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Legal Ease is the weekly Q&A from the IBAT Bottom Line.
Latest Additions to Legal Ease:
Lending, Flood Regulations: Flood Zone Discrepancies
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Is there anything in the flood regulations that prohibits a bank from closing on a loan when they know that the zone in their determination and the zone on the insurance policy declarations page conflict? The Bank's determination indicates zone AE and the insurance company indicates zone X; thus, they can only insure for X?
Any discrepancy should be addressed and resolved before the loan is closed, or the policy should be written at the most hazardous rating. FEMA issued a letter in 2008 (extracted below) that indicates that in the event of a discrepancy, the most hazardous rating must be used unless the building qualifies for the "grandfathering rule." At that point, it is the policyholders responsibility to dispute the flood zone determination by requesting a Letter of Determination Review.
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Lenders obtain flood zone determinations for the buildings for which they make loans or hold mortgages. Flood zone determination companies report to lenders the flood zone information for the building based on the current Flood Insurance Rate Map for each community. When the flood insurance policy declarations page for the building shows a flood zone other than the one reported on the Standard Flood Hazard Determination Form, lenders are concerned that the policy may be incorrectly rated.
The Department of Homeland Security, Federal Emergency Management Agency (FEMA), understands flood zone discrepancies are occurring because some WYO companies are no longer accepting the flood zone determinations provided by lenders to rate flood policies. WYO companies are either providing their own flood zone determinations or requiring agents to determine the flood zone. As a result, lenders are frequently finding the flood zone indicated on a flood insurance policy declarations page is different from the lender’s flood zone determination, and they are seeking resolution.
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Effective May 1, 2008, WYO companies and the NFIP Servicing Agent are hereby directed to use the most hazardous flood zone for rating when presented with two different flood zones, unless the building qualifies for the “grandfathering rule.” If the policyholder wants to dispute the high-risk flood zone determination, procedures are available, including the Letter of Determination Review (LODR) and the Letter of Map Amendment. These are cited in the Code of Federal Regulations, (CFR) at 44 CFR 65.17, Review of Determination. More detailed information concerning the LODR process is available from the FEMA website.
Note: Flood hazard areas identified on the Flood Insurance Rate Map are identified as a Special Flood Hazard Area (SFHA). SFHA are defined as the area that will be inundated by the flood event having a 1-percent chance of being equaled or exceeded in any given year. The 1-percent annual chance flood is also referred to as the base flood or 100-year flood. SFHAs are labeled as Zone A, Zone AO, Zone AH, Zones A1-A30, Zone AE, Zone A99, Zone AR, Zone AR/AE, Zone AR/AO, Zone AR/A1-A30, Zone AR/A, Zone V, Zone VE, and Zones V1-V30. Moderate flood hazard areas, labeled Zone B or Zone X (shaded) are also shown on the FIRM, and are the areas between the limits of the base flood and the 0.2-percent-annual-chance (or 500-year) flood. The areas of minimal flood hazard, which are the areas outside the SFHA and higher than the elevation of the 0.2-percent-annual-chance flood, are labeled Zone C or Zone X (unshaded).
Published: 05/13
Lending, Administrative Fee: Fees and APR Tolerance
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I just found out that some of the lenders have been charging a $30 administrative fee on consumer loans not secured by real estate. The max administrative fee is $25 for loans in excess of $1000, and $20 if the loan is $1000 or less. I checked the APR on the 1st one I found and it’s within 0.125 tolerance. Do we still need to refund the fee? I think we’d get ourselves into a UDAAP situation if we don’t correct this.
Agreed! Refund the excess fee - because it is not permitted. This is not a Truth in Lending or a UDAAP issue. Rather it is a violation of Chapter 342 of the Texas Finance Code. The tolerance threshold is an accuracy standard in TILA and does not address the permissibility of fees or charges under state law. The APR tolerance only determines that the annual finance charge was correctly calculated. Not including a fee or charge can certainly result in the APR being over or understated and result in a reimbursement - but again that does not address the permissibility of the fee or charge under state law. In this case the amount of the fee is simply not authorized - and if it not authorized (or only authorized up to a certain amount) it can't be charged. If the only issue was the APR tolerance, a lender could conceivably charge any disallowed fee as long as it was included and disclosed in the APR.
There is a cure provision at §349.201 of the Texas Finance Code:
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Sec. 349.202. CORRECTION OF VIOLATION OF FAILURE TO ACT OR PERFORMING PROHIBITED ACT RESULTING IN LIMITED LIABILITY. (a) Liability to an obligor for a violation of this subtitle to which Section 349.003 applies is limited as provided by this section if, after the 60-day period described by Section 349.201(a)(1) but before the time the obligor gives written notice of that violation or files an action alleging that violation, the violation is corrected as to that obligor by:
(1) the performance of the required act; and
(2) giving to the obligor written notice of the violation as provided by Section 349.204.
(b) The liability of any person for the violation to the obligor as described by Subsection (a) is limited for each transaction to an amount that does not exceed one, but not both, of the following:
(1) the actual economic loss suffered by the obligor as a result of the violation; or
(2) the time price differential or interest contracted for, charged, or received, not to exceed $2,000, if:
(A) the violation was material; and
(B) the violation induced the obligor to enter into a transaction that the obligor would not have entered if the violation had not occurred.
(c) A person who is liable under Subsection (b) is also liable for reasonable attorney's fees set by the court.
(d) In a judicial proceeding under Subsection (b)(2), the court determines whether the violation is material and the finder of fact determines whether the violation induced the obligor to enter into the transaction.
Acts 1997, 75th Leg., ch. 1008, Sec. 1, eff. Sept. 1, 1997.
Published: 05/13
Operations, Wire Transfer: Name / Account Number Inconsistency
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One of my customers entered a wire back in February through their online banking, and we entered the wire exactly as they had submitted. The wire was supposed to be going to one of my customers vendors. The vendor claimed that they never received the funds, so we gave them the fed reference number to track. Turns out that the account number that my customer entered was one digit off. The funds were deposited into an individual's account, and that individual withdrew the money and closed the account. I sent a fed message asking for the funds to be returned, because the account name and account number did not match. They then responded that they could not return the funds, because the funds were no longer available. Is there anything else that we can do?
There is not much you can do and the liability is your customer's. That issue is addressed in 12 CFR 210.27 - Reliance on identifying number (part of Regulation J).
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(b) Reliance by a Federal Reserve Bank on number to identify beneficiary. A Federal Reserve Bank, acting as a beneficiary’s bank, may rely on the number in a payment order that identifies the beneficiary, even if it identifies a person different from the person identified by name in the payment order, if the Federal Reserve Bank does not know of such an inconsistency in identification. A Federal Reserve Bank has no duty to detect any such inconsistency in identification.
The same approach is addressed in the Texas Business and Commerce Code, section §4A-208. Most banks do not check both the name and the account number because if the bank checks both, as you see in the language above, there is a question of liability if they in fact become aware of an inconsistency. A bank may rely upon the information provided by the customer, and numbers control over names. While that remains the case now, the final foreign remittance rules promulgated under Regulation E could potentiality change that.
Do use this as an opportunity to review your Wire Transfer Agreement language. Check to ensure that language in your forms includes information to the effect that you and or any receiving bank may rely upon the account number only and that your bank is not responsible for inconsistencies between the named beneficiary and the account number.
Finally, the person who received the funds in error is not entitled to them under the legal concept of "unjust enrichment". Your customer could bring a claim against that individual to recoup the funds in question.
Published: 04/13
Deposit Accounts, Memorial Accounts: Style and TIN/EIN for Memorial Accounts
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We have a customer who wants to open an account. This account will be titled Jane Doe Scholarship (Jane Doe is deceased). The scholarship account will be funded with donations from individuals and businesses. Will the account need to have its own unique taxpayer ID number? Is this a trust situation? Or can this simply be an account by a person, using their own ID # and titled Jane Doe Scholarship fund?
“The road to hell is paved with good intentions” - I am always reminded of that quote when I think of disaster / memorial accounts.
There are two concerns when you are thinking about this type of account: making sure it is a legitimate undertaking (because contributors will assume you have verified the legitimacy of the account); and that the account is properly documented.
The first issue is largely how familiar you are with who is opening the account and what it is for. That is as much a question of your appetite for reputation risk as it is anything else. Who is opening the account? Who is going to benefit from the account? Who is going to be responsible for how the funds are distributed? If it is for the benefit of a competent adult, are they aware of the account and do they approve? If it is for a minor, are the parents or guardian of the minor aware of the account and do they approve? Those are all questions I would want to answer.
Secondly – how do you set up the account? It needs some sort of formal trust agreement that outlines issues like fiduciary responsibility and management of the account. The IRS has issued a policy that it will not issue a TIN/EIN to a trust without an legal trust document, so whose TIN or EIN is going to be used if you do not use a formal trust agreement? The first line on the account needs to match the TIN / EIN used so there is that issue as well. If it is not styled properly one could argue it is the “property” of the individual on line one with the matching TIN / EIN, so what if a levy or garnishment comes in for that named individual? All that means it needs its own TIN/EIN.
Remember the person opening the account is not the owner and should not be listed as such. What happens if the person who sets up the account steps down or decides they don't want to be involved anymore? These are the kinds of questions that can only be answered with a formal trust document of some sort.
The proper way to do it is by creating a trust as a separate legal entity that owns the funds. The trust would have it own TIN/EIN, and the account style would be the name of the trust on line 1 with the name of the trustees disclosed on lines below.
A more palatable approach may be to have a church or local civic organization set-up an account using their own TIN/EIN and let them manage the account.
Re-published 4/13
Legal Ease Archive
Comments & Questions
If you would like to comment on legal topics or if you have questions please Shannon Phillips at (800) 749-4228 or e-mail sphillips@ibat.org.