Legal Ease is the weekly Q&A from the IBAT Bottom Line. Go to the Legal Ease Archive.
Latest Additions to Legal Ease:
I saw the article in IBAT’s Bottom Line eNewsletter that said the annual requirement for ATM safety notices has been repealed. However, when I go to the Finance Commission materials for its February meeting, the version of 7 Texas Administrative Code §3.92(e) that it has only reflects two changes: (1) one having to do with including the notice with other disclosures and (2) deleting a requirement to give the notice when we replace cards. I thought the annual requirement was also deleted from §3.92(e). What am I missing? Also, we are a national bank, do we even care?
First, as a national bank, you should care. Though technically you’re probably not legally required to comply, if you don’t comply, you don’t get the safe harbor. And if you don’t get the safe harbor, you subject your bank to potential liability. So, the question shouldn’t be, “must we comply?” It should be, “if we comply, do we get the safe harbor?” And the answer is: Yes!
Your confusion comes from the fact that in December the two agencies (Saving and Mortgage Lending and Department of Banking) initially proposed that an issuer send the notice when a new access device is “replaced.” We commented on that, and they removed it in the adopted rules. However, when agencies present revised amendments for adoption, they only mark the differences between the published proposal and the version presented for adoption. Thus, when you looked at the rules they proposed for adoption, it looked like the agencies only changed two sections in each rule—neither of which had to do with the annual requirement.
Yes, the annual notice requirement is gone. This is an IBAT-initiated victory for Texas banks!
The stated purposes to the amendments to DOB rule §3.92(e) (and the SML rules. §67.17(e) and §77.115(e)) are to:
1) Eliminate the annual notice requirements.
2) Authorize delivery of notice by electronic means in certain circumstances.
3) Update the basic safety precautions in subsection (e) to mention online
fraud and other relatively new cyber threats and other ATM risks.
Here is the final rule. If it is bold, it is new. If it is struck through, it is deleted. If it has neither, it is former language that is retained.
§3.92.User Safety at Unmanned Teller Machines.
(e) Notice. An issuer of access devices shall furnish its customers with a notice of basic safety precautions that each customer should employ while using an unmanned teller machine. The notice must be personally delivered or sent to each customer whose mailing address is in this state, according to records for the account to which the access device relates, and may be included with other disclosures related to the access device, including an initial or periodic disclosure statement furnished under the Electronic Fund Transfer Act (15 U.S.C. §1693 et seq.). The notice may be delivered electronically if permissible under Business & Commerce Code, §322.008.
(1) When notice is required. The issuer must furnish the notice to its customer whenever an access device is issued or renewed. If the issuer furnishes an access device to more than one customer on the same account, the issuer is not required to furnish the notice to more than one of the customers.
[New access devices. An issuer of access devices shall furnish its customer with a notice of basic safety precautions at the time the initial disclosure of terms and conditions is provided to such customer].
Annual notice. An issuer of access devices shall furnish its customers with a notice of basic safety precautions on a basis no less frequently than annually.]
(3)] Content of notice. The notice of basic safety precautions required by this subsection [ must be provided in written form which can be retained by the customer and] may include recommendations or advice regarding:
(A) security at walk-up and drive-up unmanned teller machines, such as recommendations that the customer should:
(i) remain aware of surroundings and exercise caution when withdrawing funds;
(ii) inspect an unmanned teller machine before use for possible tampering, or for the presence of an unauthorized attachment that could capture information from the access device or the customer's personal identification number;
(iii) refrain from displaying cash and put it away as soon as the transaction is completed; and
(iv) wait to count cash until the customer is in the safety of a locked enclosure, such as a car or home;
security at drive up unmanned teller machines;]
(C)] protection of the customer's code or personal identification number, such as a recommendation that the customer ensure no one can observe entry of the customer's code or personal identification number [ numbers];
(C) safeguarding and protection of the customer's access device, such as a recommendation that the customer treat the access device as if it were cash, and if the access device has an embedded chip, that the customer keep the access device in a safety envelope to avoid undetected and unauthorized scanning;
(D) procedures for reporting a lost or stolen access device and for reporting a crime [
(E) reaction to suspicious circumstances, such as a recommendation that a customer who observes suspicious persons or circumstances, while approaching or using an unmanned teller machine, should not use the unmanned teller machine at that time or, if the customer is in the middle of a transaction, should cancel the transaction, take the access device, leave the area, and come back at another time, or use an unmanned teller machine at another location;
(F) safekeeping and secure disposition of unmanned teller machine receipts [
, such as the inadvisability of leaving an unmanned teller machine receipt near the unmanned teller machine];
(G) the inadvisability of surrendering information about the customer's access device over the telephone or over the Internet, unless to a trusted merchant in a call or transaction initiated by the customer;
safeguarding and protecting of the customer’s access device, such as a recommendation that the customer treat the access device as if it was cash;]
(I)] protection against unmanned teller machine fraud, such as a recommendation that the customer promptly review the customer's monthly statement and compare unmanned teller machine receipts against the [ customer’s monthly] statement [ and];
(I) protection against Internet fraud, such as a recommendation that the customer, if purchasing online with the access device, should end transactions by logging out of websites instead of just closing the web browser; and
(J) other recommendations that the issuer reasonably believes are appropriate to facilitate the security of its unmanned teller machine customers.
I noticed that one of our lenders put a list of identification numbers for farm equipment in a financing statement (UCC-1). Because a financing statement is public, I am concerned about privacy issues. Is this amount of specificity required for a financing statement?
No, the UCC-1 should describe the collateral only in general terms.
There are two very different description requirements in the Uniform Commercial Code (UCC), which is Chapter 9 of the Texas Business and Commerce Code.
Security Agreements: Business & Commerce Code (BCC) §9.203(b)(3)(A) provides that an essential element of creating an enforceable security interest is that the “debtor has authenticated a security agreement that provides a description of the collateral.” BCC §9.108 contains the general test of the description –the description is sufficient “if it reasonably identifies what is described.”
Financing Statement: BBC §9.502 provides that a financing statement is sufficient only if it provides the name of the debtor, the name of the secured party (or the secured party’s representative), and “indicates the collateral covered by the financing statement.”
The requirement to “indicate the collateral” in the financing statement is broader than the “reasonably identifies” requirement for the security agreement. The description in the security agreement needs to be specific enough for you to determine what exactly is securing the loan. You should list make, model, and serial number. On the other hand, in the financing statement, you should describe the specific collateral in general terms. A financing statement sufficiently indicates collateral claimed to be covered by the financing statement if it provides notice that a person may have a security interest in the collateral claimed. (Make and model is certainly appropriate in a UCC-1, but not serial number or VIN.)
As far as the privacy concerns, the Secretary of State has made it abundantly clear that VINs and account numbers are confidential under the Public Information Act, as interpreted by the Texas Attorney General. That means this information can’t be released to the public. Because UCC searches are automatic/electronic, the information on a financing statement has to be redacted by the Secretary of State when it is filed. To some extent, this information can be detected by the Secretary of State through certain automatic parameters. However, the Secretary of State must review filings manually. This slows filings down and may lead to increased costs to the Secretary of State. At some point, these costs will likely be passed along to the filers.
Recommended action: We recommend that banks adopt procedures to make sure that they:
- are including make, model and VIN and account numbers (e.g. CD accounts) in their security agreements, but
- are not including serial numbers/VINs or account numbers in their financing statements (UCC-1s).
If the bank sets a limit of $2,500 for a personal consumer loan, would the bank have to accept an application if the requested amount is $1,000? Would applications below this threshold be denials under Regulation B and subject to adverse action notice requirements?
That depends on if the potential applicant has made an "inquiry" or submitted an application. The Commentary at §1002.2 provides examples of inquires that are not applications.
4. Examples of inquiries that are not applications. The following examples illustrate situations in which only an inquiry has taken place:
i. A consumer calls to ask about loan terms and an employee explains the creditor's basic loan terms, such as interest rates, loan-to-value ratio, and debt-to-income ratio.
Using that logic, if a potential applicant inquired as to the minimum loan amount, that would be treated as an inquiry and not an application, and therefore not subject to the notification requirements under §1002.9.
If a potential applicant hands a loan officer an application, that application is either complete or incomplete and should be handled accordingly. While the bank may establish procedures for handling a request for credit (an application), there is nothing in Regulation B or the Commentary about "accepting" an application that would meet those established procedures.
(f) Application means an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested. The term application does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit. A completed application means an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested (including, but not limited to, credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral). The creditor shall exercise reasonable diligence in obtaining such information.
When an application is incomplete regarding information that the applicant can provide and the creditor lacks sufficient data for a credit decision, the creditor may deny the application giving as the reason for denial that the application is incomplete. The creditor has the option, alternatively, of providing a notice of incompleteness under §1002.9(c). [Also see the Commentary to §1002.9(a)(1)-3]
"Adverse Action" under §1002.2 is defined as a refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless a creditor makes a counteroffer and the applicant uses or expressly accepts the counteroffer.
If the bank receives an application for an amount or terms the bank does not offer, that is subject to the notification requirements under §1002.9. The stated reason for the adverse action could be "Our minimum loan amount is $2,500". Provided the bank has a justified and documented business reason for having a minimum loan amount, and not just an assumption, it is defensible.
Note that any minimum loan amount may be subject to scrutiny and or criticism. Additionally, the policy must be uniformly enforced with any exceptions thoroughly documented. When a bank does set a minimum loan amount in policy, finding exceptions to that policy is relatively easy to do.
If a borrower comes in and applies for a consumer loan for $10,000.00 and the stated purpose is to buy college supplies, books and pay for furniture for a new dorm at the university, will this loan fall under §1026.46 disclosure requirements? What if part of the loan will be for non-education expenses?
The answer is yes if the entire loan is to pay for postsecondary educational expenses (and the loan is otherwise a private education loan), and yes if the loan is for multiple purposes and the consumer expressly indicates the loan will be used for postsecondary educational expenses.
(5) Private education loan means an extension of credit that:
(i) Is not made, insured or guaranteed under title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
(ii) Is extended to a consumer expressly, in whole or in part, for postsecondary educational expenses, regardless of whether the loan is provided by the educational institution that the student attends;
(iii) Does not include open-end credit or any loan that is secured by real property or a dwelling; and
(iv) Does not include an extension of credit in which the covered educational institution is the creditor if:
(A) The term of the extension of credit is 90 days or less; or
(B) An interest rate will not be applied to the credit balance and the term of the extension of credit is one year or less, even if the credit is payable in more than four installments.
(3) Postsecondary educational expenses means any of the expenses that are listed as part of the cost of attendance, as defined under section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of a student at a covered educational institution. These expenses include tuition and fees, books, supplies, miscellaneous personal expenses, room and board, and an allowance for any loan fee, origination fee, or insurance premium charged to a student or parent for a loan incurred to cover the cost of the student's attendance.
2. Multiple-purpose loans. i. Definition. A private education loan may include an extension of credit not excluded under §1026.46(b)(5) that the consumer may use for multiple purposes including, but not limited to, postsecondary educational expenses. If the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses by indicating the loan's purpose on an application, the loan is a private education loan.
ii. Coverage. A creditor generally will not know before an application is received whether the consumer intends to use the loan for postsecondary educational expenses. For this reason, the creditor need not provide the disclosures required by §1026.47(a) on or with the application or solicitation for a loan that may be used for multiple purposes. See §1026.47(d)(1)(i). However, if the consumer expressly indicates that the proceeds of the loan will be used to pay for postsecondary educational expenses, the creditor must comply with §§1026.47(b) and (c) and §1026.48. For purposes of the required disclosures, the creditor must calculate the disclosures based on the entire amount of the loan, even if only a part of the proceeds is intended for postsecondary educational expenses. The creditor may rely solely on a check-box, or a purpose line, on a loan application to determine whether or not the applicant intends to use loan proceeds for postsecondary educational expenses.