Legal Ease is the weekly Q&A from the IBAT Bottom Line. Go to the Legal Ease Archive.
Latest Additions to Legal Ease:
Is a bank shareholder entitled to a copy of a list of shareholders of the bank? How about the board meeting minutes?
First question - Yes they have a right to "inspection" of the list of shareholders, but have no specific right to a copy of the list. Second question - Yes, provided they have been a shareholder for at least 6 months or hold at least five percent of the outstanding shares.
Sec. 21.354. INSPECTION OF VOTING LIST. (a) The list of shareholders entitled to vote at the meeting prepared under Section 21.372 shall be:
(1) subject to inspection by a shareholder during regular business hours; and
(2) produced and kept open at the meeting.
(a-1) If a meeting of the shareholders is held by means of remote communication, the list must be open to inspection by a shareholder during the meeting on a reasonably accessible electronic network.
(b) The original share transfer records are prima facie evidence of which shareholders are entitled to inspect the list.
Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.
Amended by: Acts 2005, 79th Leg., Ch. 64 (H.B. 1319), Sec. 53, eff. January 1, 2006.
Sec. 21.218. EXAMINATION OF RECORDS. (a) In this section, a holder of a beneficial interest in a voting trust entered into under Section 6.251 is a holder of the shares represented by the beneficial interest.
(b) Subject to the governing documents and on written demand stating a proper purpose, a holder of shares of a corporation for at least six months immediately preceding the holder's demand, or a holder of at least five percent of all of the outstanding shares of a
corporation, is entitled to examine and copy, at a reasonable time, the corporation's relevant books, records of account, minutes, and share transfer records. The examination may be conducted in person or through an agent, accountant, or attorney.
(c) This section does not impair the power of a court, on the presentation of proof of proper purpose by a beneficial or record holder of shares, to compel the production for examination by the holder of the books and records of accounts, minutes, and share transfer records of a corporation, regardless of the period during which the holder was a beneficial holder or record holder and regardless of the number of shares held by the person.
Acts 2003, 78th Leg., ch. 182, Sec. 1, eff. Jan. 1, 2006.
I have two related home equity questions. May we modify a home equity loan to help a borrower avoid foreclosure? Secondly, if we can modify the loan, may we capitalize past due amounts?
Yes, you may modify. And, yes, you may capitalize the past due amounts owed under the terms of the initial home equity loan.
In 2014, the Texas Supreme Court issued an opinion in the case of Sims v. Carrington Mortgage Services, LLC. That case involved modifications of home equity loans, and IBAT filed an amicus brief in the case. The Court determined that, when no additional funds are advanced and the original note is not satisfied and replaced, a “restructuring is valid and need not meet the constitutional requirements for a new loan.” The Court further held that a restructuring that capitalizes past-due amounts owed under the terms of the initial loan, but does not satisfy or replace the original loan, is not a new extension of credit that must meet the constitutional requirements for a new loan. Finally, the Court concluded that restructuring a home equity loan more than once to avoid foreclosure “does not remotely resemble” an open-end account subject to the constitutional provisions on home equity lines of credit.
For a home equity lender, this means that, as long as a restructuring doesn’t satisfy and replace the original note, the lender may:
(1) capitalize past-due amounts owed under the terms of the initial loan;
(2) restructure the loan without meeting the constitutional provisions again (e.g. the bank may disregard the fact that the current loan-to-value is greater than 80%); and
(3) modify a home equity loan multiple times to avoid foreclosure without complying with the constitutional provisions on home equity lines of credit
Remember that a modification relates to the original transaction. Thus, if you have already charged fees up to 3% of the principal, you can’t charge any more fees!
Can a bank offer a free credit report to anyone without an application? In other words, we would be pulling and providing to customer/prospect as a courtesy, not for lending purposes.
No - for a number of reasons outlined below. But you could remind the customer of the ability to obtain free credit reports directly from the credit bureaus. Click here to visit the official site for free credit reports.
#1 - What does your bank's agreement with your CRA say? Often those agreements will have a clause that says reports are provided for the bank's exclusive use and may only be shared with an affiliate directly involved in a credit transaction. Providing a free credit report to customers may violate that provision.
#2 - Look at 15 USC §1681b that addresses permissible purposes in which a CRA may provide consumer reports.
(a) In general
Subject to subsection (c) of this section, any consumer reporting agency may furnish a consumer report under the following circumstances and no other:
(1) In response to the order of a court having jurisdiction to issue such an order, or a subpoena issued in connection with proceedings before a Federal grand jury.
(2) In accordance with the written instructions of the consumer to whom it relates.
(3) To a person which it has reason to believe—
(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or
(B) intends to use the information for employment purposes; or
(C) intends to use the information in connection with the underwriting of insurance involving the consumer; or
(D) intends to use the information in connection with a determination of the consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status; or
(E) intends to use the information, as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; or
(F) otherwise has a legitimate business need for the information—
(i) in connection with a business transaction that is initiated by the consumer; or
(ii) to review an account to determine whether the consumer continues to meet the terms of the account.
The CRA can provide your bank a credit report if they have reason to believe you are going to use it in connection with A thru F. An argument could be made that just wanting to provide a credit report to anyone outside of those permitted purposes is in fact not permitted. Additionally, just because you are permitted to obtain a credit report, that does not mean you can provide a copy of that credit report to another.
Additionally, see Section 607(c) of the FCRA:
"Disclosure of consumer reports by users allowed. A consumer reporting agency may not prohibit a user of a consumer report furnished by the agency on a consumer from disclosing the contents of the report to the consumer, if adverse action against the consumer has been taken by the user based in whole or in part on the report."
Clearly under that section of the FCRA, you can disclose the contents of a credit report, but it does not address providing copies of that credit report.
#3 - Finally, providing credit reports to consumers puts your bank in the awkward position of having to explain and defend the information contained in those reports. Additionally, it may cross the line and make your bank a credit reporting agency - or give your customers the impression that you are. The customer may ask how to read it, what the numbers mean, and use you to dispute a debt (complain about it in any case) that isn't controlled by you. I wouldn't want to argue with a customer that the report is or is not accurate. You can't speak about other items that may be on the report. You also do not want to give out your subscriber numbers which may be at the top. And if this has someone else's data on it, such as a co-borrowers info, you could have issues. You also need to verify ID. If I use your name and SSN and get denied and you haven't verified that I was who I said I was, you’ve now given me tons of info on you, opening a can of identity theft worms.
May we make a loan secured by homestead (home equity loan) if the property is owned by two or more people, but not all of them use the property as their homestead? Can we make the loan to the owner who lives at the property and just have the other owner (or owners) sign the security instrument (deed of trust)?
No and no. It is possible that a court would consider the signing of the deed of trust by the nonresident owner or owners as additional collateral. If the property is owned by two people, one of whom lives on the property and one of whom does not, then the resident signing the deed of trust only gives you a security interest in a 50% undivided interest in the property. If the nonresident owner also signs the deed of trust, then you would additionally have a security interest in their 50% undivided interest in the property. The problem is that half of the security interest you had in the property would be from someone who isn’t using the property as their homestead. This could be considered additional collateral for the loan. On the other hand, if you did make a loan like this, you could cure it by simply releasing the nonresident owner or owners. However, when you do that, there is no way you could foreclose on your loan.
As to your second question, you wouldn’t want to make the loan to the person residing in the home with mere written consent from the nonresiding owner because, you’d only have a security interest in a 50% undivided interest. It would be impossible to foreclose.
Although there may be a legal argument that a loan like this does not involve additional collateral, it is unlikely a risk any lender is willing to take.