that period. Effective January 1, 2025 the amount increases from $69,500 to $71,900. This applies for loans exceeding the threshold amount which are NOT secured by real or personal property used or expected to be used as the principal dwelling of the consumer nor is a private education loan under as defined in § 1026.46(b)(5). There are additional requirements for exemption with regard to open-end credit. Please note that the Oklahoma Uniform Consumer Credit Code uses the same threshold as Reg Z.

§ 1026.32 – High Cost Mortgage Loans (HOEPA) – The adjusted total loan amount threshold for high-cost mortgages in 2025 will be $26,968. The adjusted points-and-fees dollar trigger will
be $1,348.

For qualified mortgages (QMs) under the General QM loan definition in § 1026.43(e)(2), the threshold for the spread between the annual percentage rate (APR) and the average prime offer rate (APOR) in 2025 will be:
iv. For 2025, reflecting a 3.4 percent increase in the CPI-U that was reported on the preceding June 1, to satisfy § 1026.43(e)(2)(vi), the annual percentage rate may not exceed the average prime offer rate for a comparable transaction as of the date the interest rate is set by the following amounts:

A. For a first-lien covered transaction with a loan amount greater than or equal t`3o $134,841, 2.25 or more percentage points;

B. For a first-lien covered transaction with a loan amount greater than or equal to $80,905 but less than $134.841, 3.5 or more percentage points;

C. For a first-lien covered transaction with a loan amount less than $80,905, 6.5 or more percentage points;

D. For a first-lien covered transaction secured by a manufactured home with a loan amount less than $134,841, 6.5 or more percentage points;

E. For a subordinate-lien covered transaction with a loan amount greater than or equal to $80,905, 3.5 or more percentage points;

F. For a subordinate-lien covered transaction with a loan amount less than $80,905, 6.5 or more percentage points.
For 2025, a covered transaction is not a qualified mortgage unless the transaction’s total points and fees do not exceed:

A. For a loan amount greater than or equal to $134,841: 3 percent of the total loan amount;
B. For a loan amount greater than or equal to $80,905 but less than $134,841: $4,005;
C. For a loan amount greater than or equal to $26,968 but less than $80,905: 5 percent of the total loan amount;
D. For a loan amount greater than or equal to $16,855 but less than $26,9682: $1,305
E. For a loan amount less than $16,855: 8 percent of the total loan amount.

November 2024 OBA Legal Briefs

Vulnerable Adult Abuse, Neglect and Exploitation Report
Perfection of security interest
- Lien entries on vehicles, manufactured
- Semi-trailers
- Purchase Money Security Interest, blanket filing
Questions from our members
- Reg E
- LLC documentation
- Initial ARM notice
- Reconsideration of Value Questions (see also December 2024 Legal Briefs)

By Pauli Loeffler

Vulnerable Adult Abuse, Neglect and Exploitation Report

In the September 2023 OBA Legal Briefs, I noted that Tit. 43A O.S. § 10-111.1 was added to the Oklahoma statutes in 2018 and amended Effective January 1, 2024 requiring the Office of the Attorney General to establish and maintain the Vulnerable Adult Abuse, Neglect and Exploitation Registry accessible to the public in an electronic format and updated quarterly, to include:

1. A procedure for recording individuals on the registry who have been found guilty by a court of law or entered a plea of guilty or nolo contendere to a charge of abuse, neglect, or exploitation of a vulnerable adult; and

2. Disclosure requirements for information that is accessible on the registry.

B. The Vulnerable Adult Abuse, Neglect and Exploitation Registry shall include, but not be limited to:
1. The full name of the individual;
2. Information necessary to identify the individual;
3. The disposition and other identifying case information regarding convictions or confessions of abuse, neglect, or exploitation in a court of law; and
4. The date the individual was convicted or pled guilty or nolo contendere.

The Registry is compiled by the Oklahoma State Bureau of Investigation (OSBI). You can click here to view the Registry or copy and paste the link below.

(https://oklahoma.gov/content/dam/ok/en/oag/documents/divisions/medicaid-fraud-control-unit/registry/2024-10-21%20-%20Elder%20Abuse%20Registry%20from%20OSBI%20for%20posting%20on%20MFCU%20website.pdf)

You may remember that under the Oklahoma Uniform Durable Power of Attorney Act, if the bank receives a properly executed power of attorney, e.g., signed by the principal and notarized, the bank must accept the DPOA unless one of 6 reasons for denial apply. One of those reasons is: The Bank itself has made or has actual knowledge that another person has made a report to Oklahoma Adult Protective Services stating a good-faith belief that the principal may be subject to physical or financial abuse, neglect, exploitation or abandonment by the agent or a person acting for or with the agent.

It isn’t uncommon for a banker to have a bad feeling about the Agent named in the DPOA, and the Attorney General’s public registry may be of use in such cases.

Perfection of security interest

Lien entries on vehicles, manufactured homes

Two bankers reached out to me last month on what they should do when title to a vehicle or a manufactured/mobile home has an existing lien, and the bank is making a loan to a borrower to purchase the vehicle or manufactured home. Since Oklahoma is a Title holding state, the current lender holds the title and will not release its lien until its loan is paid in full. What happens if the collateral is transferred to the new owner before the new lender has filed its lien entry?

Let’s start with a vehicle. Joe Blow is selling his truck to Bob Smith who has come to your bank for a loan to purchase Joe’s truck for $6,000. There’s a lien on the title filed by Mega Bank for $4,500, and as the secured party, it holds the title. Your bank is concerned that when you pay off pay off MegaBank and Joe receives the lien release, he will have clear title and sell the truck to someone other than Bob for a higher price. This leaves Bob with a loan but no truck, and your bank with a loan with no collateral securing it.

In a prior Legal Brief covering new advances secured by prior liens where the bank wants to “lend back up” to the amount of a paid down loan, I warned banks that this will not work unless the loan provides for mandatory future advances which is rare for a consumer loan. In such cases, the bank is advised to file another lien entry for the new money. As I recall there is a definite number of active lien entries permitted to filed on the same title, but I do not remember whether that number is four, five, or six.

In order to avoid the situation involved above, your bank can protect itself by filing a lien entry on the vehicle’s title as soon as the Bob signs the security agreement, and your lien will be reflected on the title. The lien will be subordinate to MegaBank’s until it is paid off, at which point MegaBank’s lien will be removed from the title at which point your bank will be the one holding the title. Your bank will pay Mega directly, and Mega must timely release its lien pursuant to Tit. 47 O.S. § 1110. Your bank’s lien on the truck will be first in priority and will maintain that priority until your lien the loan is paid in full.

Perfection of a security interest in a manufactured home with a certificate of title is likewise by lien entry, but it is not the same as for vehicles. You need to be aware of Tit. 47 Sec. 1110 E. (below). The manufactured home must be registered, and the certificate of title will show the lien. If the owner of the manufactured home owns the real estate, the lien on the title will prevent merger of title into the real estate unless there is compliance with 1110 E.

E. If a manufactured home is permanently affixed to real estate, an Oklahoma certificate of title may be surrendered to Service Oklahoma or a licensed operator for cancellation. When the document of title is surrendered, the owner shall provide the legal description or the appropriate tract or parcel number of the real estate and other information as may be required on a form provided by Service Oklahoma. Service Oklahoma may not cancel a document of title if a lien has been registered or recorded. Service Oklahoma or the licensed operator shall notify the owner and any lienholder that the title has been surrendered to Service Oklahoma and that Service Oklahoma may not cancel the title until the lien is released. Such notification shall include a description of the lien and such notification to the owner shall be accompanied by the return of title surrendered. Permanent attachment to real estate does not affect the validity of a lien recorded or registered with Service Oklahoma before the document of title is canceled pursuant to this section. The rights of a prior lienholder pursuant to a security agreement or the provisions of a credit transaction and the rights of the state pursuant to a tax lien are preserved…

If the certificate of title to the manufactured home has been surrendered, what happens if the owner of both the real estate and the manufactured home wants to sell the manufactured home to a new owner? §1110 E. provides:

The owner of a manufactured home upon which the document of title has been properly surrendered may apply to Service Oklahoma for issuance of a new original certificate of title upon submission of:

1. An attestation from the homeowner indicating ownership of the manufactured home and the nonexistence of any security interest or lien of record in the manufactured home; and

2. A title opinion by a licensed attorney, determining that the owner of the manufactured home has marketable title to the real property upon which the manufactured home is located and that no documents filed of record in the county clerk’s office concerning the real property contain a mortgage, recorded financial statement, judgment, or lien of record. Persons or entities to whom the title opinion is addressed may rely on the title opinion. A security interest in a manufactured home perfected pursuant to this section shall have priority over a conflicting interest of a mortgagee or other lien encumbrancer, or the owner of the real property upon which the manufactured home became affixed or otherwise permanently attached. The holder of the security interest in the manufactured home, upon default, may remove the manufactured home from such real property. The holder of the security interest in the manufactured home shall reimburse the owner of the real property who is not the debtor and who has not otherwise agreed to access the real property for the cost of repair of any physical injury to the real property, but shall not be liable for any diminution in value to the real property caused by the removal of the manufactured home, trespass, or any other damages caused by the removal. The debtor shall notify the holder of the security interest in the manufactured home of the street address, if any, and the legal description of the real property upon which the manufactured home is affixed or otherwise permanently attached and shall sign such other documents, including any appropriate mortgage, as may reasonably be requested by the holder of such security interest.

Note that if the mobile home is affixed to real estate that is not owned by the mobile home owner, the bank should obtain a waiver of landlord’s lien from the owner of the real estate in the event the bank needs to repossess the manufactured home.

Another observation I have is with regard to fixture filings when the mobile home is not owned by the same person that owns the real estate. Let’s say Cousin Lucy’s manufactured home has a certificate of title and is on Uncle Albert’s land which has no mortgage.

This is the case when 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.

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. Some banks just have 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.

On the other hand, a manufactured home located in an ordinary trailer park it is unlikely to have extra ground space nor any intention of locating fixtures outside the trailer. A UCC-1 covering “fixtures” belonging to the borrower will not have much benefit to the bank.

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. § 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.”

§ 1-9-102(a)(54) of the UCC, a “manufactured home transaction” is a secured transaction (not involving a dealer’s inventory) that either (A) “creates a purchase-money security interest in a manufactured home,” or (B) 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.

Semi-trailers

If registration of title is required under Oklahoma law (Title 47, statutes below), then perfection is by lien entry, and a UCC filing accomplishes nothing. If registration is optional (may be registered to show ownership, e.g., horse trailers, farm trailers, boat trailers, etc.) perfection is by UCC filing, and a lien entry does nothing, See IN RE: JENNIFER LYNN JACKSON, Debtor. SUSAN MANCHESTER, Trustee, Plaintiff, v. ARVEST BANK, Defendant. CERTIFIED QUESTION OF LAW. 287 P.3d 986 (2012)

¶18 The modified certified question presented by the United States Bankruptcy Court for the Western District of Oklahoma is answered with specific explanations relevant to the case at bar. Title may be properly issued by the Oklahoma Tax Commission to non-required trailers for the convenience of showing ownership. The use of title beyond this single purpose for non-required vehicles would be contrary to the general scheme and purposes of the Uniform Commercial Code as adopted in Oklahoma. The proper method for perfecting a security interest in collateral that is not required to be titled (but may be titled at the discretion of the owner) still is, and has been by the filing of a UCC-1 financing statement.

§ 1105

B. The owner of every vehicle in this state shall possess a certificate of title as proof of ownership of such vehicle, except those vehicles registered pursuant to Section 1120 of this title and trailers registered pursuant to Section 1133 of this title, previously titled by anyone in another state and engaged in interstate commerce, and except as provided in subsection M of this section. Except for owners that possess an agricultural exemption permit pursuant to Section 1358.1 of Title 68 of the Oklahoma Statutes, the owner of an all-terrain vehicle or a motorcycle used exclusively off roads or highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2005, and the owner of a utility vehicle used exclusively off roads and highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2008, shall possess a certificate of title as proof of ownership. Any person possessing an agricultural exemption permit and owning an all-terrain vehicle or a motorcycle used exclusively off roads or highways in this state which is purchased or the ownership of which is transferred on or after July 1, 2008, shall possess a certificate of title as proof of ownership. Upon receipt of proper application information by such owner, the Oklahoma Tax Commission shall issue an original or transfer certificate of title. Until July 1, 2008, any security interest in an all-terrain vehicle that attached and was perfected before July 1, 2005, and that has not otherwise terminated shall remain perfected, and shall take priority over any subsequently perfected security interest in the same all-terrain vehicle, notwithstanding that a certificate of title may have been issued with respect to the same all-terrain vehicle on or after July 1, 2005, and that a lien may have been recorded on said certificate of title. There shall be eight types of certificates of title:

§ 1102

As used in the Oklahoma Vehicle License and Registration Act:

6. “Commercial trailer” means any trailer, as defined in Section 1-180 of this title, or semitrailer, as defined in Section 1-162 of this title, when such trailer or semitrailer is used primarily for business or commercial purposes…

29. “Recreational vehicle” means every vehicle which is built on or permanently attached to a self-propelled motor chassis or chassis cab which becomes an integral part of the completed vehicle and is capable of being operated on the highways. In order to qualify as a recreational vehicle pursuant to this paragraph such vehicle shall be permanently constructed and equipped for human habitation, having its own sleeping and kitchen facilities, including permanently affixed cooking facilities, water tanks and holding tank with permanent toilet facilities. Recreational vehicle shall not include manufactured homes or any vehicle with portable sleeping, toilet and kitchen facilities which are designed to be removed from such vehicle. Recreational vehicle shall include park model recreational vehicles as defined in this section…

Purchase Money Security Interest, blanket filing

A recent email from a banker asked whether it would have a valid UCC if it states: Purchase Money Security Interest in All Equipment, Livestock, etc. if they don’t list any specific pieces of collateral for a valid blanket filing.

In this case, the answer is found in Tit. 12 O.S. Sec. 1-9-324:

PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS

(a) Except as otherwise provided in subsection (g) of this section, a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 1-9-327 of this title, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within twenty (20) days thereafter.

(b) Subject to subsection (c) of this section and except as otherwise provided in subsection (g) of this section, a perfected purchase-money security interest in inventory has priority over a conflicting security interest in the same inventory, has priority over a conflicting security interest in chattel paper or an instrument constituting proceeds of the inventory and in proceeds of the chattel paper, if so provided in Section 1-9-330 of this title, and, except as otherwise provided in Section 1-9-327 of this title, also has priority in identifiable cash proceeds of the inventory to the extent the identifiable cash proceeds are received on or before the delivery of the inventory to a buyer, if:

(1) the purchase-money security interest is perfected when the debtor receives possession of the inventory;

(2) the purchase-money secured party sends a signed notification to the holder of the conflicting security interest;

(3) the holder of the conflicting security interest receives the notification within five (5) years before the debtor receives possession of the inventory; and

(4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.

(c) Paragraphs (2) through (4) of subsection (b) of this section apply only if the holder of the conflicting security interest had filed a financing statement covering the same types of inventory:

(1) if the purchase-money security interest is perfected by filing, before the date of the filing; or

(2) if the purchase-money security interest is temporarily perfected without filing or possession under subsection (f) of Section 1-9-312 of this title, before the beginning of the twenty-day period thereunder.

(d) Subject to subsection (e) of this section and except as otherwise provided in subsection (g) of this section, a perfected purchase-money security interest in livestock that are farm products has priority over a conflicting security interest in the same livestock, and, except as otherwise provided in Section 1-9-327 of this title, a perfected security interest in their identifiable proceeds and identifiable products in their unmanufactured states also has priority, if:

(1) the purchase-money security interest is perfected when the debtor receives possession of the livestock;

(2) the purchase-money secured party sends a signed notification to the holder of the conflicting security interest;

(3) the holder of the conflicting security interest receives the notification within six (6) months before the debtor receives possession of the livestock; and

(4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in livestock of the debtor and describes the livestock.

(e) Paragraphs (2) through (4) of subsection (d) of this section applies only if the holder of the conflicting security interest had filed a financing statement covering the same types of livestock:

(1) if the purchase-money security interest is perfected by filing, before the date of the filing; or

(f) Except as otherwise provided in subsection (g) of this section, a perfected purchase-money security interest in software has priority over a conflicting security interest in the same collateral, and, except as otherwise provided in Section 1-9-327 of this title, a perfected security interest in its identifiable proceeds also has priority, to the extent that the purchase-money security interest in the goods in which the software was acquired for use has priority in the goods and proceeds of the goods under this section.

(g) If more than one security interest qualifies for priority in the same collateral under subsection (a), (b), (d), or (f) of this section:

(1) a security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of collateral; and

(2) in all other cases, subsection (a) of Section 1-9-322 of this title applies to the qualifying security interests.

Questions from our members

Reg E

Q. I have a customer filing fraud on their sons account with his debit card. He is 19 and the primary account holder. She does not have a debit card in her name. This is the only card on the account in his name. Can I still dispute this transaction if the cardholder did not issue this case? I have tried calling and leaving voice messages to the primary account holder. I have also restricted his debit card. Is there anything in Reg E about this? I can’t seem to find anything involving this.

A. Reg E permits either owner to assert that an electronic funds transfer error occurred regardless of any VISA/Mastercard requirements to obtain a signed letter from the cardholder.

You can either attempt to investigate outside of the chargeback process by contacting the merchant directly or attempting a retrieval request (to which the merchant may or may not respond) or try contacting the cardholder and requesting that they provide the requested disputed letter to utilize the chargeback process (if available.)

LLC documentation

Q. The required documentation we require to open a LLC business account Is:
• Articles of Organization
• Resolution of LLC
• And verification of identities
• Beneficial ownership form

If the business does not supply the bank with the articles of organization, can we substitute the Certificate of LLC. The certificate actually states: “Whereas, the Articles of Organization of XYZ Dream Catcher OK LLC, an Oklahoma limited liability company has been filed in the office of the Secretary of State as provided by the laws of the State of Oklahoma?”

A. The reason you want the Articles of Organization is that they might state the Term of Existence as something other than Perpetual.

Follow-up question: Sometimes customers do not bring the bank the Articles of Organization, could the Bank utilize the one supplied on the Secretary of State’s website?

Response: The information on the SOS website confirms that the LLC is in existence and has not been suspended for non-payment of franchise tax, however it doesn’t give you information as to whether its existence is perpetual or for a set number of years which is why I recommend obtaining the Articles of Organization.

Initial ARM Notice

Q. When calculating the Initial ARM Notice of delivery timing requirement? According to 12 CFR 1026.20(d) the disclosure shall be provided to consumer at least 210, but no more than 240, days before the first payment at the adjusted level is due.

A. The notice under 1026.20(c) does not have to be given if there is no change in the interest rate that results in no corresponding change in the payment amount. However, 1026.20(d) is written totally differently. The early notice is only an estimate of what might happen in the future. I see no exception in 1026.20(d) like there is in 1026.20(c).

(c) Rate adjustments with a corresponding change in payment. The creditor, assignee, or servicer of an adjustable-rate mortgage shall provide consumers with disclosures, as described in this paragraph (c), in connection with the adjustment of interest rates pursuant to the loan contract that results in a corresponding adjustment to the payment.

(d) Initial rate adjustment. The creditor, assignee, or servicer of an adjustable-rate mortgage shall provide consumers with disclosures, as described in this paragraph (d), in connection with the initial interest rate adjustment pursuant to the loan contract.

Reconsideration of Value Q&As

Q. I am finalizing procedures for this rule. I was stumped by a comment from a lender stating that the rule applies only to loans secured by a single 1-4 family home; taking it to mean only one property can secure the loan. Is the lender correct? Does this not apply to real estate loans secured by more than one dwelling such as bridge loans. These are generally secured by equity in the borrower’s existing loan and the home being purchased. Could the borrower not question the value received on their existing home?

A. If the loan is secured by more than one 1-4 single family home, the borrower may request ROV on either property or both securing the loan, but each would be a separate ROV. See page 8 of the Guidance from FHA available at this link: https://www.hud.gov/sites/dfiles/OCHCO/documents/2024-07hsgml.pdf. I know Freddie Mac and Fannie Mae have similar guidance, but this was the easiest one to find.

Q. Do ROV rules apply to commercial Loans secured by 1 to 4 family single residential dwellings? We have a commercial builder who has requested a reconsideration of the value of a spec home. We also have many commercial loans secured by 1-4 family dwellings, I would appreciate guidance on this matter.

A. In reviewing the July 2024 Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations at this link: (https://www.federalreserve.gov/supervisionreg/srletters/SR2403a1.pdf ), it appears that the guidance only applies to consumers.

Q. Must the initial ROV Disclosure be provided during the application process prior to the applicant submitting the application, like the ARM/HELOC Disclosure, or can it be provided within 3 days of application? I am confused by the what is stated in the FreddieMac Selling Guide and FannieMae’s FAQs.

A. Your timing for the ROV disclosure will be the same as for the Loan Estimate (LE) and the Appraisal Notice under Sec. 1002.14. You will also have to provide the ROV disclosure at the same time you provide a copy of the appraisal.

October 2024 OBA Legal Briefs

2024 Oklahoma Legislation – Part III (UCC)
FAQs regarding account documentation

2024 Oklahoma Legislation – Part III

Uniform Commercial Code Amendments

By Pauli Loeffler

Last legislative session saw the enactment of four Uniform Acts promulgated by the Uniform Law Commission (“ULC”), also known as the National Conference of Commissioners on Uniform State Laws. In the August OBA Legal briefs, I covered the Uniform Special Deposits Act found in the Banking Code. Last month I covered the Oklahoma Uniform Directed Trust Act of 2024 codified in Title 60 O.S. §§ 1201A – et seq. as well as the 2024 amendments to Oklahoma Trust Act which is likewise found in Title 60 O.S. §§ 175.01 – 175.57. This month I will cover the amendments to the Uniform Commercial Code (“UCC”).

Before going into the changes of this last uniform act, I need to plug OBA products we have available to members that will help with all the changes. The OBA has produced both the 2024 Deskbook on Estates & Trusts and the 2024 Uniform Commercial Code. Just click Products and Services on the OBA’s webpage, and it will take you to the order forms.

The Uniform Commercial Credit Code was first adopted in Oklahoma in 1961. It is codified in Title 12A and divided into Articles.

Article 1 contains definitions and general provisions applicable as default rules to transactions covered under other articles of the UCC. It was revised in 2001, and Oklahoma adopted revisions in 2005 that were effective January 2006.

Article 2 governs the sale of goods. Although this article was covered in one of my law school classes, I don’t think I have ever received a question from a banker dealing with this Article. The ULC amended this Article and the 1991 version remains in effect.

Article 2A has provisions regarding leases and leased goods. Like Article 2, it was enacted in 1988 and the ULC amended it. The 1991 version remains in effect. to do with leases. It was enacted in 1988.

While Articles 2 and 2A have little, if any, impact on financial institutions, Article 3 is important. This UCC article covers Negotiable Instruments such as drafts (including checks) and promissory notes that have their own value because their negotiability. An instrument is negotiable if it can be transferred to another person and remain enforceable against the person who made the promise to pay. Article 3 was revised in 1990. It does not apply to money, to payment orders governed by Article 4A of this title, or to securities governed by Article 8 of this title. If there is conflict between Article 3 and Article 4 or 9, Articles 4 and 9 govern. The vast majority of UCC questions I receive involve Articles 3, 4, and 9.

Article 4 of the Uniform Commercial Code governs bank deposits and collections. This Article provides rules for check processing and automated inter-bank collections. Article 4 was completely revised in 1990 and amended in 2002.

Article 4A covers funds transfers and provides a comprehensive body of law on the rights and obligations with regard to such transactions. It was added to the UCC in 1989 and enacted in Oklahoma in 1991. Uniform Commercial Code Article 4A provides a comprehensive body of law on the rights and obligations connected with fund transfers. 2012 Amendments to Section 108 of Uniform Commercial Code Article 4A provide that Article 4A applies to a remittance transfer that is not an electronic funds transfer under the Federal Electronic Funds Transfer Act (EFTA). The amendment was necessary to conform the UCC with the federal law and associated r

Article 5 of the Uniform Commercial Code Article 5 governs letters of credit, which are typically issued by a bank or other financial institution to its business customers in order to facilitate trade. Oklahoma enacted Article 5 in 1961. The ULC updated the Article in 1995 to address advances in technology and modern business practices, and Oklahoma amended the Article 5 effective Jan 1, 1997. I only get a question with regard to letters of credit once or twice a year which always makes me go re-read Article 5’s provisions.

Article 6 which covered bulk transfers was repealed in 1990. Considering that we never covered this when I was in law school (1979-1982), I am not the only one who doesn’t miss it.

Article 7 of the Uniform Commercial Code covers documents of title for personal property, including warehouse receipts, bills of lading, and other documents typically used for commercial trade. Revised Article 7, approved in 2003, updates the original version to provide a framework for the further development of electronic documents of title, and to update the article in light of state, federal and international legal developments. Oklahoma adopted revised Article 7 effective January 1, 2006. Article 7 wasn’t covered in law school Commercial Law classes, and I have never had a question regarding warehouse receipts or bills of lading.

Uniform Commercial Code Article 8 provides a modern legal structure for the system of holding securities through intermediaries. Oklahoma adopted UCC Article 8 in 1961. ULC revised the Article 8 in 1994 revision sets forth rules concerning the system through which securities are held, specifying the mechanisms by which ownership and other interests in securities are recorded and changed, and setting out some of the rights and duties of the parties who participate in the securities holding system. Oklahoma last amended this Article effective February 1, 1996.

Article 9 covers secured transactions. The last major revision occurred effective July 1, 2001. Former OBA General Counsel Charles Cheatham covered the amendments in a series of Legal Briefs: November 2000, January 2001, February 2001, March 2001, May 2001, June 2001, July 2001, August 2001, December 2001. Those Legal Briefs are not available online, but I do have copies of them in what Jeremy Cowan and I call the Way Back files.

Further revisions were made to Article 9 by the UCL in 2010. Legislation was introduced to adopt the 2010 revisions several times, but for various reasons, bills introduced to adopt the revisions were not passed. It wasn’t until the 2015 legislative session that much needed revisions regarding the proper debtor’s name were enacted in Oklahoma. I covered those revisions with an effective date of November 1, 2015 in the August and October 2015 OBA Legal Briefs which are available online.

Article 12 is the 2022 amendment to the UCC. It is an entirely new Article addressing emerging technologies, providing updated rules for commercial transactions involving virtual currencies, distributed ledger technologies (including blockchain), artificial intelligence, and other technological developments. The amendments span almost every article of the UCC. Article 12 addresses certain types of digital assets defined as “Controllable Electronic Records” (CERs). The amendments provide new default rules to govern transactions involving these new technologies and clarify the UCC’s applicability to mixed transactions involving both goods and services. The amendments also contain some miscellaneous revisions unrelated to technological developments but providing needed clarification. I will note that Article 12 has been enacted in 25 states unlike the Uniform Special Deposit Act which has only been enacted in four states and the Uniform Directed Trust Act which has been enacted by 16 states.

Lastly, we have a new Article A containing transitional provisions under for the UCC 2024 Amendments.

FAQs regarding account documentation.

We get questions what is needed to set in order to set up certain specialized deposit accounts. Here are few account types and what is needed to open them.

Insurance Premium Trust Accounts: Checks for premiums will be made payable to the insurance company rather than the agent. The account itself will use the TIN (Tax Identification Number) of the agent or the insurance agency followed by name of insurer Premium Trust. For example, John Brown Insurance Agency, State Farm Premium Trust Account. In the a garnishment is received against John Brown or John Brown Insurance Agency, it won’t attach to the Premium Trust Account. You will also want a copy of the contract with State Farm. A separate account for the operating expenses of the agent or agency should be set up for commissions paid by the insurer. If John Brown is an independent agent for more than one insurer, a separate premium trust account should be set up for each one.

Property Management Security Deposit Accounts: Landlord-tenant statutes require trust accounts to be set up for security deposits. You need a copy of the agreement between the property owner and the management company regarding maintenance of the required account. The account will be set up in the name of the property management company using its EIN but will be denominated Security Deposit Trust Account to prevent the account being subject to levies or garnishments against the property management company.

Medicaid Income Pension Trust: An MIPT is a bona fide trust, and you set the account as you would any other trust. It is irrevocable, but it is one of the exceptions to the general rule that an irrevocable trust has to have its own EIN. You use the SSN of the settlor/beneficiary and title the account “Sally Jones, Medicaid Income Pension Trust.” The settlor/beneficiary cannot be the trustee for this type of trust, so it has to be some other individual. The trustee cannot add an authorized signer, and the account cannot have a POD. The bank has no increased duty to monitor the account. Upon the death of the settlor/beneficiary, the Oklahoma Health Care Authority will send a letter to the trustee requesting the amount of Medicaid expended on behalf of the beneficiary. It will send a copy of the letter to the bank as well. If there are any funds left after payment to OHCA, the funds may be distributed to the beneficiary’s heirs using the Banking Code Sec. 906 Affidavit of Heirs. If the beneficiary has a will, it may be possible to use the Probate Code Sec. 393 Affidavit to disburse the funds without a probate.

Oklahoma Lottery Account: The LLC must provide paperwork from the Oklahoma Lottery Commission, and the account is set up in the form, “ABC LLC, ITF The Oklahoma Lottery Commission.” Your customer is the LLC, and you will complete your CIP and Beneficial Ownership routines on the LLC. The LLC designates the authorized signer(s) on the account. The LLC’s TIN is used on the account.

Part of the packet of Lottery info will be an authorization for the Lottery Commission to periodically charge and credit the account via ACH. Because state law permits tickets sales only for cash or via debit card purchase (no credit cards, no checks), you should not see any checks deposited to the account, other than checks drawn on the customer’s operating account. The lottery account cannot be linked for online transfers to or from that operating account (the lottery account should be “view only” if online access is provided).

Funeral home/burial trust accounts: These accounts generally use the name and EIN of the Funeral Home, Burial Trust, and the garnishment will not be subject to creditors of the funeral home. Most funeral homes use a single trust account, but sometimes the funeral home will set up individual Burial Trust accounts, If the bank receives a garnishment against the individual. If this happens, contact the funeral home, and it will respond to the garnishment and claim the exemption on behalf of the individual.

September 2024 OBA Legal Briefs

2024 Oklahoma Legislation – Part II
More Deceased Customer Q&As

2024 Oklahoma Legislation – Part II

Oklahoma Uniform Directed Trust Act of 2024
Oklahoma Trust Act (Amended) – Title 60 O.S. §§ 175.01 – 175.57 (Effective 11/1/2024)
Registration and Pre-Registration – Transfer of License Plates – Contracts and Agreements for Electronic System – Title 47 O.S. § 1111.2 (Effective 9/1/2024)

By Pauli Loeffler

Oklahoma Uniform Directed Trust Act of 2024.

The Oklahoma’s legislators passed the “Oklahoma Uniform Directed Trust Act of 2024” during the last legislative session. I will refer to this Act as the “2024 Uniform Trust Act” or 2024 UTA. Like the Uniform Special Deposits Act that I covered in the August 2024 Legal Briefs, this is another Act promulgated by the Uniform Laws Committee. The 2024 UTA is found in Title 60 O.S. §§ 1201A – 1217. Its provisions take effect November 1, 2024. Note that the Oklahoma Trust Act (“OK Trust Act” or “OTA”) is also in Title 60 O.S. §§ 175.01 – 175.57. This Act still exists, but certain sections have been repealed or amended. The legislature also passed the Oklahoma Qualified Dispositions into Trust Act codified in Title 60 O.S. §§ 1301-1390 effective November 1, 2024, which I will not cover. I will note new § 1401 in Title 60 Trusts – Non Application of Rules Against Perpetuities is effective November 1, 2024. Inasmuch as all attorneys groan at the mere mention of the Rules Against Perpetuities, I will only mention the statute and leave it to an estate planner or your bank counsel to explain. Another new statute is Title 60 O.S. § 1402 – Trustee and Qualified Beneficiaries – Binding Nonjudicial Settlement Agreement – Validity – Matters that May be Resolved – Request of Approval from Court.

Let’s start with the 2024 UTA. I strongly suggest making a strong pot of coffee to keep you awake as we explore this Act.

Section 1202 provides definitions of terms used under the 2024 UTA. “Breach of trust” means a violation by a trust director or trustee of a duty imposed on that director or trustee by the terms of trust, the 2024 UTA, or laws of this state other than the 2024 UTA.

I read at least a couple of trusts each week sent by bankers who have questions regarding trusts provided by customers. The 2024 UTA has definitions that I have not encountered before: “Directed trust,” “Directed trustee, and “Power of direction.” The definition for the first term means “a trust for which the terms of the trust grant a power of direction; the second term means a trustee that is subject to a trust director’s power of direction; and the third term means a power over a trust granted by the terms of the trust to the extent the power is exercisable while the person is NOT serving as trustee. It includes a power over investment, management, or distribution of trust property or trust administration.

Section 1203 provides that the 2024 UTA applies to a trust whenever created that has its principal place of administration in Oklahoma if the trust is created before November 1, 2024, provided the decision or action occurs on or after the Act’s effective date, and 2) if the principal place of administration is changed to Oklahoma on or after the effective date the 2024 UTA applies only to a decision or action occurs on or after the date of change. In other words, we are talking about an existing trust.

Section 1205 defines “power of appointment” as a power that enables a person acting in a nonfiduciary capacity, e.g., a non-trustee, to designate a recipient of an ownership interest in or another power of appointment over trust property. The 2024 UTA does not apply to a power of appointment, a power to appoint or remove a trustee or trust director, power of a settlor over a trust with the power to revoke the trust. A power to designate a recipient of an ownership interest in power of appointment over trust property while not a trustee is a power of appointment rather than a power of direction.

Section 1206 permits a trust to grant a power of direction to a trust director and a trust director may exercise or nonexercise a power of direction. Under the 2024 UTA, Trust directors with joint powers must act by majority decision. I know bankers aren’t going to be thrilled with this provision. Of course, the trust could include language allowing trust co-directors to act independently if more than one trust director is named, and this would negate the Act’s requirement. I note § 175.17 of the OTA in subsection C. specifically allows a current co-trustee to execute a power of attorney naming another current co-trustee to act on his or her behalf. You will find a Template on the OBA Legal Links web page under Templates, Forms, and Charts under the subheading “Trusts.” Even though § 1208 of the 2024 UTA states that trust directors have the same fiduciary duty and liability as a trustee, I am unsure whether the co-trustee POA under the OTA can be used.

Section 1208 provides that a trust director has the same fiduciary duty and liability as a trustee. Section 1210 requires a trust director to provide a trustee or another trust director with information.

Under § 1211, unless required by terms in the trust, a trustee has no duty to monitor a trust director, inform or give advice to a settlor, beneficiary, trustee or trust director.

Oklahoma Trust Act.

Turning now to the OK Trust Act § 175.24 – Powers of Trustees – Bond – Payment from Trust – Legal Proceedings – Attorney-Client Relationship was amended effective November 1, 2024. Most of the changes are minor, dealing with gender neutrality such as the use of spouse rather than husband or wife. However, Subsection B. is new.

1. In the exercise of its authority under paragraph 9 of subsection A of this section, a trustee may pay, from the assets of the trust, reasonable compensation and costs incurred in connection with employment of attorneys, accountants, agents, and brokers reasonably necessary in the administration of the trust estate.

2. In the event of any legal proceeding regarding the trust, a trustee may pay the costs or attorney fees incurred in any proceeding from the assets of the trust without the approval of any person and without court authorization unless otherwise ordered by the court in such legal proceeding.

3. Unless expressly provided otherwise in a written employment agreement, the creation of an attorney-client relationship between an attorney and a person serving as a fiduciary shall not impose upon the attorney any duties or obligations to other persons interested in the estate, trust estate, or other fiduciary property, even though fiduciary funds may be used to compensate the attorney for legal services rendered to the fiduciary. This paragraph is intended to be declaratory of the common law and governs relationships in existence between attorneys and persons serving as fiduciaries and any such relationship hereafter created.

4. Whenever an attorney-client relationship exists between an attorney and a fiduciary, communications between the attorney and the fiduciary shall be subject to attorney-client privilege unless waived by the fiduciary, even though fiduciary funds may be used to compensate the attorney for legal services rendered to the fiduciary. The existence of a fiduciary relationship between a fiduciary and a beneficiary does not constitute or give rise to any waiver of the privilege for communications between the attorney and the fiduciary.

C. The following rules of administration shall be applicable to all express trusts but such rules shall not be exclusive of those otherwise imposed by law unless contrary to these rules:

1. Where a trustee is authorized to sell or dispose of land, such authority shall include the right to sell or dispose of part thereof, whether the division is horizontal, vertical, or made in any other way, or undivided interests therein;

2. Where a trustee is authorized by the trust agreement creating the trust or by law to pay or apply capital money subject to the trust for any purpose or in any manner, the trustee shall have and shall be deemed always to have had power to raise the money required by selling, converting, calling in, or mortgaging or otherwise encumbering all or any part of the trust property for the time being in possession;

3. A trustee shall have a lien and may be reimbursed with interest for, or pay or discharge out of the trust property, either principal or income or both, all advances made for the benefit or protection of the trust or its property and all expenses, losses, and liabilities, not resulting from the negligence of the trustee, incurred in or about the execution or protection of the trust or because of the trustee holding or ownership of any property subject thereto; and

4. When the happening of any event, including marriage, divorce, attainment of a certain age, performance of educational requirements, death, or any other event, affects distribution of income or principal of trust estates, the trustees shall not be liable for mistakes of fact prior to the actual knowledge or written notice of such fact.

D. The powers, duties, and responsibilities stated in the Oklahoma Trust Act or the Oklahoma Uniform Prudent Investor Act shall not be deemed to exclude other implied powers, duties, or responsibilities not inconsistent herewith.

E. The trustee shall pay all taxes and assessments levied or assessed against the trust estate or the trustee by governmental taxing or assessing agencies.

F. No trustee shall be required to give bond unless the instrument creating the trust, or a court of competent jurisdiction in its discretion upon the application of an interested party, requires a bond to be given.

Section 175.47 – Duration of Trust is amended with regard to Subsection C. effective November 1, 2024, with regard to the Rule Against Perpetuities in line with § 1401, discussed above:

C. Except as provided in this section, the common law rule against perpetuities shall not apply to a trust subject to the trust laws of this state.

Section 175.57 – Breach of Trust – Accounting and Approval

A. A violation by a trustee of a duty the trustee owes a beneficiary is a breach of trust.
B. To remedy a breach of trust that has occurred or may occur, the court may:

1. Compel the trustee to perform the trustee’s duties;
2. Enjoin the trustee from committing a breach of trust;
3. Compel the trustee to redress a breach of trust by payment of money or otherwise;
4. Order a trustee to account;
5. Appoint a receiver or temporary trustee to take possession of the trust property and administer the trust;
6. Suspend or remove the trustee;
7. Reduce or deny compensation to the trustee;
8. Subject to subsection I of this section, void an act of the trustee, impose an equitable lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or
9. Grant any other appropriate remedy.

C. A beneficiary may charge a trustee who commits a breach of trust with the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred, or, if greater, the profit that the trustee made by reason of the breach.

D. In a judicial proceeding involving a trust, the court may in its discretion, as justice and equity may require, award costs and expenses, including reasonable attorney fees, to any party, to be paid by another party or from the trust which is the subject of the controversy.

E. 1. For purposes of this subsection, “accounting” means any interim or final report or other statement provided by a trustee reflecting all transactions, receipts, and disbursements during the reporting period and a list of assets as of the end of the period covered by the report or statement.

2. For any trust that is before a district court under subsection A of Section 175.23 of this title, the trustee may submit an accounting and seek approval of the accounting by the court. Such accounting and the final approval by a district court, whether or not such accounting is contested, shall be conclusive against all persons interested in the trust, and the trustee, absent fraud, intentional misrepresentation, or material omission, shall be released and discharged from any and all liability as to all matters set forth in the accounting.

3. If a trust is not before a district court under subsection A of Section 175.23 of this title and if no objection has been made by a beneficiary who is an eligible distributee or permissible distributee of the trust’s income or principal within one hundred eighty (180) days after a copy of the trustee’s accounting has been provided to such beneficiaries together with written notice of the provisions of this section, the distribution beneficiary is deemed to have approved such accounting of the trustee, and the trustee, absent fraud, intentional misrepresentation, or material omission, shall be released and discharged from any and all liability to all beneficiaries of the trust as to all matters set forth in such accounting.

4. If paragraphs 2 and 3 of this subsection do not apply, absent fraud, intentional misrepresentation, or material omission, an action to recover for breach of trust against a trustee who is a resident of this state or who has its principal place of business in this state, or an officer, director, or employee of such trustee may be commenced only within two (2) years of a trustee’s accounting for the period of the breach. In the case of fraud, intentional misrepresentation, or material omission, the limitation period shall not commence until discovery of the breach of trust.

5. For the purpose of this subsection, a beneficiary is deemed to have received a report or other statement:

a. in the case of an adult, if it is received by the adult personally, or if the adult lacks capacity, if it is received by the adult’s conservator, guardian, or agent with authority, or
b. in the case of a minor, if it is received by the minor’s guardian or conservator or, if the minor does not have a guardian or conservator, if it is received by a parent of the minor who does not have a conflict of interest.

6. Except as otherwise provided by the terms of a trust, while the trust is revocable and the settlor has capacity to revoke, the rights of the beneficiaries are held by, and the duties of the trustee are owed exclusively to, the settlor; the rights to be held by and owed to the beneficiaries arise only upon the settlor’s death or incapacity. The trustee may follow a written direction of the settlor, even if contrary to the terms of the trust. The holder of a presently exercisable power of withdrawal or a testamentary general power of appointment has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power.

F. 1. A term of the trust relieving a trustee of liability for breach of trust is unenforceable to the extent that it:

a. relieves a trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interest of the beneficiaries, or

b. was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor.

2. An exculpatory term drafted by or on behalf of the trustee is presumed to have been inserted as a result of an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.

G. A beneficiary may not hold a trustee liable for a breach of trust if the beneficiary, while having capacity, consented to the conduct constituting the breach, released the trustee from liability for the breach, or ratified the transaction constituting the breach, unless:

1. The beneficiary at the time of the consent, release, or ratification did not know of the beneficiary’s rights and of the material facts that the trustee knew, or with the exercise of reasonable inquiry, the beneficiary should have known, and that the trustee did not reasonably believe that the beneficiary knew; or

2. The consent, release, or ratification of the beneficiary was induced by improper conduct of the trustee.

H. 1. Except as otherwise agreed, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of administration of the trust if the trustee in the contract discloses the fiduciary capacity.

2. A trustee is personally liable for obligations arising from ownership or control of trust property, or for torts committed in the course of administering a trust, only if the trustee is personally at fault, whether negligently or intentionally.

3. A trustee who does not join in exercising a power held by three or more trustees is not liable to third persons for the consequences of the exercise of the power. A dissenting trustee who joins in an action at the direction of the majority co-trustees is not liable to third persons for the action if the dissenting trustee expressed the dissent in writing to any other co-trustee at or before the time the action was taken.

4. A claim based on a contract entered into by a trustee in the trustee’s fiduciary capacity, on an obligation arising from ownership or control of trust property, or on a tort committed in the course of administering a trust, may be asserted against the trust in a judicial proceeding against the trustee in the trustee’s fiduciary capacity, whether or not the trustee is personally liable on the claim.

I. 1. A person who in good faith assists a trustee or who in good faith and for value deals with a trustee without knowledge that the trustee is exceeding or improperly exercising the trustee’s powers is protected from liability as if the trustee properly exercised the power.

2. Dealing in good faith with another person with knowledge that the other person is a trustee does not place a third person on notice to inquire into the extent of the trustee’s powers or the propriety of their his or her exercise.

3. A person who in good faith deals with another person with knowledge that the other person is a trustee is not solely on that account placed on notice to inquire into the extent of the trustee’s powers or the propriety of their his or her exercise or to see to the proper application of assets of the trust paid or delivered to a trustee.

4. A person who in good faith assists a former trustee or who for value and in good faith deals with a former trustee without knowledge that the person is no longer a trustee is protected from liability as if the former trustee were still a trustee.

5. The protection provided by this section to persons assisting or dealing with a trustee is secondary to that provided under comparable provisions of other laws relating to commercial transactions or to the transfer of securities by fiduciaries.

You will note that I have highlighted Subsection E. 6. The reason for the emphasis it that this provision allows the settlor of the trust to indorse a check payable to the Trust and deposit the check into an account owned by the settlor that is not under the trust. It also allows the settlor to name a non-trustee as an authorized signer on the Trust account or add a deputy to a safe deposit box leased by the Trust. You will find a template for adding a non-trustee authorized signer to a Trust account as well as one to add a deputy to a safe deposit box on the Legal Links web page noted above.

Title 47 O.S. § 1111.2 Registration and Pre-Registration – Effective September 1, 2024.

A. The license plate and certificate of registration shall be issued to, and remain in the name of, the owner of the vehicle registered and the license plates shall not be transferable between motor vehicle owners. When a vehicle is sold or transferred in the state, the following registration procedures shall apply:

1. When a current and valid Oklahoma motor vehicle license plate has been obtained for use on a motor vehicle and the vehicle has been sold or otherwise transferred to a new owner, the license plate shall be removed from the vehicle and retained by the original plate owner;

2. In the event an owner purchases, trades, exchanges, or otherwise acquires another vehicle of the same license registration classification, Service Oklahoma shall authorize the transfer of the current and valid license plate previously obtained by the owner to the replacement vehicle for the remainder of the current registration period. In the event the owner acquires a vehicle requiring payment of additional registration fees, the owner shall request a transfer of the license plate to the newly acquired vehicle and pay the difference in registration fees. The fee shall be calculated on a monthly prorated basis. The owner shall not be entitled to a refund:

a. when the registration fee for the vehicle to which the plate(s) is to be assigned is less than the registration fee for that vehicle to which the license plate(s) was last assigned, or

b. if the owner does not have or does not acquire another vehicle to which the license plate may be transferred;

4. When a lender or lender’s agent repossesses a vehicle and the license plate has not been removed in accordance with this section, the lender or lender’s agent shall not be subject to the provisions of this section and the license plate shall be considered removable personal property and may be reclaimed from the repossessed vehicle…

6. a. Within two (2) business days of the date of sale or transfer of the motor vehicle, either the seller or the purchaser of the motor vehicle shall complete the pre-registration of the vehicle by submitting documentation to Service Oklahoma or a licensed operator identifying the motor vehicle subject to the sale or transfer, purchaser information, and any associated state-issued license plate on the vehicle. Pre-registration may be accomplished either in person at Service Oklahoma or a licensed operator location or by means of an electronic transaction or online system established by Service Oklahoma in accordance with Section 1132B of this title.

B. 1. The new owner of a motor vehicle shall, within two (2) months from the date of vehicle purchase or acquisition, make application to record the registration of the vehicle with Service Oklahoma or the licensed operator and shall pay all taxes and fees provided by law.

2. Any person failing to register a motor vehicle by timely transferring the license plate as provided by this section shall pay the penalty levied in Section 1132 of this title.

C. A surviving spouse, desiring to operate a vehicle devolving from a deceased spouse, shall present an application for certificate of title to Service Oklahoma or the licensed operator in his or her name within two (2) months of obtaining ownership. Service Oklahoma or the licensed operator shall then transfer the license plate to the surviving spouse.

More Deceased Customer Q&As

By Pauli Loeffler

Distributions after probate has closed.

Q. Sole account owner is deceased. The husband brings in the “Decree of Settlement of Final Account, Adjudication of Heirship and Distribution of Estate” that lists him as the estate’s personal representative and the beneficiary of the estate.
Hypothetically, if he never set up an estate account for his wife, could he indorse the check made payable to the estate as personal representative and convert it to a check made payable to himself?
This isn’t happening. This is just a discussion that our bank officers were having.

A. If the probate has been settled and the husband brings in the document you described, the bank now has documentation of the accountholder’s death and of the husband’s authority to claim the account for the estate. The bank can issue its cashier’s check payable to “Estate of [decedent’s name], [husband’s name], Personal Representative,” and he can indorse it as it is issued, add his own personal indorsement, and exchange it for a check payable to himself.
The bank would want to retain a copy of the court order.

Safe deposit box, no probate

Q. We have a deceased safe deposit box customer. There are four living children. There is a will but no probate. Is there a way all others can allow just one of them to enter the safe deposit box without them?
A. The heirs will all need to sign the § 906. A.2 affidavit of heirs which is available on the OBA Legal Links web page under Templates, Forms, and Charts. All heirs under the will must either be present when the box is opened or designate an agent to act for them. You will find a Template for Appointment of Agent on the Legal Links web page as well. The § 906 A. 2 affidavit is the appropriate affidavit to use, and it will need to be signed by whoever is/are the residuary heir(s) under the will. If a trust is the residuary heir under the will, the only person who must sign the Affidavit would be the current trustee.

August 2024 OBA Legal Briefs

In this issue:

2024 Oklahoma Legislation – Part I
A potpourri of deceased customer Q&As
Still more on the FDIC’s revisions to part 328

2024 Oklahoma Legislation – Part I

By Pauli D. Loeffler

Uniform Special Deposits Act – Tit. 6 O.S. § 910 et seq.

This is an entirely new Act that has only been adopted in the states of Oklahoma,
Colorado, and Washington and has been introduced in three other states: West
Virginia, Rhode Island, and Delaware.

There is no requirement that a bank offer accounts subject to the Special Deposit Act.

First, in order to be a “special deposit,” the deposit must be designated as “special” in
an account agreement. Second, the account must be for the benefit of at least two
beneficiaries. One or more of the beneficiaries may be the depositor. It must be
denominated in money defined as a medium of exchange authorized by a domestic or
foreign government for a permissible purpose, meaning a governmental, regulatory,
commercial, charitable, or testamentary objective. Finally, the account must be subject
to a contingency specified in the account agreement that is not certain to occur but if it
does, it creates the bank’s obligation to pay a beneficiary.

Quite frankly, the bank already has certain deposit accounts which are essentially
“special deposits.” For instance, funeral homes and cemeteries which sell plots and pre-
need funeral policies under Title 36 O.S. Sec. 7103 and Sec. 7126 the of the Oklahoma
Statutes would meet the definition of a special deposit. Another example are CDs
required by the Oklahoma Corporation Commission as bond for plugging wells. A third
example is under the Residential Landlord Tenant Act requiring the establishment of an
escrow account for security deposits of the tenant. These and similar relationships such
as those mentioned above will continue as they are.

The Act clarifies what a “special deposit” is. A special deposit must be (i) designated as
“special deposit” in an account agreement governing the deposit at a bank, (ii) for the
benefit of at least two beneficiaries (one or more of which may be a depositor), (iii)
denominated in money, (iv) for a permissible purpose identified in the account
agreement, and (v) subject to a contingency specified in the account agreement that is
not certain to occur, but if it does occur, creates the bank’s obligation to pay a
beneficiary. The examples I mentioned above meet all the criteria EXCEPT for being
designated a “special deposit” in the account agreement.

Inasmuch as only three states have adopted this Uniform Act, whether your current
deposit software provider will produce a specific form or add a check box to the existing
forms to designate the account as subject to the Special Deposit Act is a question I cannot answer. If a customer provides his own “Special Account” agreement, you need to discuss this with bank counsel.

I will add that the Uniform Laws Committee that promulgated the Uniform Special
Deposit Account Act has produced a one hour video I viewed and that you may access
via this link.

Title 19 O.S. § 298 – Change in margin size for recording with County Clerk

The margins for deeds, mortgages, releases, etc., presented to the county clerk for
recording on and after November 1, 2024, are changing. The top margin is increasing
from at least one inch to at least two inches, and all other margins are increasing from
at least one-half (1/2) inch to one inch. I would note that by increasing the size of the
margins, the number of pages being recorded may also increase. Banks will need to
keep the change in mind when providing cost disclosures for consumer loans.

B.
…

The top margin of all documents shall be at least two (2) inches and all other
margins shall be at least one (1) inch.

C. Despite any provision in this section to the contrary, the county clerk shall accept for
filing any document that fails to meet the requirements of subsection B of this section if:

1. The document is an original or a certified copy of an original;
2. The document is legible without the aid of magnification or other enhancement
of the text;
3. The document is xerographically reproducible by the copying equipment in use
by the county clerk;
4. The document meets all other statutory requirements for recordation; and
5. The person offering the instrument for recording pays the additional fee
provided in Section 32 of Title 28 of the Oklahoma Statutes for nonconforming
documents.

If the bank does not comply with the new margin requirements, there will be an
additional fee under § 32 of Title 28:

13. For recording the first page of deeds, mortgages, and any other instruments
which are nonconforming pursuant to subsection C of Section 298 of Title 19 of
the Oklahoma Statutes – $25.00
14. For recording each additional page of an instrument which is nonconforming
pursuant to subsection C of Section 298 of Title 19 of the Oklahoma Statutes –
$10.00

A potpourri of deceased customer Q&As

By Pauli D. Loeffler

The OBA Legal and Compliance Team receives a lot of questions regarding deceased
customers. Here are just a few of the many we received in the last month.

Finding the POD

Q. We have a checking account that has a POD beneficiary named and the customer
has passed away. However, it is an older account and all we have is a name with no
other identifying information for the beneficiary, not even a phone number. To
complicate matters further, the beneficiary is not one of the customer’s children. One of
the customer’s sons has been named special administrator of the estate. However,
since the account had a POD named it doesn’t become part of the estate. Can we tell
the son that the account has a POD beneficiary, and he is not it? Is there anything he
can do or provide to us that would require us to share who the POD beneficiary is?

A. The son appointed as Special Administrator of the estate stands in the shoes of the
deceased customer and can have any and all information regarding the account
including the signature card naming the POD. Perhaps the son may be able to provide
information regarding the POD. You will have to advise him that the funds are not part
of the estate, and if the bank cannot locate the POD, the funds will be escheated as
unclaimed property for the POD to claim.

Minors as PODs

Q. The owner passed away in March of 2021 leaving two CDs. One of the CDs has his
granddaughter, age 17, listed as his beneficiary, and the other has his grandson, age
14, listed. We have made numerous attempts to have the father of the grandchildren,
who was also a representative for the estate, come and close the accounts for the
benefit of his children. He will not come. We can only speculate on the reasons why.
The money is now due to be sent as unclaimed property to the state. We really do not
want to do that to these kids. Can we make checks payable directly to children and
bypass the father? Do we have other options? I do have a way to contact the
granddaughter directly. She was informed that she has funds here.

A. First, we are talking about CDs that I presume automatically renew. These have a
much longer period before reporting and remitting to the Oklahoma Treasurer as
unclaimed property:

Tit. 60 O.S. Sec. 652

D. Automatically renewable time deposits shall be subject to this section, except that
automatically renewable time deposits shall be presumed abandoned fifteen (15) years
following the expiration of the initial time period of the time deposit unless, during that
period the owner has:

1. Increased or decreased the amount of the deposit;

2. Communicated in writing with the banking or financial organization concerning
the property;

3. Otherwise indicated an interest in the property as evidenced by a
memorandum or other record on file prepared by an employee of the banking or
financial organization; or

4. Had another relationship with the banking or financial organization concerning
which the owner has:

a. communicated in writing with the banking or financial organization, or
b. otherwise indicated an interest as evidenced by a memorandum or
other record on file prepared by an employee of the banking or financial
organization and if the banking or financial organization communicates in
writing with the owner with regard to the property that would otherwise be
presumed abandoned under this section at the address to which
communications regarding the other relationship are regularly sent.
…
Upon presumed abandonment of the automatically renewable time
deposit, the holder shall report the presumed abandonment to the State
Treasurer and may, at the holders option, either retain the property or pay
or deliver it to the State Treasurer.

In other words, the CDs may not yet be due for reporting as Unclaimed Property. Even if
the CDs are required to be reported by the bank, it has the option to retain the CDs.
There is also the possibility that the grandchildren were named in the will, and there
may have been custodians named to manage those funds, in which case, the bank can
make the checks payable to the custodians.

Still more on the FDIC’s revisions to part 328

By John S. Burnett

In the June and July 2024 issues of Legal Briefs, I analyzed first the effects of the
FDIC’s Part 328 revisions on an insured depository institution’s (IDI’s) ATMs and other
digital deposit-and like devices (June 2024 Legal Briefs), and then other significant
changes to the regulation (July 2024 Legal Briefs). So, what else is there to discuss?

First, we learned in mid-July that the ABA, the Bank Policy Institute, and the Consumer
Bankers Association had written to the FDIC to ask that it “continue to work with
member institutions and other industry stakeholders to determine those aspects of the
final rule where comprehensive and clarifying implementation guidance is necessary for
institutions to be able to properly implement the rule, and this guidance, which could
take the form of FAQs, for example, be published by the end of 2024.” The letter went
on to request that the FDIC extend the compliance deadline by 12 months to January 1,
2026, to “provide institutions with sufficient time to comply with the rule, as clarified by
the guidance.”

Whether or not the FDIC will extend the compliance deadline is unknown. At the time
this Legal Briefs article was written, the deadline was still January 1, 2025.

Clarification and guidance in a Q&A document

The FDIC has posted “Questions and Answers related to the FDIC’s Part 328 Final
Rule,” [https://www.fdic.gov/resources/deposit-insurance/questions-and-answers-
related-to-the-fdics-part-328-final-rule.html]. The Q&A may be updated from time to
time. Make note of the “Last Updated” date (currently August 16, 2024) to see if there’s
anything added since your last review of the webpage.

What follows is taken from the FDIC’s responses in the July 16, 2024, Q&As; the
“Observations” are mine

FDIC Official Sign
Q1. Does the rule require the current FDIC official sign to be posted at new accounts
desk?

A. If a banker at a new accounts desk “usually and normally” receives and processes
deposits (e.g., processes a check deposit at the new accounts desk), then the official
sign must be posted at the new accounts desk. In a scenario where the banker at the
new accounts desk always walks the initial deposit over to the teller line, then the teller
is “receiving” the deposit and the official sign posted at the teller window is sufficient;
therefore, in that situation, an official sign would not be required at the new accounts
desk.

Observation: This is not new information. Apparently, bankers continue to ask the
question, however, so including it in this Q&A is helpful.

Q2. Are insured depository institutions (IDIs) required to provide any initial disclosures
about FDIC insurance coverage, either orally or in writing, before opening an account?

A. No. Part 328 does not require IDIs to provide “initial disclosures” about FDIC
coverage before account opening.

Observation: This is also not new information.

Q3. Is the FDIC official sign required at night drop facilities?

A. No. The official sign is required wherever deposits are usually and normally received.
FDIC staff does not view that deposits are usually and normally received by the IDI
when placed in a night depository.

Observation: Again, not new, but some banks have posted the FDIC official sign at
their night depositories. That is not prohibited, but it is unnecessary.

Q4. The new FDIC official digital sign is generally required to be displayed in the colors
navy blue and black. Does the final rule modify the physical official sign color
requirements?

A. No. The final rule does not modify color requirements for the physical FDIC official
sign. The rule continues to require use of the standard, in-branch official FDIC sign,
which is …. [the response continues with a description of the physical sign, using the
wording of section 238.3(b)(4) of the rule].

Non-Deposit Sign

Q1. Is the non-deposit sign required to be displayed in the individual offices within IDIs
where non-deposit products are offered?

A. Yes. Under 12 CFR § 328.3(c)(2), an IDI must continuously, clearly, and
conspicuously display the required non-deposit signage at each location within the
premises where non-deposit products are offered. If non-deposit products are offered in
individual offices, the non-deposit sign should be visible in those offices.

Placement and Display of Official Digital Sign

Q1. Are IDIs’ websites considered deposit-taking channels for purposes of the digital
signage requirements?

A. Under part 328, the FDIC official digital sign must be displayed on “digital deposit
taking channels,” which includes IDIs’ “websites and web-based or mobile applications
that offer the ability to make deposits electronically and provide access to deposits at
insured depository institutions.” 12 CFR § 328.5(a). If an IDI’s website is purely
informational, with no ability to make deposits or access deposits, it would not be
a digital deposit-taking channel.

Observation: And if it is not a digital deposit-taking channel, you are not required to use
the FDIC official digital sign. But don’t forget, if you promote deposit accounts on the
site, you will need to comply with new § 328.6 (Official advertising statement
requirements), as you probably have been all along.

Q2. Can the official digital sign appear only on the IDI’s “home page” and not on the
other web pages that make up the website?

A. No. The FDIC official digital sign must be displayed on the (1) initial or homepage of
the IDI’s website or application, (2) landing or login pages, and (3) pages where a
customer may transact with deposits. For example, the FDIC official digital sign should
be displayed where a mobile application allows customers to deposit checks remotely,
because this electronic space is in effect a digital teller window. 12 CFR § 328.5(d).

Q3. Where are we required to place the official digital sign on a bank webpage or app to
ensure compliance with the “clear,” “continuous,” and “conspicuous” placement of the
digital sign?

A. In general, the FDIC would expect to see official digital signs displayed on the
applicable pages in a manner that is clearly legible to all consumers to ensure they can
read it easily. The official digital sign could be displayed above the IDI’s name, to the
right of the IDI’s name or below the IDI’s name, but under all circumstances, the official
digital sign continuously displayed near the top of the relevant page or screen and in
close proximity to the IDI’s name would meet the clear and conspicuous standard under
the rule.

Here is an example:

Q4. Can the official digital sign be dismissed once a customer logs in?

A. No. The final rule requires that the official digital sign be displayed “in a continuous
manner,” which means it must remain visible on the (1) initial page or homepage of the
website or application, (2) landing or login pages, and (3) pages where the customer
may transact with deposits. 12 CFR § 328.5(d). The final rule, however, does not require the official digital sign to continue to follow the user as they scroll up or down the
screen.

Q5. Does the official digital sign need to be linked to the FDIC’s website?

A. No. Part 328 does not require the official digital sign to be linked to the FDIC’s
website. However, it may be helpful to consumers if IDIs link the official digital sign to
the FDIC’s optional online BankFind tool, so that consumers can more easily confirm
that the bank is FDIC-insured. This would help consumers better differentiate IDIs from
non-banks. Optional, downloadable versions of the FDIC official digital sign are
accessible to, and available for, bankers on FDICconnect, a secure website operated by
the FDIC that FDIC-insured institutions can use to exchange information with the FDIC.

Observation: Customers may or may not find the BankFind tool useful. Linking to it is
completely optional.

Q6. How should IDIs display the FDIC official digital sign on mobile devices with screen
resolutions that do not support the ability to display the entirety of the digital sign on one
line?

A. Generally, the FDIC official digital sign should be displayed as presented (shown
below) in the final rule at 12 CFR § 328.5(b), with no alteration to the text except for
color variation as noted in the regulation text.

However, if the image does not fit a particular device or screen, the official digital sign
can be scaled, “wrapped,” or “stacked” to fit the relevant screen and may satisfy the
“clear and conspicuous” requirement.

Observation: Scaling the image could render it illegible. I suggest you check it on a
number of mobile phones. “Wrapping” or “stacking” the text may be a better option on
narrower screens in portrait mode.

Q7. If an IDI’s name appears at the top of its website, and it also appears in the
website’s footer, does the new FDIC official digital sign need to be displayed at the top
of the page and also in the footer?

A. Under the final rule, IDIs are required to display the FDIC official digital sign “clearly
and conspicuously” in a continuous manner; the official digital sign continuously
displayed near the top of the relevant page or screen and in close proximity to the IDI’s
name would meet the clear and conspicuous standard under the rule. 12 CFR § 328.5(f).

IDIs are not required to display the FDIC official digital sign every time the IDI’s
name appears, such as in the footer of the website.

Q8. To satisfy the final rule’s official digital sign requirements, can the official digital sign
be placed in the footer of the webpage?

A. No. purposes of satisfying the final rule, IDIs are required to display the official digital
sign in a clear, continuous, and conspicuous manner. The official digital sign
continuously displayed near the top of the relevant page or screen and in close
proximity to the IDI’s name would meet the clear and conspicuous standard under the
rule. 12 CFR § 328.5(f). Therefore, placing the official digital sign in a footer of an IDI’s
webpage would not meet the clear, conspicuous, and continuous display requirement.

Observation: Questions 7 and 8 should have been combined.

Q9. If an IDI displays the FDIC official digital sign on its mobile app’s homepage and
alongside the IDI’s logo within the app, is it also necessary to include this signage on
the transaction portal before a customer completes a transaction?

A. It depends in part on what type of transaction is being completed. The FDIC official
digital sign must be displayed on the (1) initial or homepage of the bank’s website or
application, (2) landing or login pages, and (3) pages where a customer may transact
with deposits. 12 CFR § 328.5(d). For example, the FDIC official digital sign should be
displayed where an IDI’s mobile application allows customers to deposit checks
remotely, because this is an electronic space where a customer is transacting with
deposits.

However, if a consumer is completing a transaction by using an embedded third-party
payment platform that consumers: (a) access after logging into their IDI’s website; and
(b) utilize to initiate payments/move funds out of the IDI, then the official digital sign
should not be posted on those pages.

Observation: If your bank includes both of these types of transactions on the same
page, it will need to separate them as described in the FDIC’s response.

Q10. What are examples of “pages where the customer may transact with deposits” that
require the display of the FDIC official digital sign?

A. Examples of “pages where the customer may transact with deposits” that require the
display of the FDIC official digital sign include, but are not limited to: mobile application
pages that allow customers to deposit checks remotely; and, pages where customers
may transfer deposits between deposit accounts held within the same IDI (e.g.,
checking to savings or vice versa).

On the other hand, the FDIC would not expect an IDI to display the FDIC official digital sign on pages where a customer is transferring money from a deposit account to a non-deposit account.

Observation: Check your bank’s online and app pages that offer transfer capabilities to
see if some transfer types need to be set up on a separate page.

Q11. On which webpages should IDIs include non-deposit signs, and are we in
compliance if we place the non-deposit signs in the footer of the webpage?

A. With respect to which specific webpages the non-deposit signs must be displayed,
when an IDI offers both access to deposits and non-deposit products on its digital
deposit-taking channels, it must display a non-deposit sign indicating that non-deposit
products: are not insured by the FDIC; are not deposits; and may lose value. This non-
deposit sign must be displayed clearly, conspicuously, and continuously on each
page relating to non-deposit products.

With respect to whether the non-deposit signs can be placed in the footer, although
there is no requirement for the non-deposit sign to be displayed near the top of the
relevant page or screen, placing the non-deposit sign in a footer of an IDI’s webpage
would generally not meet the clear, conspicuous, and continuous display requirement.

In addition, the non-deposit products sign may not be displayed in close proximity to the
FDIC official digital sign. 12 CFR § 328.5(g)(1).

Observation: It may be “cleaner” to avoid offering or access to deposit and non-deposit
products on the same page.

Use of Advertising Statement on Digital Channels

Q1. Should IDIs include the “Member FDIC,” “Member of FDIC,” or “FDIC-Insured”
advertising statement on every page of their digital platforms?

A. The advertising statement (e.g., “Member FDIC”) must be displayed on
advertisements, consistent with 12 CFR § 328.6. It is not intended to overlap with the
official digital sign, and the advertising statement is not required on web pages where
an IDI displays the official digital sign, such as the bank’s homepage. However, an IDI is
not prohibited from displaying the advertising statement on a page that also includes the
official digital sign, so long as the use of the advertising statement on that page is
otherwise consistent with the official advertising statement requirements in 12 CFR §
328.6.

Automated Teller Machines or Like Devices

Q1. When implementing new official digital signage on ATMs, are IDIs required to
remove existing physical signs, or can both types of signage be displayed
simultaneously?

A. IDIs are not required to take down physical FDIC official signs attached to ATMs. For
an IDI’s ATM or like device that receives deposits but does not offer access to non-
deposit products, except as described below, the final rule provides flexibility to meet
the signage requirement by either (1) displaying the FDIC official digital sign
electronically on ATM screens (consistent with the image as described in 12 CFR §
328.5), or (2) displaying the physical official sign by attaching or posting it to the ATM.
However, IDIs’ ATMs or like devices that accept deposits and are put into service after
January 1, 2025, must display the official digital sign electronically (with no option to
satisfy the requirement through display of the physical official sign). 12 CFR § 328.4(e).

Observation: If an IDI’s ATM does not receive deposits, neither the official physical
sign nor the official digital sign is required to be displayed. If, however, a screen
displayed on the ATM includes an advertisement subject to § 328.6, the official
advertising statement or an optional short title or symbol should appear on that screen.

Social Media

Q1. Are IDIs required to post the new official digital sign on its social media
advertisements?

A. No. IDIs are not required to display the FDIC official digital sign on its social media
advertisements. IDIs should ensure that social media advertisements are compliant with
the official advertising statement requirements contained in 12 CFR § 328.6.
Observation: Social media are not digital deposit-taking channels.

Technical assistance

Q1. Where can IDIs obtain additional information about the final rule to support
compliance efforts?

A. The FDIC posted the slides from the FDIC’s banker webinar on Part 328 on
its website.
The FDIC issued a Financial Institution Letter and press release addressing the
issuance of the final rule.
The final rule was published in the Federal Register on January 18, 2024.

Q2. Where can IDIs obtain downloadable versions of the digital official sign?

A. The FDIC has made optional versions of the official digital sign available for IDIs
on FDICconnect, a secure website operated by the FDIC that FDIC-insured institutions
can use to exchange information with the FDIC. The requirement to display the new
FDIC official digital sign only applies to IDIs. Display of the FDIC official digital sign by
any non-bank third party would improperly imply that the non-bank is FDIC-insured and
would constitute a misrepresentation under part 328 subpart B.

Compliance and effective dates

Q1. Are there any changes that had to have been implemented by the final rule’s
April 1, 2024, effective date, or do IDIs have until January 1, 2025, to comply with all
requirements?

A. The compliance date for the amendments made to the final rule is January 1, 2025.
No changes had to be implemented by April 1, 2024, but IDIs can begin posting the
official digital sign and implementing other aspects of the regulation prior to January 1,
2025. For example, some IDIs have already posted the new official digital sign on their
websites. Similarly, some non-bank entities have updated their disclosures consistent
with the amendments to part 328 subpart B.

Advertising for Non-Deposit Products

Q1. In marketing materials that feature safe deposit boxes or credit products alongside
insured products like checking accounts, should IDIs include a disclosure stating that
these products are not FDIC-insured?

A. For the purposes of part 328, safe deposit boxes and credit products are excluded
from the definition of “non-deposit product.” Therefore, there is no requirement under
part 328 for an IDI to include such a disclosure in marketing material for these products.
Observation: Some banks have posted notices in their safe deposit areas and/or in
contracts for safe deposit service to advise customers that, despite the use of “safe
deposit” in the name of the service, the contents of a customer’s safe deposit box is not
insured by the FDIC or by the bank and that customers should consider insuring any
intrinsically valuable contents in a rider to their hazard insurance policies. These notices
are not affected by part 328.

July 2024 OBA Legal Briefs

More on the FDIC’s Revisions to Part 328

By John S. Burnett

In last month’s Legal Update, I offered an analysis of the changes the FDIC has made to the rules applicable to deposit-accepting ATMs (and similar equipment) in its regulations at 12 CFR Part 328 on Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo.

Before going further, I want to emphasize here that the new rules on FDIC signage on ATMs in new § 328.4 only apply to deposit-accepting ATMs (and like devices).

In this month’s issue, we review these other significant changes to the regulation:

The new definitions section
Reorganized and updated information on the FDIC’s official sign
New alternative official sign display options
Non-deposit product signage requirements
FDIC signs for digital deposit-taking channels
Another optional FDIC short title for ads
A “cleanup on aisle 10” change
Required policies and procedures
Changes to Subpart B

Definitions

There are now two sets of definitions in the regulation. Section 328.1 includes definitions applicable within the entire regulation, for “Branch,” “Corporation” (the FDIC), “Deposit,” “Digital deposit-taking channel” (websites, banking applications, and any other electronic communications method through which an insured depository institution accepts deposits), “Hybrid product,” “Insured depository institution,” and “Non-deposit product” (any product that is not a “deposit,” including, but not limited to: insurance products, annuities, mutual funds, securities and crypto-assets, but credit products and safe deposit boxes are excluded from this definition).

If you compare the old Subpart A with the new Subpart A, you will see that many of the definitions in the previous version appear with the first instance of the defined term in the text of the regulation, and some terms in the previous version are simply not defined.

Section 328.101 comprises definitions applicable only to Subpart B. More on that later.

Reorganized and updated information on the FDIC’s official sign

Under the “old” regulation, section 328.1 provides a description and definition of the FDIC’s official sign, which is the sign that FDIC-insured depository institutions (IDIs) must post at their teller stations. There is also a definition included of the “symbol” of the FDIC, which is essentially the official sign with the graphic and statement to the left of the initials FDIC cut off, and the horizontal lines removed.

Then, in the old regulation, section 328.2 provides the requirements for displaying the official sign; a provision allowing the use of signs that vary from the official sign in size, color, or material (with certain limitations on size and color combinations); information on procuring the official sign from the FDIC or from commercial sources in other sizes and colors; and a rule allowing the FDIC to require an IDI to “change the wording of the official sign in a manner deemed necessary for the protection of depositors or others.” I presume that addresses cases in which an IDI has not updated its signage when the FDIC makes a change (such as the change in the standard deposit insurance limit from $100,000 to $250,000 several years ago), or in which an IDI has bought non-conforming signs from a commercial source.

In the new regulation, all of that information is reorganized in sections 328.2 and 328.3. Section 328.2 includes the descriptions of the official sign and symbol, reworded information on procurement of signs, and the rule allowing the FDIC to require you to change its posted signs.

New section 328.3 governs signage within the premises of IDIs and adds requirements for signage when an IDI offers non-deposit products within their premises. And this is where we see some substantive changes.

New alternative official sign display options

To start, we see essentially the same old rules on displaying the FDIC’s official sign at teller stations (for banks that usually and normally receive insured deposits at teller windows or stations). You can still use signs that are larger than the standard 7 x 3 inches, and in colors other than black on gold (still limited to two colors with the logo, wording and graphics in one color and the background in another, as long as the color combination still makes the logo, graphics and wording legible).

NEW! If you do not offer non-deposit products on the premises, you can choose to replace those official signs at each teller station with official signs that are placed at one or more locations visible from the teller stations or windows in a manner that ensures a copy of the official sign is large enough to be legible from anywhere in that area. For example, your lobby design team might want to blow the official sign up to 70 by 30 inches – ten times the standard size – with navy blue logo, graphics, and text against a gold background, to complement the color scheme of your lobby, and place it in only one spot, eight feet above floor level behind the center of your teller line where no one can miss seeing it. Overkill, you say? Perhaps, but it gets across the point that you have this new option (but only if you do not offer non-deposit products on the premises).

Also new is a rule designed for café style bank lobbies or other non-traditional arrangements, whether or not non-deposit products are offered on the premises. If insured deposits are usually and normally received in areas of the premises other than teller windows or stations, you must display the official sign in one or more locations in a way that ensures a copy of the official sign is large enough so as to be legible from anywhere in those areas.

Non-deposit products signage requirements

Thirty years ago, the FDIC, Federal Reserve Board, OCC and Office of Thrift Supervision (for those of you new to banking, the OTS was eliminated by the Dodd-Frank Act of 2010) issued the “Interagency Statement on Retail Sales of Nondeposit Investment Products,” which was developed to eliminate customer confusion regarding what is insured and not insured among the various products available from FDIC-insured depository institutions.

The update of Part 328 by the FDIC has incorporated that guidance. Banks that offer non-deposit products should find the rules in section 328.3 familiar, and it is expected that compliance under the 1994 Guidance will comply with section 328.3.

There is a requirement for segregated areas to be used for the offering of non-deposit products and those areas are to be clearly delineated and distinguished from areas where insured deposit-taking activities occur. In cases of physical area limitations where there are challenges to offering non-deposit products in a distinct area, you still must take prudent and reasonable steps to minimize customer confusion.

There is a familiar requirement for conspicuous signage in such areas indicating that the non-deposit products : are not insured by the FDIC; are not deposits; and may lose value.

You can use electronic media to display the official sign and the non-deposit sign as long as one related to the product being offered is continuously and conspicuously displayed while that product is being offered. So, for example, you could use an electronic sign board that displays the official sign most of the time but is switched off and replaced by the “not, not, may” sign when offering non-deposit products.

Signs for digital deposit-taking channels

In last month’s Legal Briefs, I introduced the FDIC’s new official digital sign that will appear on some ATMs. That new sign is officially described in new section 328.5, which governs signage for digital deposit-taking channels, “including IDIs’ websites and web-based or mobile applications that offer the ability to make deposits electronically and provide access to deposits at IDIs.” The design of the official digital sign is spelled out in meticulous detail in section 328.5(b), which I won’t repeat here, but I do recommend that you share that very technical description with whoever designs your website, banking app, and any other digital deposit-taking channels.

Display of the FDIC official sign (the one that appears at teller stations) or the use of the shorthand “Member FDIC” will no longer be acceptable, effective January 1, 2025, for use on bank websites or other digital deposit-taking channels.

Can you get by just by replacing the old FDIC symbol with the new official digital sign everywhere on your website or app?

No. The new official digital sign (or the “digital symbol” — essentially the digital sign without the gray graphic underscore) must appear on the following pages or screens:

Initial or homepage of the website or application
Landing or login pages
Pages where the customer may transact with deposits (for example, make deposits on an IDI’s smartphone app). I believe this would also apply to any page in an online banking web or smartphone app on which a customer can make a transfer to or from the customer’s accounts.

The official digital sign must be clearly legible across all IDI deposit-taking channels. To be considered clear and conspicuous, the official digital sign should be placed near the top of the relevant page or screen and close to the bank’s name. That requirements means the bank’s name should appear on each such page or screen.

Burying the official digital sign in a universal footer for all pages of a website will not be acceptable.

What about web or application pages that offer non-deposit products?

If a digital deposit-taking channel offers both access to deposits at an IDI and non-deposit products, the institution must clearly and conspicuously display signage indicating that the non-deposit products: are not insured by the FDIC; are not deposits; and may lose value, continuously on each page relating to non-deposit products. This non-deposit signage may not be displayed in close proximity to the FDIC’s official digital sign. As a matter of practicality, it’s probably best not to mix deposit products and non-deposit products on the same page or screen of the website or application.

Can a bank provide a link on the website or application allowing logged-in customers to access a third-party’s offering of non-deposit products?

Yes, but the IDI must provide a one-time per web session notification on its digital deposit-taking channel before the customer leaves the digital deposit-taking channel. The notification must be dismissed by an action of the bank customer before initially accessing the third party’s online platform and it must clearly and conspicuously indicate that the third party’s non-deposit products: are not insured by the FDIC; are not deposits; and may lose value. Optionally, the notification may also indicate that the bank customer is leaving the IDI’s website or other disclosures that may help prevent consumer confusion.

As with the FDIC’s official sign, the FDIC may require any IDI, with 30 days’ notice, to change the wording, color or placement of the FDIC official digital sign and other signs for digital deposit-taking channels when the FDIC deems it necessary for the protection of depositors or others or to ensure consistency with the requirements of subpart A of the regulation.

Changes in official advertising statement requirements

Old section 328.3 – “Official advertising statement requirements” has been reissued as section 328.6 under the same heading, with only one change other than updating cross-references to other sections of the update regulation. It does give your marketing department one additional “short title” that can be used in advertisements in place of the full official advertising statement “Member of the Federal Deposit Insurance Corporation.” In addition to the familiar short titles “Member of FDIC” and “Member FDIC,” and the symbol of the FDIC, your marketing department now has the option of using “FDIC-Insured” in ads subject to section 328.6.

For decades, bankers have asked probing questions about using “Member FDIC” in ads. Questions like “Do we need to include ‘Member FDIC’ on Frisbees we give away to kids at our booth at the county fair each year if they have our bank name on them?” Questions that I tend to counter with “What other reason does the bank have for having its name on the Frisbees than to advertise the bank, and what about a Frisbee makes it impractical to include ‘Member FDIC’ along with the bank’s name?” The FDIC has included a list of ten types of advertisements that do not require the official advertising statement in old section 328.3 for as long as I can remember, and it hasn’t updated that list at all in the updated regulation.

Cleanup on aisle 10

That is, EXCEPT for item 10 on the list, which, until April 1, 2024, still referred to an FDIC insurance limit of $100,000 because it was not updated when the limit was boosted to $250,000 permanently in 2010. In the new section 328.6 the phrasing was changed to “or that its deposits or depositors are insured by the Federal Deposit Insurance Corporation to at least the standard maximum deposit insurance amount (as defined in § 330.1(o)) for each depositor.”

Policies and procedures

What self-respecting FDIC regulator would not include a requirement that parties subject to its regulation have policies and procedures for compliance with the regulation?

Until April 1, 2024, Part 328 did not have such a requirement. To be sure, the FDIC has always expected that IDIs (and others affected by the rule) comply with Part 328. But the updated regulation, which has a required compliance date of January 1, 2025, now requires, in new § 328.8, that IDIs establish and maintain “written policies and procedures to achieve compliance with this part.” Not only must the policies and procedures be written, but they also must be “commensurate with the nature, size, complexity, scope, and potential risk of the deposit-taking activities of the insured depository institution and must include, as appropriate, provisions related to monitoring and evaluating activities of persons that provide deposit-related services to the insured depository institution or offer the insured depository institution’s deposit-related products or services to other parties.”

In the prefatory text published with the amendments on January 18, 2024, the FDIC expanded on its requirement that the policies and procedures address any third-party that provides deposit-related serves to an IDI:

“Here, the policies and procedures established and maintained by IDIs will facilitate compliance with part 328, including by ensuring that appropriate monitoring is conducted and evaluations are performed regarding activities of certain persons that provide deposit-related services to IDIs or offer an IDI’s deposit products or services to other parties. The policies and procedures will help ensure activities are conducted in compliance with applicable laws and that IDIs are aware of whether certain third parties are in violation of subpart B of part 328. Having these policies and procedures in place will help mitigate the risks of consumer harm and confusion, consistent with the statutory purpose underlying section 18(a) of the FDI Act and the FDIC’s mission to maintain and promote public confidence in the banking system.” [https://www.federalregister.gov/d/2023-28629/p-212].

That paragraph is significant. You may recall that the FDIC has been issuing “cease and desist” letters to various fintechs that were allegedly misrepresenting their non-deposit products to be FDIC-insured or making other misleading statements about FDIC coverage of funds invested with the fintechs. In some cases, those companies have said that their clients’ funds are placed with an IDI, making them “fully insured” or “guaranteed by the U.S. government,” which, of course, isn’t always the case because there is a cap on FDIC coverage per depositor per capacity.

The requirement that an IDI be aware of whether certain third parties are in violation of subpart B now makes it the IDI’s responsibility to monitor the activities and statements of third parties it may work with to ensure the third parties are not misrepresenting the facts with regard to FDIC coverage of their clients’ funds.

Changes to subpart B

Subpart B was not overhauled to the extent that subpart A was. Here’s a list of the changes.

Definitions: Section 328.101 now includes a definition of “deposit” and selected other definitions were cleaned up a bit or restated rather than citing back to subpart A.

Prohibition: Section 328.102 has added prohibitions against using FDIC-associated terms or images in a way that inaccurately states or implies that a person other than an IDI is insured by the FDIC. Also added are examples of material misrepresentations relating to FDIC coverage.

June 2024 OBA Legal Briefs

Bankers’ FAQs
Changes in UCCC amounts effective 7/1/24
ATMs and the FDIC’s new Advertisement of Membership Rule

Bankers’ FAQs

By Pauli Loeffler

Some of the questions submitted to the OBA’s Compliance team are asked with some frequency by our members. We’ve gathered some of these questions and responses to assist you when similar situations present themselves.

Altered check, indorsement claim

Q. We had a large check ($40,275.60) on which the payee was altered from United Health Care to Lizabeth Zambrano when it was deposited into JP Morgan Chase Bank. The payee, Lizabeth Zambrano endorsed the checked with her initials L.Z. instead of her full name. Can this check be returned because it was not endorsed correctly?

A. Your opportunity to return the check ended at midnight on the banking day after the check posted to your customer’s account. However, your customer, the check issuer, can have the intended payee (United Health Care) provide an affidavit that it did not receive, indorse, or receive the proceeds of the check, and the check issuer can provide an affidavit that the check was payable to United Health Care, the payee name was altered by person unknown to Lizabeth Zambrano, who appears to have indorsed the check and deposited it with JPMorgan Chase Bank (JPMCB).

Your bank then sends copies of the affidavits and a copy of the original check to JPMCB with a claim that JPMCB breached its Presentment Warranty under UCC 4-208 that the check was not altered.

Given the dollar amount involved, you may want to consider getting legal counsel involved. Time is of the essence — JPMCB’s liability to your bank under the presentment warranty can be reduced if you fail to notify them of the breach of warranty claim within 30 calendar days of learning of the alteration and of JPMCB’s involvement as the depositary bank. That includes obtaining the affidavits I mentioned above.

And, for whatever it is worth, “E.Z.” could be Elizabeth Zambrano’s actual signature. It does not have to contain all the letters of her given name.

Multiple payees, who must indorse

Q. When “and” appears on a check, I know both parties need to sign, but when one name appears below the other is that also the case? I have always assumed the answer is “no.” Am I wrong? What about when there is a “/”?
A. If there is an “and” or “&” between payee names, all payees must indorse or deposit the check into an account owned by all payees. If there is an “and/or,” “&/or,” “/,” or no conjunction between the names, any payee may indorse or deposit the check into an account s/he owns.
UCC Section 3-110 – Identification of Person to Whom Instrument is Payable
(d) If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.
Oklahoma Code Comment
Sections 3-109 and 3-110 rewrote pre-revision Sections 3-110, 3-111, 3-116 and 3-117, for clarity and to modernize the language. Subsection 3-110(d) clarifies pre-revision Section 3-116 by seeking out guidelines for determining when an instrument payable to two or more payees must be indorsed by all of them. Essentially, in order to require indorsement by all the payees, their names must be joined in the conjunctive, as in “Jane Doe and John Doe” or “Jane Doe & John Doe.” Any other formulation will permit indorsement by only one payee, as with “Jane Doe or John Doe,” “Jane Doe/John Doe,” or “Jane Doe, John Doe.”

Payee is named as “Life Tenant”

Q. We were presented with a check payable to “John Doe, Life Tenant.” How do we handle this check?

A. As long as the life tenant payee is alive, the bank can deposit the check into his account. About a decade ago, oil and gas royalty checks started to include “Life Estate” after the name of the payee when the interest of the mineral owner would transfer on death to remaindermen.

If the life tenant is alive and kicking, the bank can deposit the check to any account he owns or cash it and totally ignore any persons named as remaindermen.

It is a different situation when the life tenant is deceased and name or names of the person(s) entitled to the funds are listed below the life tenant. “How do we handle the check?” Even if all remaindermen are present to indorse the check, I would suggest that the bank refuse to deposit the check or cash the check if it is not an “on-us” item. Why do I make this recommendation?

In order to get the deceased life tenant’s name from being the payee of future checks, a new division order for each remaindermen is required. The remaindermen need to notify the purchaser of the oil and gas of the death of the life tenant so 1099s are issued correctly to the remaindermen. I suggest that you tell the remaindermen to return the check along with a copy of the deceased’s death certificate to the purchaser so it will provide new Division Orders for them to execute, as well as a W-9. The royalties will be held in suspense pending receipt of those forms, at which point the payor will release any funds currently held and will issue separate checks to the remaindermen going forward.

Authorized signers on revocable trust accounts

Q. Can we add an authorized signer who isn’t a current trustee to a revocable trust?

A. If the settlor/trustee of a revocable trust wants to add a person who isn’t a trustee as an authorized signer, Sec. 175.57 of Title 60 applies:

3. Except as otherwise provided by the terms of a trust, while the trust is revocable and the settlor has capacity to revoke, the rights of the beneficiaries are held by, and the duties of the trustee are owed exclusively to the settlor; the rights to be held by and owed to the beneficiaries arise only upon the settlor’s death or incapacity. The trustee may follow a written direction of the settlor, even if contrary to the terms of the trust. The holder of a presently exercisable power of withdrawal or a testamentary general power of appointment has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power.

While the settlor is alive and competent, he can add whomever he wants an authorized signer, and since the settlor is the only one who can claim a breach of fiduciary duty, and as the sole current beneficiary of the funds, he is estopped from making such claim. This is also the reason we allow the trustee/grantor of a revocable trust with an account at your bank to deposit checks payable to the trust or to himself as trustee to cash or deposit checks to his personal account.

I do like a “belt and suspenders” approach even in this situation, and you will find templates on the OBA’s Legal Links web page to use to add an authorized signer to a trust account as well one to add a deputy to a safe deposit box.

Joint tenants without right of survivorship, PODs

Q. Could you please clarify if there are any provisions that prevent each tenant from electing their own PODs? This would allow each elected POD to collect their equal share of the account funds upon the death of the signers.
Example: John Doe or Mary Doe, Joint Tenants in Common Without Rights of Survivorship
John Doe, POD Sally Doe and Bob Doe, in equal shares
Mary Doe, POD Sam Smith

A. Sec. 901 of the Banking Code covers PODs. This section has no provisions for tenants in common allowing them to independently name their own PODs, nor is this allowed for purposes of determining FDIC deposit insurance. The tenancy in common is terminated upon death of a tenant in common, and unless they designate some other proportion at the time the account is opened, 50% of the funds will be paid to the surviving tenant and the rest will be paid to the estate of deceased tenant.

Reg E

Q. We’ve had a situation where our customer is disputing some Cash App charges on his account, and I want to make sure what we’re responsible for. Any advice you have is greatly appreciated!

On 08/08/2023, our customer came into a branch location to question some Cash App charges on his account that he said were not his. The names associated with those posted transactions were his ex-wife and stepson. Being family, he was hesitant on how he wanted to handle the situation. Our employee suggested that he file a police report and get back to us. At that time, the employee shut down his current debit card, and issued a new card. He never signed any dispute forms, never brought in a police report, and we never heard back from him. Fast forward almost a year later, on 05/17/2024, he came to our main bank location and said he was advised by a lawyer to seek the full amount of these Cash App charges that occurred in the amount of $38K, and he did present a police report that he actually filed on 08/11/2023 that he never told us about. The first fraudulent charge happened on 03/09/2023. His next bank statement cycle was on 04/04/2023. And his last Cash App charge was on 08/09/2024. He was also notified by Fiserv Fraud Alert on 04/23/2023 of potentially fraudulent activity on his account, and he did confirm that to be legit. However, it was not a Cash App transaction, and he apparently didn’t review his statements at that time for other fraudulent charges.

Per Reg E, even though he didn’t actually sign any dispute forms, but verbally gave notice those wasn’t his transactions, would that bank be responsible for all transactions from the first unauthorized charge, up to 60 days after the next statement cycle, 03/09/23 through 06/04/23?

Due to untimely notice, the bank should not be liable for any transactions after that since we could have shut down his card and stopped all further transactions?
Due to untimely notice, would the bank also have been relieved from giving him any provisional credit on 08/08/2023 and had the right to investigate first?

Do you see any ground the bank has to stand on due to customer negligence, or since the customer didn’t follow through with our dispute procedures?

A. First, you cannot require the customer to file a police report. When the bank investigates the claim of a series of unauthorized EFTs (UEFT), and cannot determine they were authorized, the bank must apply the timing and liability rules in Regulation E section 1005.6 to determine which UEFTs the consumer is to be reimbursed for and which UEFTs the consumer must bear responsibility for.

In this case, because there was no lost or stolen access device involved, the first and second tiers of liability in paragraphs 1005.6(b)(1) and (b)(2), don’t apply. You go straight to the third tier of liability, in paragraph 1005.6(b)(3). Determine when the bank sent the periodic statement showing the earliest UEFT and add 60 days to that date. This is the date after which any UEFT in the claim is the consumer’s responsibility. Any UEFT on or before that date should be reimbursed to the consumer.

Although you don’t have to provide provisional credit or adhere to the investigation timing rules under the section 1005.11 rules if the claim is for a UEFT appearing on a statement sent more than 60 days before the claim is received, you do need to determine whether the EFTs listed in the claim were or were not authorized, and you must comply with section 1005.6.

Changes in Uniform Consumer Credit Code Amounts effective 7/1/24

By Pauli Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, compiled by the Bureau of Labor Statistics, U.S. Department of Labor. You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here. It is also accessible on the OBA’s Legal Links page under Resources once you create an account through the My OBA Member Portal. You can access the Oklahoma Consumer Credit Code with regard to changes in dollar amounts for prior years on that page as well.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2024, the amount provided under (b) will increase by $1.00 to $32.00.

Late fees for consumer loans must be disclosed under both the U3C and Reg Z, and the consumer must agree to the fee in writing. Any time a loan is originated, deferred, or renewed, the bank has the opportunity to obtain the borrower’s written consent to the increased late fee as set by the Administrator of the Oklahoma Department of Consumer Credit. However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to unilaterally increase the late fee amount if it states a specific amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is properly worded, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

§ 3-508A.

This section of the “U3C” sets the maximum annual percentage rate for certain loans. It provides three tiers with different rates based on unpaid principal balances that may be “blended” based on the amount of the loan under (a):

(a) the total of:

(i) thirty-two percent (32%) per year on that part of the unpaid balances of the principal which is Seven Thousand Dollars ($7,000.00) or less;

(ii) twenty-three percent (23%) per year on that part of the unpaid balances of the principal which is more than Seven Thousand Dollars ($7,000.00) but does not exceed Eleven Thousand Dollars ($11,000.00); and

(iii) twenty percent (20%) per year on that part of the unpaid balances of the principal which is more than Eleven Thousand Dollars ($11,000.00)…

It also has an alternative maximum rate that may be used rather than blending the rates under 2. (b): “twenty-five percent (25%) per year on the unpaid balances of the principal.

The amounts under each tier are NOT subject to annual adjustment by the Administrator of the Oklahoma Department of Consumer Credit under §1-106. However, subsection (4) added in 2022 allows the lender to charge a closing fee which IS subject to adjustment under § 1-106. The closing fee which was $178.87 has increased as follows:

(4) In addition to the loan finance charge permitted in this section and other charges permitted in this act, a supervised lender may assess a lender closing fee not to exceed One Hundred Eight-Four Dollars and Sixty-Four Cents ($184.64) upon consummation of the loan.

Note that the closing fee is NOT a finance charge under the OK U3C, and therefore not considered for purposes of usury. However, the fee IS a finance charge under Reg Z. Most banks use Reg Z disclosures. This means that it is possible that the fee under Reg Z disclosures will cause the APR to exceed the usury rate under § 3-508A. If that happens, document the file to show that the fee is excluded under the U3C in order to show the loan does not in fact violate Oklahoma’s usury provisions. Please note that the bank is NOT required to charge a closing fee at all, and banks may choose to not charge the fee at all or charge less than the amount permitted under the statute.
You can access the § 3-508A Table here. (https://www.oba.com/wp-content/uploads/2022/11/3-508A-ABS-Chart.pdf)

§ 3-508B 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,” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate.

The permitted principal amounts for § 3-508B is adjusting from $3,450.00 to $3,540.00 for loans consummated on and after July 1, 2024.

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but no other fees can be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, nor any other kind of fee is allowed. No credit insurance even if it is voluntary can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead. Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding $3,540.00. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days. The maximum term of any loan made under this section shall be one (1) month for each Ten Dollars ($10.00) of principal up to a maximum term of eighteen (18) months. This would be loans not exceeding $621.00. Loans under subparagraphs e through i of paragraph 1 of this section ($621.01 up to $2,300.00) the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal up to a maximum term of eighteen (18) months, and under subparagraphs j and k of paragraph 1 of this section ($2,300.01 – $3,450), the maximum terms shall be one (1) month for each Twenty Dollars ($20.00) of principal to a maximum term of twenty-four (24) months.

Lenders making § 3-508B loans should be careful and promptly change to the new dollar amount brackets, as well as the new permissible fees within each bracket for loans originated on and after July 1st. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 may result in excess charges for certain small loans and violations of the U3C provisions. Since §3-508B is “math intensive,” and the statute whether online or in a print version does NOT show updated acquisition fees and handling fees you must download and print the notification from the Oklahoma Department of Consumer Credit by clicking the link set out in the first paragraph of this article.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund, but if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for prior years with links on this page, (https://www.ok.gov/okdocc/Licenses_We_Regulate/Supervised_Lender/index.html) but had not done so at the time this article was written. Note if a loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for prior years can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table. I expect the charts and table for 2024 to be added shortly.

§ 3-511 Loans

I frequently get calls when lenders receive a warning from their loan origination systems that a loan may exceed the maximum interest rate. Nearly always, the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under § 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511. This is another section for which loan amounts may adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2024 in bold type.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $6,400.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more than $1,920.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1,920 or less.

The reason the warning has popped up is due to the italicized language: The small dollar loan’s APR exceeds 18%, and it is either single pay or interest-only with a balloon.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and 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 is covered in Section 5-103(2) of the U3C. This dollar amount was previously $6,200.00 and increases to $6,400.00 on July 1, 2024.

ATMs (and like devices) and the FDIC’s new Advertisement of Membership Rule

By John S. Burnett

If your bank has ATMs or similar devices that accept deposits, someone in your organization should be working on making sure those ATMs will be in compliance with the FDIC’s revised Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo regulation (12 C.F.R. Part 328) which has a compliance date of January 1, 2025.

The FDIC has created a new “official digital sign” for use on some ATMs (details below) and on bank websites, online banking sites, and smartphone banking apps. In this article, I will review only the requirements for ATMs.
The official digital sign includes the FDIC initials in bold text, followed by “FDIC-Insured. Backed by the full faith and credit of the U.S. Government” in italics. You can see a reproduction of the sign on the BankersOnline webpage for section 328.5 of the FDIC’s regulation (https://www.bankersonline.com/regulations/12-328-005-new).

What do you need to do to ensure your deposit-accepting ATMs are in compliance after January 1, 2025? It depends on which of the following three groups your ATM falls into:

ATMs or like devices receiving deposits and offering access to non-deposit products, regardless of when they are placed into service
ATMs or like devices receiving deposit and NOT offering access to non-deposit products, placed into service after January 1, 2025.
ATMs or like devices receiving deposits and NOT offering access to non-deposit products placed into service before January 1, 2025.

Group 1

These machines must include the FDIC official digital sign displayed clearly, continuously, and conspicuously on their home page or screen and on each transaction page or screen relating to deposits. Presumably that includes screens used in making a deposit, withdrawal, or transfer to or from a deposit account and balance inquiries.
“Not, Not, May” disclosures. Each screen on each transaction page or screen relating to non-deposit products must display clearly, continuously, and conspicuously electronic disclosures indicating that such products : are not insured by the FDIC; are not deposits; and may lose value. This “Not, Not, May” disclosure may not be displayed in close proximity to the FDIC official digital sign.

Group 2

These machines that receive deposits for an insured depository institution and does not offer access to non-deposit products must display the FDIC official digital sign displayed clearly, continuously, and conspicuously on their home page or screen and on each transaction page or screen relating to deposits.

Group 3

If your bank has ATMs in this group, you can upgrade them at any time to conform to the requirements for Group 2 machines, or you can advertise your bank’s membership in the FDIC by affixing an FDIC’s physical official sign (similar to the sign used at each teller’s station, not the official digital sign) to the machine façade so that is displayed “clearly, continuously, and conspicuously.” If you elect this option for these “grandfathered” machines, you or your third-party ATM servicer must monitor the signage and promptly replace any FDIC physical official sign that is removed, defaced, or degraded by weather, vandalism, or otherwise. If the sign is no longer clear or conspicuous, it should be replaced.

May 2024 OBA Legal Briefs

Military Customers – A Protected Class?

By Andy Zavoina

For starters, service members are not a protected class under Reg B or ECOA, but note I added a question mark in the title of this article. The question is, do you want to treat them as a protected class? In my opinion, a bank often mitigates risks most effectively by putting service members in the same category as the Reg B protected categories of race, color, religion, national origin, sex, marital status, age (provided that the applicant has the capacity to enter into a binding contract), the fact that all or part of the applicant’s income derives from any public assistance program, or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.

I remind you of these prohibited basis categories for two reasons: to drive home the point that violations of a service member’s rights can yield severe consequences similar to those of Reg B violations, and the fact that if your bank has a fair lending violation (Reg B included), the Department of Justice (DOJ) is the government agency that will enforce it, and the DOJ is the same agency that will enforce the Service members Civil Relief Act (SCRA) as well. Under the SCRA, the Attorney General is authorized to file a federal lawsuit against any person, or entity, who engages in a pattern or practice of violating this law. Does “a pattern or practice” remind you of a term you have heard in fair lending training? For clarity, the DOJ is directly responsible for enforcing the SCRA, whereas the CFPB monitors complaints and can enforce unfair, deceptive, or abusive practices against banks for mistreating service members.

Often, we hear about the homeless problem and there is a subcategory of those who are veterans and that seems to get more attention because it seems more wrong when a veteran is involved. If there is an action against a debt collector, a repossession agent, or a bank charging overdraft fees, it sounds bad in the media, and then they add, “and this included veterans and service members,” because that garners more attention as well. This is both a reputation risk issue and one compounded by the fact that the SCRA may have been violated and because it carries the same weight as the Reg B consumer categories that are mentioned above. Yes, service members and veterans have given up a lot to defend our country and way of life. But as to salary, service members are also paid for what they do, and unlike many years ago when the draft helped ensure the armed services had the required manpower that was needed, today many service members make as much or more in the military as they would in the civilian sector, so compensation is not necessarily lower, especially when the entire compensation and benefits package is considered. The pay and benefits are competitive as to regular duties, but certainly those making the ultimate sacrifice could never be paid enough.

Putting aside the original spirit and intent of this law, while a part of that is still intact, a big part of it is not, and has been replaced with the idea that the SCRA is a benefit of military service. That is how it is explained to many service members. The Consumer Financial Protection Bureau (CFPB) explains that “The SCRA is a law created to provide extra protections for service members in the event that legal or financial transactions adversely affect their rights during military or uniformed service. These protections enable service members to devote their entire energy to the defense needs of the Nation.” So, while there is little obligation on a service member to validate any financial hardship that adversely affects them, they do need to be able to focus on their mission and the defense of our country.

While this is not an educational substitute for a class in lending to the military or the SCRA, I would be remiss not to remind you that, in addition to service members, the SCRA also protects commissioned officers in active service of the Public Health Service (PHS) and the National Oceanic and Atmospheric Administration (NOAA). While the key focus of the SCRA is military, as we discuss this group, read it with the PHS and NOAA included.

As more support for informally adding service members to the Reg B protected bases, the CFPB has a separate department just for these matters, the Office of Service member Affairs (OSA). Annually the CFPB also provides separate reports on service members, including how this group fares in the submission and resolution of consumer complaints. They are specifically separated so that they may be evaluated as a sole category separate from all others. What you do and how you serve your military customers is under a microscope.

In June 2023 the CFPB published “The Office of Servicemember Affairs: Annual Report” for 2022. Complaints submitted by service members serve as a key initial indicator of emerging issues and continuing trends. The report provides data and analysis around the most common complaints submitted by service members.

The Bureau received approximately 66,400 complaints from military consumers in 2022. This was a 55.5 percent increase over 2021. Reviewing the complaints handled by the OSA allows us the opportunity to examine internal procedures for responding to complaints and to improve communication and training to avoid similar complaints in your bank.

This brings me back to the DOJ. In July 2022 the DOJ issued a joint letter with the CFPB that was not directed to banks, but to the auto industry. That absolutely does not mean banks could not learn from the message, and it absolutely does not mean banks have not been penalized for violating these guidance items since 2022. The message is as pertinent today as it was two years ago.

In that letter there are three main provisions they wanted auto lenders to be aware of. Banks make auto loans, and other loans might be applicable as well. The three issues that were addressed included:

Wrongful Vehicle repossessions

The SCRA prohibits repossession of a vehicle during a period of military service unless you (the lender) have a court order or that vehicle loan was made before the period of service, making the loan not covered by the SCRA. There is no notice requirement from your borrower to have this protection, because the burden of determining whether the borrower is protected is on you, the lender. Verification is easiest via the Defense Manpower Data Center (DMDC) website, and I recommend checking that before any repossession order is issued. It may be wise to check it again if you have any reason to believe the borrower may become protected and/or check it again after the repossession to ensure the borrower is not protected at that point. That does not cancel out the fact that the vehicle of a covered borrower was repossessed, but if you verified the DMDC database prior to repossession you should be able to claim a safe harbor from fault. And if you check right after the repossession you can proceed with the return of personal items and a commercially reasonable private sale or auction on the vehicle knowing you will not receive a claim of protection and have to “un-do” that sale, which can be difficult. The DMDC has no separate hard cost, so it is a minimal investment of an employee’s time for peace of mind.2. Failure to terminate vehicle leases without penalty

Failure to terminate vehicle leases without penalty

Under the SCRA, a service member can terminate motor vehicle leases early without penalty after entering service or upon receiving qualifying permanent change of station (PCS) or deployment orders. When service members terminate motor vehicle leases, the SCRA requires that they be refunded all lease amounts paid in advance after the effective date, including “capitalized cost reduction” amounts. This has been a major bone of contention for several larger leasing institutions. The lesson learned here for banks is that upfront fees and costs that are considered part of the overall loan, like a rate buy down, should be amortized and not considered “one and done” as a cost of the loan or lease.

Interest rate benefits

If a loan was incurred prior to military service, the SCRA limits the interest rate to 6 percent upon a proper request from the service member. A proper request should include a formal request and a copy of their orders. The CFPB encourages lenders to use the DMDC checks as proof by itself and to provide rate reductions based on that information. A service member’s commander could also write a letter confirming the service member’s status, and that would satisfy the requirement for any verification. The amount above 6 percent must be forgiven and not deferred or added to the final payment, and it must be effective as of the date of SCRA eligibility, not the date of the request. Remember too, when the borrower is on active duty or the reservist receives their activation orders, they are a covered borrower. This provision allows the service member to make their request during the period of service or within 180 days after leaving the service.

Are banks or other financial institutions better than the auto industry and not deserving of such guidance? Of course not. And to go a step farther, I would point out that another form of enforcement comes not from the regulators or DOJ, but from the courts. So, there are several fronts that pose a compliance enforcement risk on your bank.

DOJ cases

Let’s start with a few DOJ cases and then look in detail at class action lawsuits which can take years to resolve and result in highly expensive litigation. All of this should be considered in a risk assessment concerning loan products. I want to ensure you are aware of some of these cases because they are not typically in mainstream media.

In March 2023, the DOJ filed two statements of interest for cases involving arbitration. The first was Espin v. Citibank, N.A. and the second was Padao v. American Express National Bank. Both cases were in the U.S. District Court for the Eastern District of North Carolina and were concerned with the right of the service members to bring class action litigation under the SCRA instead of being forced into private arbitration proceedings on their own.

The service members were disputing adherence to the 6 percent interest rate rule and were seeking to bring class actions against the banks on behalf of themselves and other service members who may have been affected by violations of this requirement. The complaint alleged that Citibank failed to comply with Section 3937 of the SCRA, requiring lenders to limit the interest rate charged to covered service members to 6 percent during periods of military service. Citibank and American Express were seeking to have the cases dismissed and to require each service member to bring their own individual claim in private arbitration. The DOJ’s statements of interest urged the court to deny each bank’s motion and allow the plaintiffs’ SCRA class claims to proceed.

On September 29, 2023, the court denied Citibank’s motion to compel arbitration in Espin v. Citibank. This class action lawsuit brought by four service members who held credit cards issued by, or had other interest-bearing obligations to, Citibank. In its statement, the DOJ argued that the SCRA gives service members pursuing SCRA claims the right to participate in a class action case in federal court even where a defendant seeks to enforce a contract clause mandating individual arbitration. The DOJ also argued that the relevant portion of the SCRA applies even where the arbitration agreements were executed before the change in law in 2019. The court’s opinion adopted the position advocated by the DOJ.

The Padao case was a class action lawsuit brought under the SCRA by a single service member on behalf of a class of service members who held credit cards issued by, or had other interest-bearing obligations to, the bank. While this was a different lender and plaintiff, the dispute was the same as was the specific Section 3937 reference to the 6 percent rate. The difference here is that this case was based on a single service member’s complaint and expanded to a class. The Padao case is still pending.

In these two cases, the banks are both large. Oftentimes a small community bank sees these very large banks as all-knowing. They have plenty of legal staff to understand all the requirements and react to them. But case after case shows that is not always true. Some like to push the limits or rely on their own interpretations of a requirement. What is your bank’s appetite for risk?

I want to draw attention to the fact that similar to other SCRA cases, especially involving repossessed collateral, significant actions are brought against a bank because of its actions with a single borrower. Just one person starts a snowball that turns into an avalanche. Some readers will be of the opinion that their bank has many military customers, and they know how to handle them as to SCRA compliance. Others may believe they have no military customers and do not need to know SCRA requirements, as they have yet to be an issue. The reality is, you should not be complacent, but be compliant. Evaluate risk, evaluate training, test your procedures, and verify all of it with controls and audits.

At any time, a civilian borrower could enlist in the service and suddenly you find you have an SCRA request. You could also have a reservist called up to active duty who would then be protected. The bank needs to have personnel trained on how to handle these accounts and evaluate the requests. It needs to look not just at loan records, but at overdrafts and safe deposit boxes because after all, a safe deposit box is a lease and the SCRA has a section just for leases. Just as the bank should train everybody in the bank in some basics, where is the Public File for CRA, how do I file a claim for an unauthorized withdrawal from my deposit account, what should they do in event of a robbery, they should recognize “I’m now in the military” as a key phrase that deserves immediate attention of the bank.

You may be surprised if an examiner, or a DOJ lawyer, asks you how many borrowers you have under SCRA protections, especially taking advantage of the 6 percent rate. Regardless of your answer, none, one, or one thousand, the next question may be asking how many were denied SCRA protections? Natural follow-ups to that will be how do you know, how do you track it, who makes the decision, and what factors are involved in that decision. Then, what controls are in place for quality assurance. When there is one complaint, they will look for other cases where the person accepted your answer but did not complain to a regulatory agency or the DOJ.

I do not know of any bankers who want DOJ lawyers in their banks asking questions about loan files. Lawyers are neither lenders nor bankers, and you could find yourself explaining every form and the reasons for every action taken on every loan made in the last five years. You do not want to spend your days doing that and catching up on your regular work at night and on the weekends.

In 2023, I found only four civil money penalties under the SCRA. Two were against towing companies and two were for lease termination problems involving homes. The penalties totaled only $53,000. Not that you would want to justify to your board any civil money penalty as being fair. Fortunately, these were not banks. But that does not mean all banks are getting it all right. The two arbitration cases mentioned earlier are examples even though one is still pending. There are costs incurred already; should we expect a different outcome from the same court for the same complaint?

Let’s revisit a few basic requirements of the Military Lending Act (MLA) and the SCRA, which I have indicated as “M” and “S” below. You can find each of these at www.BankersOnline.com/regulations, near the bottom of the page under the “Other” section. As a general rule the MLA applies to new loans made to service members and the SCRA applies to loans made to people who later became service members. (Please take note that the service member can include dependents, and some SCRA protections are not dependent on this pre-service test.)

M1 – Under the MLA your rate is capped at 36 percent. This applies to a covered borrower with a covered loan.

M2 – The 36 percent is calculated using the Military Annual Percentage Rate, which is like an all-in Reg Z APR. That is, it includes many more finance charge components such as any credit insurance premium or fee, any charge for single premium credit insurance, any fee for a debt cancellation contract, or any fee for a debt suspension and credit-related ancillary products sold in connection with the credit transaction for closed-end credit or an account for open-end credit; (exception bona fide fees). This can make 36 percent easily reachable.

M3 – You are not required by law to verify the applicant’s military status, but if you do not and violate the MLA, the first issue on the borrower’s list of cures is that the loan contract becomes void.

M4 – To obtain a safe harbor, the bank needs to verify the military status before the loan is consummated, by either checking with the MLA database at the DMDC or by obtaining that verification on the credit report. The source for the credit report is the DMDC so that is the sole resource for verification.

[Prior to a change in the MLA rules banks would obtain a signed statement from the applicant as to their military status. Very recently I mentioned in live training that this method is no longer acceptable and banks should have ceased using the form years ago. I almost did not mention it as I also said I think all banks have done away with it. Then during the next break, a banker verified with me that the form they were getting signed was of no use. All it does is create a document the bank creates, has signed, verifies it is signed, and then it is filed away until that file is involved in an audit or quality control check when more time is spent checking it. It provides no safe harbor and only costs the bank time and money and demonstrates that it does not understand the current MLA requirements. Check that your bank’s policy and procedures is updated if you have any doubts. And if your policy does require an MLA verification, it should be completed for that reason with an approved source.]

S1 – Generally, the maximum rate of interest for an SCRA-covered borrower on a covered SCRA loan is 6 percent. This rate can be requested up to 180 days after the service member is released from the service and it is retroactive to the date they were covered, not the date of the request.

S2 – Late fees are considered “interest” for the SCRA. If the bank reduces the interest rate to 6 percent, the maximum rate allowed, turn off late fee accruals or you could be usurious.

S3 – The rate caps apply when a person is on active duty, or a reservist receives their orders. What about National Guard? Title 32 outlines the role of the United States National Guard; normally Title 32 members are not covered under SCRA. To be considered for SCRA coverage a Title 32 member must be called “…to active service authorized by the President or the Secretary of Defense for a period of more than 30 consecutive days under section 502(f) of title 32, United States Code, for purposes of responding to a national emergency declared by the President and supported by Federal funds.” Also, this protection is afforded to joint loans with both the service member and their spouse.

S4 – The CFPB published a report in December 2022 that service members have paid millions of dollars in interest needlessly and that regardless of the law’s requirement that they request protections and provide documentation such as orders, banks should be proactive. This includes not waiting for a service member to make a claim for the interest rate reduction and proactively looking for signs that they may qualify. One way to accomplish this is verification through the DMDC database mentioned above. It has been fine-tuned more and more for accuracy and to reduce update latency. Banks can verify individual service members as well as batch process requests. Many banks adopted the batch processing method and would check the banks CIF records against the database on a monthly or other basis. New hits could be shown on the bank’s records as on active duty immediately and individual verifications could be initiated with the customer if desired.

Another case example

Now let’s turn to a very recent and newly filed class action case involving the SCRA. The case is Nowlin et al v Wells Fargo Bank, N.A., and it was filed in the U.S. District Court for the Eastern District of North Carolina on March 20, 2024. What the suit alleges that the bank “…illegally and negligently charged thousands of American service members and military families excessive interest rates and fees and compound interest on principal balances that were improperly inflated due to the bank’s misconduct.” We only have the plaintiff’s 29-page lawsuit because the filing is so recent and Wells Fargo has not yet replied to it.

The lawsuit notes that Wells Fargo heavily markets itself as being dedicated to the military. Yet even after claiming this, the bank has charged covered borrowers, with covered loans, in excess of the 6 percent interest rate limit, and that it must forgive that interest difference because it cannot be deferred or added to the loan, and that the bank is not waiving all fees as required. As identified above late fees would be considered interest but we do not have a specific description in the reports available as to what those fees are.

By way of background, the service members discovered the problem in 2022. Actually, Wells Fargo appears to have discovered the problem before that. The bank attempted to correct the issue at least with some of the service members by sending them a check and a letter explaining why the check was issued. However, rather than just being grateful for the unexpected checks, some service members questioned the “misleading correspondence” that explained it. These customers began investigating the issues on their own and determined there were “wholesale violations” and that the bank, in fact. has improperly damaged thousands of military families in this process.

The suit accuses Wells Fargo of failing to reduce the interest rates on service members’ accounts, waive fees, comply with the SCRA’s requirement that interest rate deductions are effective on the date military orders are received, and forgive incurred interest. It also criticizes Wells Fargo’s internal systems and then indicates that there is a miscalculation of principal, interest, and payoff amounts. Anyone who has ever manually calculated loan disclosures or done a series of calculations where one is dependent on the next understands that if one of those calculations is incorrect, all those that follow and rely on the first will be incorrect. They have to be. Again, these are all from the plaintiffs’ filing.

In addition to the miscalculations, they accuse Wells Fargo of imposing more interest, fees and other charges than is allowed. And that makes sense if the bank was not providing the reductions of interest in a timely manner or subsequently waiving fees and other charges. There seems to be a bit of piling on in this filing, but I suppose they need to paint a picture of an incompetent bank that already has a soiled reputation.

It is particularly stated that the bank’s internal audit (or compliance) program discovered the errors, and the bank was aware it both violated the SCRA and the bank’s own military benefits program. In the correspondence the bank has not admitted to any violations. Wells Fargo issued reimbursement checks but failed to adequately describe the methodology used to calculate those refunds.

Since the suit mentions the separate Wells Fargo Military Benefits program, there should be discussion as to whether or not such a program is actually a contract with the service members who relied on it. Since a contract is not a federal issue, the contract side of the discussion would be based on state law, but then again, could this be elevated to an unfair, deceptive, or abusive act or practice which may be punishable under federal UDAAP regulations? The suit alleges that without this special program, many of those service members would have banked elsewhere. A comment such as this, compounded with allegedly not reducing interest and not waiving fees demonstrates financial harm. That should immediately raise UDAAP red flags.

Lastly, the suit, in my opinion, piles on to the claims of illegal activity as it states Wells Fargo is, “still in possession of certain funds belonging to” impacted service members. The suit seeks to define the class of plaintiffs as those service members banking at Wells Fargo as far back as January 1, 2006. That means the bank is potentially responsible for more than 19 years of records reviews, calculations and statements, etc.

As you read this, reflect on any comparable situation your bank has been involved with. As a preventive measure, consider your bank’s position if a similar claim was made. Has training been adequate? Could the bank have been more transparent without admitting guilt in the letters explaining what transpired? Should the method of calculating the reimbursements been better defined to those with a need to know? Would that transparency and clear math alone have prevented what could be a lengthy and costly litigation? And will the examiners immediately demand to know what happened and why, because this could elevate the risk to the bank in the case even more? Remember, according to Andy Z, a service member is as good as a protected class.

Legislation to watch

In closing, I will point out that on April 17, 2024, Florida’s Senator Rick Scott and Georgia’s Senator Jon Ossoff introduced a bipartisan bill to lower costs for service members and their families through their bipartisan SCRA Benefit Utilization Act to expand access to financial protections and benefits. According to a post by Senator Scott, “The bipartisan bill would expand existing financial literacy programs to include information about these protections; require the Department of Defense’s annual survey to include information about these programs; include benefit information on all activation orders; and require creditors to apply a 6 percent cap to all eligible accounts under their jurisdiction once a service member invokes their SCRA rights.” Companion legislation was introduced in the U.S. House of Representatives by Pennsylvania’s Congressman Matt Cartwright.

Expect more claims.

April 2024 OBA Legal Briefs

Update on the new CRA regulations
FDIC rule affects ATMs, websites, apps and more
Personal liability

Update on the new CRA regulations

By John S. Burnett

You know that the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation announced final revisions to their Community Reinvestment Act regulations in October 2023, and those rules were finally published on February 1, 2024, at 89 FR 6574 [https://www.federalregister.gov/d/2023-25797] in the Federal Register. You also probably heard that, although the new regulations will be effective April 1, 2024, most of the changes in the regulations are not applicable until January 1, 2026, and one provision on reporting data under the new rules won’t be applicable until January 1, 2027. There are also some amendments in the rule that will not have an effective date unless and until the CFPB’s “1071” Small Business Lending Reporting rule is given a “green light” by the courts.

Three provisions delayed at the 11^th hour

If your bank has been racing to add its CRA Public File to its website, you can relax a bit. The agencies have issued, just a few days before April 1, a supplemental interim final rule that postpones the applicability of revised section ___.43 until January 1, 2026. That postponement includes the requirements in revised section __.43 requiring that the written comments from the public, the list of bank branches, and those opened or closed be updated quarterly, as well as the quarterly progress update required in new section __.43(b)(5) for banks with less than “Satisfactory” CRA evaluation ratings.

Also postponed to January 1, 2026, is the applicability date of the facility-based assessment area provision in section __.16.

The third change clears up confusion on which CRA Notice version banks need to post. It will allow banks to continue to use the CRA Notice in the agencies’ “legacy” regulations — the notice they posted before April 1, 2024 — until January 1, 2026.

These three changes were made because they all include requirements based in part on other sections of the updated CRA regulations that will not be applicable until January 1, 2026.

Where your Public File must be available

Because the applicability date for the changes to the Public File requirement has been postponed to January 1, 2026, banks should continue to have their full Public File available at their main office and, if they have offices in more than one state, at one office in each state. The reduced-content Public File can continue to be maintained at other offices.

Banks with public websites can also post their Public Files on their public websites before January 1, 2026, but they will have to continue to make the information in their Public File available to the public, upon request and at no cost from either the website or a physical file, from now until January 1, 2026, and from their public websites on and after that date.

Other developments relating to the new CRA rules

You may also have heard that a number of banking and business trade groups filed a civil suit in the U.S. District Court for the Northern District of Texas challenging the final CRA rules and will request a preliminary injunction to enjoin the agencies from implementing and enforcing the final rules while the suit is pending. In the meantime, the agencies have shown no sign of relenting in their support for the rules, and there has been no news (as of this writing) that an injunction has been issued.

The court issued a preliminary injunction just before the April 1, 2024, effective date, enjoining the Fed, OCC, and FDIC from enforcing the revised CRA regulations, and pushing back the April 1 effective day and each applicability date (such as the January 1, 2026, and January 1, 2027, dates mentioned above) one day for each day the injunction remains in place.

FDIC rule affects ATMs, websites, apps and more

By John S. Burnett

There is another regulatory change with an effective day of April 1, 2024, with compliance required by January 1, 2025, that all FDIC banks should be working on. The FDIC re-wrote subpart A of its regulation on “Advertisement of Membership, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC’s Name or Logo (12 C.F.R. Part 328), and it affects every FDIC-insured bank in the nation.

While all of subpart A was re-issued, not everything is changing. Parts of the current rule were simply reorganized and shifted around to group similar topics. For example, current section 328.3 (“Official advertising statement requirements”) has been reissued as section 328.6 and otherwise largely untouched.

Paragraph 328.6(b)(1) in the new version adds “FDIC-insured” as a new optional short title that can be used in place of the official advertising statement “Member of the Federal Deposit Insurance Corporation,” joining the old standbys “Member FDIC” and “Member of FDIC” that have been approved for decades.

The current section 328.3(d) list of ten types of advertisements that do not require use of the official advertising statement or its alternate short form statements has not been changed in new section 328.6(d), except for the dollar amount in item 10 that was mistakenly not changed from $100,000 to $250,000 when the standard maximum deposit insurance amount (SMDIA) was officially changed in 2010. The new version of that paragraph, in section 328.6(d)(10) reads:

“(10) Advertisements which contain a statement to the effect that the depository institution is a member of the Federal Deposit Insurance Corporation, or that the depository institution is insured by the Federal Deposit Insurance Corporation, or that its deposits or depositors are insured by the Federal Deposit Insurance Corporation to at least the standard maximum deposit insurance amount (as defined in § 330.1(o)) for each depositor.”

Comment: One of the “frequent flyer questions” we get from bankers is a variation on “Do we have to include ‘Member FDIC’ on a [banner/business card/deposit receipt/signature card …]. The FDIC has not updated this list of “non-advertisements” in decades, and did not do so this time, either.

And, just to wrap up this discussion of new section 328.6, paragraph (f) reads the same as the version in current section 328.3—You can use a non-English equivalent of the official advertising statement in any advertisement, provided that the translations has been given prior written approval by the FDIC. To my knowledge, there is no list of accepted translations that can be accessed by banks. Instead, if your bank wants to use a translation, submit it in writing to the FDIC to obtain approval.

What is changing?

So, what in the rule IS changing? Here’s the short list. Explanations will follow:

Banks have new flexibility in placement of the FDIC official sign
New rules on signage in areas of bank offices in which non-deposit products are offered have been added
There are new areas where the official sign must be placed, such as on ATMs and similar machines
There are new requirements when deposit products are offered or accessible by consumers affecting a bank’s website, online banking portal, and mobile banking apps
New requirements for written policies and procedures

Flexibility in placement of the FDIC official sign. If insured deposits are usually and normally received at teller windows or statements, the insured depository institution (IDI) must display at each such teller window or station in its standard 7” by 3” size or larger, with black lettering on a gold background. Other color combinations are acceptable as long as the logo and text are in the same color and the background in a contrasting color. No change from the prescribed wording is allowed. So far, no change.

Here’s the first flexible requirement: If the IDI does not offer non-deposit products on the premises, one or more official signs can be placed at one or more locations visible from the teller windows or stations in a manner that ensures a copy of the official sign is large enough to be legible from anywhere in that area, in lieu of placing a sign at each station or window. Stretching this to the ridiculous, I suppose you could replace all the FDIC signs at your teller windows/stations with a single much larger version hung or painted high on the wall behind the tellers.

Another placement option is available for non-traditional deposit reception. If insured deposits are usually and normally received in areas of the premises other than teller windows or stations (customer service desks or other arrangements, such as café style banking like what you may have seen on some Capital One TV ads), the official FDIC sign must be displayed in one or more locations such that a copy of the official sign is large enough to be legible from anywhere in those areas.

An IDI may also display the official sign in other areas, except where non-deposit products are offered.

Non-deposit products offered on an IDI’s premises

In general, non-deposit products must be offered only in areas physically segregated from areas where deposit products are usually and normally accepted. The IDI must identify areas where activities related to the sale of non-deposit products occur and clearly delineate and distinguish those areas from the areas where insured deposit-taking activities occur.

At each non-deposit offering area, the IDI must continuously, clearly, and conspicuously display signage indicating that the non-deposit products:

Are not insured by the FDIC
Are not deposits
May lose value

Such signs may not be in close proximity to the FDIC’s official sign. The FDIC did not specify design or size requirements for the non-deposit sign (other than it be clear and conspicuous).

In limited situations where physical considerations present challenges to offering non-deposit products in a distinct area, an IDI must take prudent and reasonable steps to minimize customer confusion.

Signage on ATMs and similar machines

In the current rule, the phrase “automated teller machine” appears only once, as an example of a “Remote Service Facility,” on which an IDI may, but is not required to, place the official FDIC sign, with certain restrictions. The abbreviation “ATM” does not appear at all. These rules have been around for a long time, after all.

The new rule includes a new section 328.4 that “governs signage for insured depository institutions’ automated teller machines or other remote electronic facilities that receive deposits.” There are separate requirements (1) for these facilities that are placed in service before January 1, 2025, and receive insured deposits but do not offer access to non-deposit products; (2) for ATMs and similar facilities that receive insured deposits and offer access to non-deposit products; and (3) for ATMs placed in service on or after January 1, 2025.

Deposit products only, in service before 1/1/2025: An IDI may comply with the official sign requirement by doing either of the following:

Placing a physical official sign (the version placed at teller windows/stations) on the machine. Such signs are placed on the face of the machine or its enclosure, conspicuously visible to a user, and must be replaced if removed, degraded, or defaced to remain displayed “clearly, continuously, and conspicuously.” This option continues to be available for these machines after 1/1/2025 as long as they do not offer access to non-deposit products.
Displaying the “FDIC official digital sign” [see below] on appropriate screens of the ATM or similar facility as described below for machines placed in service after 1/1/2025.

Deposit products, with access to non-deposit products: By 1/1/2025, an IDI’s ATM or similar machine must clearly, continuously, and conspicuously display disclosures indicating that non-deposit products are not insured by the FDIC, are not deposits, and may lose value, on each transaction page or screen relating to non-deposit products. This disclosure may not be displayed in close proximity to the FDIC digital sign.

ATMs and similar devices placed in service after 1/1/2025: An IDI’s ATM or similar device that receives deposits for an IDI and does not offer access to non-deposit products and is placed into service after January 1, 2025, must display the official digital sign on its home page or screen and on each transaction page or screen relating to deposits.

The FDIC official digital sign

New section 328.5 (Signs for digital deposit-taking channels) introduces a new official sign to be used only in digital deposit-taking channels such as ATMs and similar devices [see above] and IDIs’ websites and web-based or mobile applications that offer the ability to make deposits electronically and provide access to deposits at IDIs. It looks like this:

When on a contrasting light background, the letters FDIC are in navy blue and the text to the right is black. If displayed on a dark background, the FDIC and text will both be in white. There are font and size parameters in paragraph (b) of section 328.5.

Requirements for use of the official digital sign on ATM screens were listed earlier. For other IDI deposit-taking channels as listed in the previous paragraph, the official digital sign must, after 1/1/2025, appear on

Initial or homepage of the website or application
Landing or login pages
Pages where the customer may transact with deposits

The official digital sign must be clearly legible across all IDI deposit-taking channels. [NOTE: This will be difficult on mobile banking apps displayed on most cell phones. It may require displaying the official digital sign with text wrapped on two (or more?) lines. I wrote to the FDIC about this problem over a month ago and have not yet had the courtesy of a response. In the prefatory text that accompanied the final rule at publication, the FDIC said it is reviewing options to provide IDIs with technical assistance or guidance to assist in implementing the FDIC official digital sign requirements.]

When placed on a web or app page, the official digital sign should be continuously displayed near the top of the relevant page or screen and in close proximity to the IDI’s name.

Displaying non-deposit signage on digital deposit channels

If a digital deposit-taking channel offers both access to deposits at an IDI and non-deposit products, the IDI must clearly and conspicuously display signage indicating that the non-deposit products: are not insured by the FDIC; are not deposits; and may lose value. This signage must be displayed continuously on each page relating to non-deposit products but may not be displayed in close proximity to the official digital sign.

One-time notice for customers related to third-party non-deposit products

If a digital deposit-taking channel offers access to non-deposit products from a non-bank third party’s online platform, and a logged-in bank customer attempts to access such non-deposit products, the insured depository institution must provide a one-time per web session notification (sometimes referred to as a “speed bump”) on the insured depository institution’s deposit-taking channel before the customer leaves the insured depository institution’s digital deposit-taking channel. The notification must be dismissed by an action of the bank customer before initially accessing the third party’s online platform and it must clearly, conspicuously indicate that the third party’s non-deposit products: are not insured by the FDIC; are not deposits; and may lose value. Nothing in this paragraph shall be read to limit an insured depository institution’s ability to include additional disclosures in the notification that may help prevent consumer confusion, including, for example, that the bank customer is leaving the insured depository institution’s website.

Written policies and procedures

Of course, your bank has a policy requiring compliance with regulations and procedures to implement the policy.

For the first time, the FDIC is now requiring that IDIs establish by January 1, 2025, and maintain written policies and procedures for compliance with this regulation. Such policies and procedures must be commensurate with the nature, size, complexity, scope, and potential risk of the deposit-taking activities of the IDI and must include, as appropriate, provisions related to monitoring and evaluating activities of third parties that provide deposit-related services to the IDI or offer the IDI’s deposit-related products or services to other parties.

Personal liability

By Andy Zavoina

Many years ago, I learned a valuable compliance lesson while making a presentation to my bank’s board. I always liked to tell them I was the conduit between the board and the examiners. Compliance information I provided management and the board flowed regularly and this allowed me to provide two-way communication with the examiners and the bank as a whole, and to insulate the board from ever getting a notice from our examiners asking them to attend a special meeting after an exam, and to bring with them their personal checkbooks as the monetary penalty that was owed had to come from them and not the bank.

In this particular meeting I was discussing Money Market Deposit Accounts. Like many banks before the Reg D amendments in early 2020, we had customers writing more than the allowed number of checks during a statement cycle. Remember the customer could make no more than six transfers or withdrawals, three of which could be by check, draft, debit card or similar order. We used to apply the “couch potato” rule that if they had to get off the couch to make the transfer and it was not convenient to do so, it likely did not count as one of the restricted transfers. If it was convenient, like writing a check, it counted. And those were days when lots and lots of payments were made by check.

Very often the New Accounts folks wanted an exception to the number of transfers rule because this was a good customer with large deposits. But Reg D defined this rule in the definition of a savings account and the money market deposits were savings accounts. There were no exceptions built in and while guidance was that they could have three inadvertent errors in a rolling twelve-month period, that wasn’t set in stone and a habitual violator had little room for exception. I regularly audited the accounts with excessive transfers and Operations had controls to always review them. We also had customers that business development and lenders had persuaded to move to our bank and these deposit accounts and the large balances were factored into the profitability of the relationship. According to most of those exception requests, the customers’ old banks never enforced that rule, so why should we? For the historical record, the requirement was that the following was allowed:

Up to 6 transfers and withdrawals per calendar month or statement period of at least four weeks:

to another account of the depositor at the same financial institution, or to a third party
by automatic or preauthorized transfer
by telephonic agreement (including FAX and data transmission) order or instruction

No more than 3 of these 6 can be by the following and payable to third parties

check
draft
debit card (Point of Sale)
similar orders

Most ACH debits are included in the 6/month limit.

Now you can understand what the requirement was and that these were “good” customers because “good” meant more digits in the average balance. The directors of the bank liked to consider themselves “good customers,” as well, and because of the close relationship and their position, they were better than the average “good customer.” Well, I had one director, as he explained it, several times, whose wife just picked up the wrong checkbook when she went shopping and I will tell you that any time that was the case, six was a very lonely number.

Back to my presentation. I had this problem with some accounts and officers wanting to grant exceptions in addition to the directors’ accounts. I’d recently read an article that I shared with the board. It was about a bank that chose to openly ignore the transfer limitation rule and it was going to accept the risk. The examiners in this article, at this point, were discussing the potential penalties. One of the examiners followed the train of thought that the board sets the direction of the bank. In this case the examiners considered going back to when the problems started and calculate the interest paid on all the money market accounts. The entire category was up to being reclassified as demand deposits. That means interest should not have been paid on those balances for that entire period [this predated the Dodd-Frank Act, which has since made interest on demand deposits legal] and the directors personally could be held responsible to repay the bank the interest that was paid on these accounts. That possibility raised every eyebrow in our board room, and I was assured of complete support and cooperation as I managed the money market accounts audits and my compliance program. My problem director also found a way to color code the checkbooks and there were no problems from his account after that.

The key issue that resonated with the board was individual liability. So often we bankers do not realize that we can often be held accountable for our own actions. That can include monetary penalties and some violations can warrant incarceration – jail time. That is a big step away from the status quo, cushy and prestigious positions some aspire to because they see less responsibility than there actually is. So, I like to provide reminders from time to time to directors, management, officers, and even lower-level employees that they must be aware that if their actions are poorly chosen, regardless of the reason, they are responsible for what they do. This helps with buy-in for the compliance program overall and in getting the resources necessary to do your job. It is not intended to be a scare tactic, but instead a reason to listen, to learn and to perform.

It never helps the bank or the employees, officers or directors to ignore the rules. Good compliance is good for the customers, the bank, and those who carry out those compliance rules with every disclosure they provide, and every Reg E claim they process and every account they service. People need to understand that they may think they are helping the bank by denying a valid Reg E claim, as an example, but they are not, and if they are truly violating the Electronic Fund Transfer Act, they may be putting themselves at risk.

Succinctly, violations, especially “willful” ones, are first the responsibility of the bank as it is the provider of services and the other party in the agreement with the depositor. But if an employee is acting outside the scope of their duties, they may have individual liability. You must ask, what training and education on the topic did the employee have? What was their motivation to do what they are accused of doing? This may be one reason Wells Fargo employees other than management were not held personally responsible for much of the “8 is great” new accounts production requirements and falsely opening new accounts under customers’ names without permission.

Examiners have focused more in the last few years on direct responsibility. When an entity like a bank keeps getting penalized, it has less personal meaning and the entity never went to jail and the people working there never pay out of pocket. So, let’s start a discussion based on a hot item, the Bank Secrecy Act. The law says, “willful violations of the statute or its implementing regulations by an institution and any of its partners, directors, officers, or employees are punishable by a civil penalty of $25,000 (or the amount of the transaction at issue, up to $100,000) per day for each day the violation continues and at each office or location where it occurs or continues.” The BSA is not new and has been a requirement since 1970. But it has been just the last few years that regulators have begun using the personal liability portion of the regulation. While this personal responsibility mindset is happening in other countries as well, in 2015 “the Yates Memo” from Deputy Attorney General Sally Yates announced a call to action for the Department of Justice (DOJ) to increase its efforts to hold executives personally accountable for corporate misdeeds. The Yates Memo stated it was “seeking accountability from the individuals who perpetrated the wrongdoing” as “it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public’s confidence in our justice system.” Has this been the case? Just a few months ago, on January 31, FinCEN assessed a $100,000 penalty against Gyanendra Kumar Asre. According to the press release, “Asre allowed millions of dollars in high-risk transactions to be processed without required anti-money laundering controls or reporting to FinCEN,” said FinCEN Director Andrea Gacki. “Today’s action serves as a reminder that FinCEN will not hesitate to take action against individuals when their conduct jeopardizes the integrity of our financial system.” In addition to the fine, Asre has a five-year ban on working at any institution subject to the BSA rules. There is more to this than just a bad BSA officer. As the BSA Officer at a credit union, Asre was responsible for detecting and preventing money laundering activities. But it gets more personal, and the credit union should have increased oversight because of this relationship. Asre had his own money services business and failed to register it with FinCEN. That violation was compounded by inadequate AML program management that allowed millions of dollars in high-risk transactions to be conducted through the system.

And I did mention incarceration as a penalty available to the DOJ and regulators. Two of the earlier actions go back to 2015 when a then former BSA officer was sentenced to two years in prison and forfeited almost $1 million and another was fined $1 million and threatened with a permanent ban from working in our industry. FinCEN assessed a civil money penalty against Thomas E. Haider. It was alleged that over a five-year period at MoneyGram, he failed to implement and maintain an effective AML program and neglected to comply with BSA requirements to report suspicious activity despite complaints about scams being operated through the MoneyGram system. In the second case, again it was not a banker, but Charlie Shrem, who was both Founder and BSA Officer for BitInstant. This was a Bitcoin exchange and Shrem did correctly register his company as a MSB, but he was allegedly helping another unregistered company in its operations. While Shrem had implemented an AML compliance program, he allegedly failed to file SARs on the illegal activity being conducted by the company he was aiding and abetting. And not related to these, but to personal liability, at the end of March 2024 Sam Bankman-Fried, the former CEO of cryptocurrency exchange FTX, was sentenced to 25 years in prison for crimes of fraud and conspiracy.

Now let’s look at nine separate actions involving personal liability actions against employees of the Bank of England – in England, Arkansas, just for clarity. These were FDIC actions in January 2024. The nine employees actually worked for the Bank of England loan production office in a Detroit suburb. They were accused of using bait and switch tactics among other methods to deceive mortgage applicants. The violations were charged for actions going back to 2018 until 2020. Examples of the deceptive techniques used included misrepresenting actually available loan pricing for mortgage loans, misrepresenting to consumers that they could skip two months of their mortgage payments, and further misrepresenting the loan production office’s affiliation with the Department of Veterans Affairs. These were considered unsafe and unsound practices and were done in part for personal gain. One might assume this was based on loan production but that was not specified in the orders.

The (now former) branch manager was penalized for failing to ensure those working for him were not violating Section 5 of the FTC Act and were not committing the misrepresentations expressed above. He was fined $100,000 and banned from banking. The former sales manager was also banned for the same misrepresentations and fined $12,000. Five other employees were fined a total of $163,500 in amounts ranging from $1,000 to $110,000. The actions they were accused of included luring consumers to apply for mortgage loans with low, unavailable loan prices that would not be honored and subsequently increasing the price before closing the loan, and misrepresenting to consumers that they could skip two months of mortgage payments and by misrepresenting to consumers the bank’s affiliation with the Department of Veteran’s Affairs. Two others were not fined but were recognized for their roles and required remedial training. The fines totaling $275,500 cannot be paid or reimbursed by the bank. These are personal fines.

While employees have personal liability for their own actions, the bank has the responsibility, the obligation, to ensure they understand the requirements of what they do and why. “This is the way we’ve always done it” is not good enough. If you are interested in reading more on these last enforcement actions, links may be found in the BankersOnline Top Stories pages, on February 26, 2024, under the heading of the FDIC January enforcement actions.

March 2024 OBA Legal Briefs

OBA Feedback
FCRA and HR
Employees, Social Media, and Ownership
Federal Preemption in Question

OBA Feedback

By Andy Zavoina

The OBA has had numerous requests about what can be done when a credit report is accessed on a consumer and that consumer becomes inundated with calls from other lenders competing for the loan or to offer ancillary services. The consumers tend to blame the bank and it is not your fault, but what can be done?

The calls are not new or innovative – just more prevalent in today’s market. This practice known as “event-based trigger marketing,” is legal under the Fair Credit Reporting Act (FCRA) even though it is often an annoyance to the borrower and then to the bank when you have to field complaints. The relationship between the bank and its customer can be harmed because the customer associates the unwanted solicitations with the bank. Bank customers across the country have reported a sharp increase in recent years in various unwanted calls, text messages, emails and other solicitations originating this way.

Based on my personal recent experience after a credit inquiry, many competitors immediately contacted me, the applicant, in hopes they could offer better terms than I already had pending, and the offers continued even after consummation. Further, vendors offering complimentary products began contacting me with references specifically to that recent mortgage loan. In my case it was a mortgage, and the offers (even a year later) are for a home warranty and specifically reference the XYZ Bank’s mortgage. In other cases, the offer may be for an extended car warranty for a recent car loan or a refi with emphasis on skipping a payment or lowering the monthly payment. The solicitations attempt to co-brand off the lender’s good name by referencing the lender and in some cases using the lender’s logo or font style. Unless the reader looks at the fine print, they don’t see the “not affiliated with…” disclaimer to avoid Unfair or Deceptive Acts or Practices (UDAP) or other issues.

We recommend advising your customers it is through no fault of the bank that this is happening and the best way to avoid the contacts is to opt-out at the credit bureau. Banks may even want to be proactive as the advice does little once the horse has left the barn.

There is a website consumers can visit, www.optoutprescreen.com or they can call 1-888-5-OPT-OUT (1-888-567-8688) that allows individuals to opt out from receiving these calls. The major credit bureaus operate the phone number and website and the standard opt-out is for five years. Using the same contact methods, they can opt out permanently but to do so must sign and return the Permanent Opt-Out Election form (which they get online). Your consumer may be advised to consider that as an option. Calling the opt-out line or visiting the site will only stop prescreened offers that are based on lists supplied by the major credit bureaus. Consumers could continue to receive offers for things like credit and insurance based on lists from other sources. Opting out also won’t end mail from local merchants, religious groups, charities, professional and alumni associations, and companies that the consumer already does business with. To stop mail from groups they must contact each sender directly.

On a related note, in August 2023, the White House announced a crackdown to protect consumers from third party data brokers. CFPB Director Chopra announced plans for new rules that would strictly limit the types of consumer data that may be sold by businesses and ensure that data brokers comply with the FCRA. Note that the recent complaints our bankers have been receiving will not directly benefit from this as the activity is not out of compliance with the FCRA, but it is a start.

There were actually two proposals being discussed. The first of the new rules would make a data broker that sells certain types of consumer data as a “consumer reporting agency.” The CFPB is considering a proposal that would generally treat a data broker’s sale of data regarding, for example, a consumer’s payment history, income, and criminal records as a consumer report, because that type of data is typically used for credit, employment, and certain other determinations. This would trigger requirements under the FCRA for ensuring accuracy and handling disputes of inaccurate information. It would also prohibit misuse of the information.

The second proposal addresses confusion about what is referred to as “credit header data” on a consumer report. The use of personally identifiable information is a necessity to data brokers and this credit header data is on reports sold by the big three bureaus, Equifax, Experian, and TransUnion. This header information includes key identifiers of the consumer, such as their name, date of birth, and Social Security number. The CFPB wants to clarify the extent to which credit header data constitutes a consumer report, reducing the ability of credit bureaus to impermissibly disclose this sensitive contact information that can be used to identify people who don’t want to be contacted. This is viewed as especially important to survivors of abuse.

And going full circle back to the original issue of event-based trigger marketing, in February 2024 the ABA Banking Journal reported that the ABA urged Congress to pass legislation to ban the sale of the consumer contact information to lenders who then inundate the consumers with unwanted solicitations. The ABA expressed support for S. 3502 (which was introduced and referred to the Senate Banking Committee) and H.R. 7297 (which has only been introduced so far), both of which would eliminate abusive event-based trigger marketing and limit prescreened credit offers to consumers who actually consent or who have a preexisting relationship with a bank.

So, what can you do today as we await proposals and bills to become effective? In addition to the www.optoutprescreen.com or call 1-888-5-OPT-OUT (1-888-567-8688) referral which the Federal Trade Commission recommends, the bank can take a proactive posture. If the customer is not looking for new credit or insurance from other than your bank, they may want to opt out for the five-year period or permanently. Again, these apply to prescreening solicitations only.

Additional resources the consumer may consider include the Do Not Call (DNC) list and the Direct Marketing Association (DMA). The National Do Not Call Registry was created to stop unwanted sales calls. It’s free. Consumers can register their home or cell phone number. They need to go to DoNotCall.gov or call 1-888-382-1222 from the phone they want to register.

Consumers may also register at the DMA website, DMAchoice.org to reduce promotional mail from marketers. It won’t stop all promotional mail, however, and they will have to pay a $4 processing fee, but the registration will last for 10 years.

DMAchoice.org also has an Email Preference Service that lets people get fewer marketing emails. Registration is free and will last for six years. Bear in mind none of these actually stop scammers and marketers who ignore the laws and the opt-outs, DNC list or DMA exclusions.

Banks with these complaints may want to produce a brochure, or web page they make available and can refer customers to, explaining what is happening. If I were creating such a consumer resource, I would hit these thoughts as I have highlighted them here. Certainly, you would want to elaborate on the points below based in whole or in part on the information above to meet your taste.

Why am I getting these calls after applying for a mortgage?
When a consumer applies for a mortgage, the lender accesses the credit report for the applicants. Because the lender has to have a valid reason to get that credit report, the credit bureau now knows this consumer is looking for a new loan. Credit bureaus have to make money. One way to do this is to sell your contact information to other lenders who make loans similar to what you are applying for. Those lenders approach the credit bureaus and agree to buy a list of prospects on a very regular basis. This allows those other lenders to strike while the iron is hot. This may also facilitate the consumer getting the best deal available if they want to compare terms and pricing. Unfortunately, the lenders buying the lists often do not have a better deal, but go into a hard sale posture. To make matters worse, there may be multiple lenders with the same agreement, which reduces the ability to comparison shop and frustrates you with all the calls, emails and text messages followed by snail mail offers.
I like the terms I’m getting. How do I stop these multiple offers from pestering me?
Unfortunately the credit bureaus want to make money and legally selling personal data is one way they accomplish that. By getting on the Do Not Call list, the Opt-Out Prescreen list and the Direct Marketing Association opt-out list, you can reduce future contacts. But what is done now, is done. Using voicemail and other filters on the media you use may help reduce the bother, but it will not eliminate it. In some cases, several types of solicitations may be forthcoming for a year or more, so actually getting on the opt-outs now can still help.

FCRA and HR

By Andy Zavoina

It isn’t common that we in compliance get involved with Human Resources (HR) to check on the controls they use for compliance, but it is time to ensure the checks and balances are all in place. Both of these departments are highly regulated, and, in this case, Compliance should have a stronger grasp of the Fair Credit Reporting Act (FCRA), which is a key crossover regulation between Compliance and HR. I will provide the basic requirements here in the event Compliance has not yet but needs to incorporate HR into its risk assessment and audit calendar. I will say that a part of my FCRA annual audit included a review of the credit bureau bill. It was separated by terminal, so I knew which departments accessed the files. Then it was a case of finding the approved, denied, or withdrawn loan or employment file. One year, I discovered that HR was routinely accessing credit reports for employees being considered for promotion, and this was done without any notice to the employee before or after the decision was made. I considered it adverse if an employee was taken out of the promotable list due to information from the credit report or worse, if action was taken to demote or terminate employment. That had not happened, but the procedure adopted was simply wrong.

The FCRA imposes several restrictions and disclosure requirements on HR, just as it does loan staff, as to accessing, use and the impact of decisions made based on credit report data. Before HR obtains a credit report, it must give notice to an applicant or employee that it plans to pull a consumer report on them, and that it might use the consumer report information in its employment decisions. HR must also get the applicant or employee’s written approval to obtain the consumer report. The notice and authorization can be on the same page and must be in stand-alone format and not part of an employment application or other document, and it may not include any other authorizations or waivers.

If the bank uses information from the consumer report in its decision to take adverse action against an applicant or employee such as deciding not to hire, or to terminate or demote them, the bank must provide the applicant or employee with a disclosure before the adverse action occurs. This disclosure must contain:

A) A notice that the bank is contemplating adverse action;
B) A copy of the consumer report; and
C) A copy of the publication, “A Summary of your Rights Under the Fair Credit Reporting Act.”
In addition, the bank must give the applicant or employee a reasonable period of time to respond to the notice of contemplated adverse action. Typically, five business days is the minimum period that is recommended. During this time, the bank should not fill the open job position or take other action that would constitute an adverse employment action against the applicant or employee. If the applicant or employee provides additional information, the bank must consider it, but is not required to reverse the decision. Much like a Reg B Adverse Action is intended to inform an applicant of the reasons for denial so they can correct the deficiencies over time and reapply, this is intended to provide time to correct a deficiency and secure that position which obviously cannot be held open indefinitely. It provides a short window for the applicant to explain or correct obvious errors.

After HR takes adverse action based on a Consumer Report, it must give the applicant or employee notice of the actual adverse employment action. This notice should be in writing and must include:

1) The name, address, and telephone number of the Consumer Reporting Agency that provided the Consumer Report;

2) A statement that the Consumer Reporting Agency did not make the adverse employment decision and cannot give specific reasons for it; and

3) Notice of the applicant or employee’s right to dispute the accuracy or completeness of the information the Consumer Reporting Agency provided, and the applicant or employee’s right to get a free copy of the report from the Consumer Reporting Agency if the applicant or employee asks for it within 60 days.

HR may contend that the necessary forms and disclosures above are all provided by a vendor or the Credit Reporting Agency itself. But these forms could still contain errors or be outdated and therefore should be reviewed for compliance just as loan forms are all reviewed for compliance and accuracy. The bank is still the one liable for deficiencies.

In this particular case the form in question, “A Summary of Your Rights Under the Fair Credit Reporting Act,” which is often referred to as a “Summary of Your Rights” disclosure is in Reg V, 12 CFR Part 1022 from the CFPB under Appendix K. The bank must provide the employee or applicant with a Summary of Your Rights in the form prescribed by the CFPB. We all know forms change from time to time.

In March 2023, the CFPB published an updated “A Summary of Your Rights Under the Fair Credit Reporting Act” form and the required usage begins March 20, 2024. The updated form added verbiage designed to alert the applicant or employee to his or her rights to place a “security freeze” on their credit report from a consumer reporting agency and the contact addresses for certain agencies such as the OCC were updated. This security freeze will prohibit the consumer reporting agency from releasing information in the job applicant’s or employee’s frozen credit report without their express authorization, and the OCC address was changed to include P.O. Box 53570, Houston, TX 77052 instead of the street address at 1301 McKinney. That is one way to know you have the current form; just look for the section using the term “Security Freeze.”

In researching the form for this article, I found many instances of the old form first. Because the new form (linked below) was optional for the last year but is soon to be mandatory (again as of March 20, 2024) it is a last opportunity to ensure your HR department is using the correct version.

New Summary Form linked from the BOL Regulations pages: https://www.bankersonline.com/regulations/12-1022-appk

Employees, Social Media, and Ownership

By Andy Zavoina

Does your bank outsource its social media work or have one or two enthusiastic employees who just “get it” and love posting on social media on behalf of the bank? If so, this brief article is for you because the bank needs to worry about work product and copyright and ownership of these accounts. If there isn’t a clear path on who owns these social media accounts, there needs to be.

JLM Couture is a company dealing in bridal gowns, bridesmaid dresses and the like. Like a bank or any other business, JLM sees value in a social media following. In this case JLM had a contract employee who managed, among other things, social media for the company. In JLM Couture, Inc. v. Gutman, the company and the designer had an employment contract. This contract was detailed and addressed most of their relationship, but not social media accounts. As you will imagine, there was a parting of the ways and a lawsuit that has gone on for over two years.

The case has gone from federal district court to the 2nd Circuit and back again. One issue was for work product and who owned the social media the employee was doing for JLM.

When the relationship ended, JLM claimed ownership of the designer’s Instagram, TikTok and Pinterest accounts. They argued that she created them in her capacity as an employee and it was a work product. Gutman argued that she created them in her personal capacity, they were registered in her name, and she did not pass ownership to JLM by agreeing to use her accounts to market JLM’s products. Part of JLM’s argument was that ownership passed because a provision in their contract with Gutman which provided that all “designs, drawings, notes, patterns, sketches, prototypes, samples, improvements to existing works, and any other works conceived of or developed by [the designer] in connection with her employment with the Company involving bridal clothing, bridal accessories and related bridal or wedding items,” are works for hire and the exclusive property of JLM.

Originally, the federal district court gave JLM control and created a six-factor test that it developed specifically for social media ownership disputes. On appeal, the 2nd Circuit disagreed with this methodology and ruled that traditional property law principles would apply. The 2nd Circuit noted that if Gutman created the accounts using her personal information and for her personal use, then she is the owner of the accounts. Gutman could have transferred ownership to JLM by contract but noted that transferring rights to content posted on the account is different from transferring ownership.

Some lawyers would potentially read this differently, as the 2nd Circuit did when it said the social media did not qualify as “other works” because under the general principle of contract interpretation “the ordinary meaning of general terms at the end of a list must be interpreted to embrace only objects similar in nature to those objects enumerated by the preceding specific words.” In this case, the items listed are closely related to fashion design and are things that might be sold to the public, but social media accounts are far separate from those.

My read on the case is that one party felt it could broadly interpret the agreement it had with an employee and say the company owned these accounts. But legally that was not as clearly stated as JLM believed. More than two years of lawyer costs and court fees have been billed and the case goes on. Social media accounts your bank feels it owns have value and should be in the bank’s name and tied to bank-owned email accounts and paid for (as necessary) by the bank. They should not be in an employee’s name just because that employee opened the account. Postings should not be mixed between personal and business purposes unless they are the same.

In my area, a successful high school athletic director and head football coach enjoyed many years of success with his team. Early on in these successful seasons he convinced the school board that they needed a new identity, and they became known as the “Bulldawgs” or the “Dawgs” for short, they play at Bulldawg Stadium, and he tweaked the logo that is virtually everywhere. But winning seasons don’t last forever, and the coach and school have parted ways. As he collected his severance, he reminded them that he would be generous and allow them to use the name and logo he copyrighted but only for a brief time. After that they could change it or license the rights from him. We will have to see how that goes, but years of litigation are not really an option and should not be for your bank either.

Federal Preemption in Question

By Andy Zavoina

The dual banking system we enjoy provides that banks can, in general, choose to be chartered as a national or a state bank. This choice leads to determining who a bank’s primary regulator will be and what laws and regulations will apply to it. National banks still have to follow some state laws and state banks still have to follow some federal laws, so it is never “all or nothing” but there are advantages to and disadvantages to each.

National banks are still subject to many applicable state laws such as those affecting contracts, property rights, and debt collection, when those state laws do not conflict with the purpose of a federal law. Nonetheless, federal law preempts state laws that interfere with the powers of national banks. The doctrine of federal preemption is grounded in the Supremacy Clause of Article VI of the Constitution and the Supreme Court has held that, “under the Supremacy Clause . . . any state law, however clearly within a State’s acknowledged power, which interferes with or is contrary to federal law, must yield.” The Supreme Court held that the National Bank Act of 1864 (NBA) preempts state laws that “significantly interfere” with a “national bank’s exercise of its powers.” In some cases, a federal law explicitly says it will preempt others and in some cases this is implied. The Office of the Comptroller of the Currency (OCC) is the primary regulatory agency to oversee national banks and it has taken a broad view of the preemptive effects of the NBA.

One question that is currently being posed is to what degree does a state’s law have to “significantly interfere” to be overridden by a federal law?

In a case with the decision still pending, Bank of America N.A v. Riffard is one of two we will discuss arguing preemption. In this case, Bank of America believed the Wisconsin Consumer Act (WCA) did not apply to it. Jean-Pierre Riffard had two separate credit cards from Bank of America and defaulted on the monthly payments on each account. Bank of America sued Riffard for breach of contract due to his nonpayment. Riffard argued the case should be dismissed because Bank of America never provided him with notice of his right to cure before accelerating his debt and suing him, as required by the WCA. Bank of America argued the NBA preempts the WCA.

The WCA is a state law that regulates consumer credit transactions and debt collection. Under section 425 of the WCA, a creditor must give a consumer notice of any default on a credit account and an opportunity to cure the default.

The Wisconsin circuit court hearing the case agreed with Bank of America but noted there are differing results from the court on this matter. The Eastern District of Wisconsin held the WCA provision is not preempted in Boerner v. LVNV Funding LLC (2019). Contrary to this the Western District of Wisconsin held the WCA is preempted in Lako v. Portfolio Recovery Associates (2021). In Lako, the district court concluded “the WCA goes beyond debt collection and sets conditions on the lending relationship between the creditor and the borrower.” The court also noted in Lako the WCA not only prohibits the debt collection, but also acceleration of the debt until state required notices are made.

Last November the case was heard by the Wisconsin Court of Appeals. Riffard characterized the WCA’s notice-to-cure provisions as debt collection rules that are not preempted while briefs in support of Bank of America argued that applying cure notice requirements to national banks would subject them to each state’s regulatory requirements and defeat the NBA’s purpose of having a uniform regulation for national banks.

On February 27, 2024, the Supreme Court of the United States (SCOTUS) heard oral argument in Cantero v. Bank of America, N.A. In this case the question is whether the NBA preempts a New York statute requiring banks to pay interest on mortgage escrow accounts. The 2nd Circuit ruled that the application of the New York statute to national banks is preempted by the NBA, and this reversed a lower district court ruling.

The OCC has provided preemption regulations for the benefit of national banks so that each can rely on these rules and choose not to comply with many of a state’s consumer protection regulations. As SCOTUS contemplates this Cantero case, if it does not believe the NBA preemption applies to the New York law, it will directly call into question the validity of the OCC’s preemption regulations. This would mean that all national banks should then reconsider any preemption laws it is taking advantage of which could also be questioned and determine whether the bank must now comply with those state consumer protection laws and regulations. If SCOTUS provides an adverse ruling to Bank of America, it could be adverse to all national banks and trigger a wave of actions by state Attorneys General as well as private litigation against national banks based on violations of state consumer protection laws and regulations, as in the Riffard case. Would these actions be limited to a SCOTUS decision date forward, or be retroactive and open to many class action cases? There is no crystal ball that could force the probable causes and effects of such an action, but in researching this article I did come upon an October 12, 2000, article in The Oklahoman addressing one charter switch by the then new Peoples Bank of Oklahoma. The article stated, “Within 30 days, the bank… had virtually doubled its monthly income. Its lending limit had climbed from 15 percent to 30 percent of its capital. In addition, the bank’s annual regulatory fees had dropped significantly.

“We’ll save six or seven thousand dollars a year just on the fees we pay,” board member Randy Wright said. “That’s almost a month’s income. With a small bank like ours, every dime counts.” The article went on to point out, “For Peoples Bank, the decision to convert was purely financial.”

For other banks, like Arvest – which converted four banks this summer – the change had less to do with economics. “We eliminated two regulators. We did it to simplify things,” said Neil Schemmer, chief executive officer of the recently converted Arvest Bank in Norman. “Until this summer, all but five of the 16 banks in Arvest’s holding company were state-chartered banks,” Schemmer said. “Now, all but one are.” There may be many reasons for banks to make charter choices. If there are fewer NBA protections, that may affect banks’ consideration of a national bank charter choice.

OBA Legal Briefs Archive – January 2005 – April 2025

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