Legal Ease Archive

Yes!  This is a good place to engage in "loan production," which does NOT require any prior approval by regulators.  Be sure that you don't approve and fund loans, however.  That would create a "branch."  Also, any dealer paper generated by boat and RV dealers will need to comply with the requirements of the Business & Commerce Code giving the consumer a three day cooling off period as well as chapter 345 of the Finance Code.

First, here is a link to the OCC Handbook on Retail Non-deposit Sales: http://www.occ.treas.gov/handbook/rnis1.pdf. It doesn’t sound like this activity, however, is covered. Nonetheless, I believe that the bank could have “reputation risk” with regard to the program. Therefore, your notion of including at least some disclaimers seems very prudent....not because you are getting referral fees for selling these products, but because you need to make sure that there is appropriate segregation in the customer’s minds between you and the company.

So, perhaps the brochure should include a disclaimer like:  MMM not affiliated with State National Bank. Products discussed may not be bank deposits or FDIC insured and are not guaranteed by the bank or any government entity.

Loans purchased from ANY third party are excluded.   (See definition of "account" at 31 CFR 103.121(a)(1)(ii)(B).)  However, if the auto dealer is originating loans for you (much like a mortgage broker), then the CIP rules apply.  The bank is ultimately liable for compliance with CIP, but according to the commentary, "...a bank is permitted to arrange for a car dealer or mortgage broker, acting as its agent in connection with a loan, to verify the identity of its customer."

Yes.  This is not a "consumer" rule.  It applies to all accounts (deposit, loan, trust, etc.)  So, yes, you would need to document your "exceptions."  (I assume this means that you used alternative media to confirm?!)
 
Question 2:  If the bank declines to open an account  because the customer (person or business entity) is unable to provide the bank with the required CIP data, does the bank  have to provide the customer with  a notice of decline (stating reason for decline)?
 
Answer 2:  CIP does not have such a requirement.  There is no Reg B adverse action notice for accounts.  HOWEVER, do not forget to give your FCRA adverse action notice if you turn down due in whole or in part to a consumer report (e.g. Telecheck).
 
Question 3:  If the bank declines to open an account because the (person or business entity) requests bank services that the bank feels may not be prudent with sound business practices, does the bank have to provide a notice of decline (stating reason for decline)?   Please advise what type of notice would then be required.  I have listed a few examples on accounts that we would decline:
 
 * Depositing third party checks,
 * Account is the depository account for Internet funds
 * Customer claims to be social security  beneficiary broker
 * Corporation is not in good standing with the State Comptroller
 * Type of Business  (gentlemen's club or bar, etc.)  
 * Bank is unable to fulfill currency/ coin  needs of business
 
Answer 3:  You could turn them down, or close the account, for those or any other reason!  You don't have to tell them why.  Only exception  you couldn't turn someone down because they were disabled and you didn't want to accommodate them (ADA issue).

Nondocumentary methods!  This can include comparing info from the customer with info from a consumer reporting agency, public database, or other source; checking references with other financial institutions; and obtaining a financial statement (which you could verify).

Yes. But don't look for a clear answer in the regs! The CIP rules simply permit use of "any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard." For more information about the matricula consular cards and their security features, go to http://portal.sre.gob.mx/usa/index.php?option=displaypage&Itemid=84&op=page&SubMenu

The Texas New Alliance Task Force, in which IBAT participates, discussed this thoroughly with attending regulators at a meeting in Austin. Remember that although the cards are permissible ID, you may still want a secondary source of ID if you have reason to doubt the authenticity of the card.

No.  See the definition of "customer" in the CIP rules.  It means "An individual who opens a new account for: ... (2) An entity that is not a legal person, such as a civic club."  See 31 CFR 103.121.  The first draft of the rule would have included all signatories.  That provision was hotly opposed by the banking industry successfully!

Actually, the BSA has always required that you TRY to get the taxpayer ID number. But you could keep a list of those that didn't comply.
 
Look at 31 CFR 103.121(b)(2)(i)(4). For US persons, a TIN is required. For a non-US person, the number may be a TIN, passport number, alien identification card number or number and country of issuance of any other government-issued ID.

---

Yes, both lending an deposits must comply with the Customer Identification Program (commonly referred to as CIP) requirements.  Under CIP, before opening an account or extending credit, your bank must be reasonably satisfied that the customer is who they say they are. See 31 CFR §103.121(a)(1)(i).   In doing so, your bank must obtain the customer's name, address, date of birth, and identifying number. 31 CFR §103.121(b)(2) . Your bank must also verify this information. See 31 CFR §103.121(b)(2)(i).

The IRS has implemented a TIN Matching program.  You can learn more about it here.

The answer is the same whether or not the robber got away with money.  A SAR is not required for a robbery or burglary committed or attempted as long that is reported to appropriate law enforcement.

31 CFR 103.18(c) Exceptions. A bank is not required to file a SAR for a robbery or burglary committed or attempted that is reported to appropriate law enforcement authorities, or for lost, missing, counterfeit, or stolen securities with respect to which the bank files a report pursuant to the reporting requirements of 17 CFR 240.17f–1.

The new exam procedures do not explicitly require this but strongly encourage that decisions--both to file and not to file--should be documented.  The procedures note that "...the bank should not be criticized for the failure to file a SAR unless the failure is significant or accompanied by evidence of bad faith."  The file should have at least a brief written memo that explains the investigation and why the SAR was not filed in order to prove to the examiner that there was no bad faith!   

In April of 2007, the Financial Crimes Enforcement Network (FinCEN) filed a Federal Register notice announcing the delayed implementation of certain revised Suspicious Activity Report (SAR) forms that were scheduled to become effective on June 30, 2007.  The agency withdrew this effective date for the revised SAR forms for depository institutions, casinos and card clubs, insurance companies, and the securities and futures industries.  FinCEN will establish new effective and mandatory compliance dates for these revised forms in a future notice.  The delay does not impact ongoing suspicious activity reporting, which will continue using the current forms.  Click here to read the FinCEN press release.

Your board minutes should reflect that the board received the report of SARs filed that month.  However, the actual report is confidential and should NOT be attached to the minutes.  Do NOT include the names of the alleged perps.  One cautious way to handle this is to hand out the report and then pick it up at the end of the meeting!

Yes!  They are subject to the CIP rules and should be on the lookout for suspicious situations for SAR reporting.

A bank is required to file a SAR no later than 30 calendar days after the date of initial detection by the bank of facts that may constitute a basis for filing a SAR.  If no suspect was identified on the date of the detection of the incident requiring the filing, a bank may delay filing a SAR for an additional 30 calendar days to identify a suspect. In no case shall reporting be delayed more than 60 calendar days after the date of initial detection of a reportable transaction. In situations involving violations that require immediate attention, the bank shall immediately notify, by telephone, an appropriate law enforcement authority in addition to filing a SAR. See 31 CFR §103.19.  So if the suspicious situation is still developing and you don't know all of the details, you have 30 days to get more information so that you can submit a complete report.  If there is enough information to indicate what kind of activity is going on, instead of waiting, you might submit the report and then submit additional details as they become available.  However, if you haven’t identified a suspect, you probably want to delay filing the SAR for 60 calendar days or until you identify a suspect, whichever occurs first.

FinCEN guidance has specified that as a general rule of thumb, organizations should report continuing suspicious activity with a report being filed at least every 90 days.  (The SAR Activity Review, Issue 1, October 2000, page 27).  An update provides a detailed account of the suspicious activity that has occurred since the last SAR.  Technically, every suspicious activity requires a SAR, but FinCEN provided the above guidance allowing a SAR every 90 days to reduce burden on financial institutions and law enforcement.  When you file a 90-day update, do not check box 1 because it doesn’t actually correct the prior report. Complete it as if it were the first report on the suspect’s activity with the exception that the date range an dollar amount will be cumulative, rather than just over the last 90 days.  Reference the previous SAR(s), summarize the previously reported information, and detail only activity that has occurred since the last report.

If the nature of the activity changes after you file a SAR, then the suspicious activity isn’t considered ongoing.  If this happens, you should consider the changed activity a new transaction and file a new SAR rather than updating the previous filing after 90 days.  It may be appropriate to cross-reference any previously filed SAR in the narrative.

See The SAR Activity Review, Issue 8, April 2005, beginning on page 29 (particularly pages 31 – 33).

No stop payment is permitted!    Section 3.411 of the UCC imposes damages against a bank that wrongfully refuses to honor a cashier's, teller's or certified check or stops pay on one of those.  You CAN re-issue these items after 90 days if a party gives you a declaration of loss under section 3.312, asserting that the item is lost, destroyed or stolen.

As you know, the "lost" cashier's check processes require a wait of 90 days!  (see Section 3.312 of Bus & Commerce Code)
 
If you want to accommodate this bank, request a "hold harmless" (which is really an indemnity) from the other bank.  Get assurances that they will put a hold on that account to make sure that the cashier's check is not presented twice by the same party!  Insurance companies no longer sell lost instrument bonds for cashiers checks because of UCC 3-312.

Section 3.312 of the UCC, enacted in 1995, applies to cases in which a cashier's check, teller's check, or certified check is lost, destroyed, or stolen.  Under the UCC §3.312, a claim may be asserted only by the drawer or payee of a certified check or the remitter or payee of a cashier's check or teller's check.

The claim may be made by communication to the obligated bank describing the check with reasonable certainty and requesting payment of the amount of the check.  ("Obligated bank" means the issuer of a cashier's check or teller's check or the acceptor of a certified check.)  The communication must be received at a time and in a manner affording the bank a reasonable time to act on it before the check is paid.  The claimant must provide reasonable identification if requested by the obligated bank.   Additional requirements (such as requiring the posting of a bond or other form of security on the claimant to assert a claim) may not be imposed on the claimant by the obligated bank.

The communication must contain or be accompanied by a "declaration of loss" of the claimant with respect to the check.  A "declaration of loss" is a written statement (usually an affidavit) made under penalty of perjury to the effect that:

1)    the declarer lost possession of the check;

2)    the declarer is the drawer or payee of the check, in the case of a certified check, or the remitter or payee of the check, in the case of a cashier's check or teller's check;

3)    the loss of possession was not the result of a transfer by the declarer or a lawful seizure; and

4)    the declarer cannot reasonably obtain possession of the check because the check was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

Delivery of the declaration of loss is a warranty of the truth of the statements made in the declaration.  If the claimant falsely submits a declaration of loss, a holder of the check, unable to obtain payment because of the declaration of loss, would have a cause of action against the claimant for breach of this warranty.

A claim asserted as set forth above, has no legal effect until it is enforceable at the later of:

(1) the time the claim is asserted; or

(2) the 90th day following the date of the check in the case of a cashier's check or teller's check, or the 90th day following the date of acceptance, in the case of a certified check.

Because a depositary bank cannot be sure whether a claim under Section 3.312 has been asserted on a teller's check, cashier's check, or certified check, it should not take one of these checks if it cannot present the check for payment before the 90th day following the date of the cashier's check or teller's check or the 90th day following the date of acceptance, in the case of a certified check.  If a depositary bank takes such a check after the applicable 90-day period and a valid claim has been asserted, payment will be excused when it presents the check to the obligated bank.

Because a claim has no legal effect until it becomes enforceable, until the claim is enforceable the obligated bank may pay the check or, in the case of a teller's check, may permit the drawee to pay the check.  The obligated bank is discharged of all liability with respect to the check once it has paid a person entitled to enforce the check.

When the claim becomes enforceable and payment of the check has not been made to a person entitled to enforce the check, the obligated bank is obliged to pay the amount of the check to the claimant.   If anyone presents the check after the claim becomes enforceable, the obligated bank may dishonor the check.

No.  First, this type of fee does not "relate to an account."  Therefore, it is not required to be disclosed by either Reg DD or the State Banking Code (section 34.303).  Thus, changing it does not trigger the usual 30 day advance notice (found in Reg DD and state law) required before increasing (or adding) a fee.
 
The Texas Legislature attempted to prevent "on us" fees by requiring checks to be paid "at par."  However, several large banks successfully sued, claiming that federal law preempted this attempt by the state to indirectly regulate account fees.
 
This section of Texas law (sec. 4.112, Business & Commerce Code) has not been repealed and still appears in the statutes.

As a "best practice," I would recommend requiring checks to be deposited.  Then you want the "cash back" to be documented with a check for "cash" or a cash withdrawal slip.  Remember that cash back transactions that exceed $10,000 must be reported on CTRs.  No exception.
 
One of the more common types of employee fraud is diverting checks that should be deposited or getting cash back from the deposit.  Thus, it is important to have documentation that will show up in the statement to reflect the cash out.  Then it is the responsibility of the customers to review their statements.

No.  More importantly, you are not required to cash government checks.  There was an effort to make this mandatory (at no cost) several sessions ago in Congress, but the effort failed.  If you do cash such checks, you may charge a fee.

It depends on whether or not an executor has been appointed.  See  31 CFR §240.15. below for specific information on handling checks drawn on the US Treasury when a check is issued to a deceased person.

http://law.justia.com/cfr/title31/31-2.1.1.1.15.0.2.15.html

Title 31: Money and Finance: Treasury
PART 240—INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED STATES TREASURY

Indorsement of Checks

§ 240.15   Checks issued to deceased payees.

(a) Handling of checks when an executor or administrator has been appointed. (1) An executor or administrator of an estate that has been appointed in accordance with applicable State law may indorse checks issued for the following classes of payments the right to which under law does not terminate with the death of the payee: payments for the redemption of currencies or for principal and/or interest on U.S. securities; payments for tax refunds; and payments for goods and services.

(i) An executor or administrator indorsing any such check must include, as part of the indorsement, an indication of the capacity in which the executor or administrator is indorsing. An example would be: “John Jones by Mary Jones, executor of the estate of John Jones.”
(ii) When a check indorsed in this fashion is presented for payment by a financial institution, it will be paid by Treasury without the submission of documentary proof of the authority of the executor or administrator, with the understanding that evidence of such claimed authority to indorse may be required by Treasury in the event of a dispute.

(2) An executor or administrator of an estate may not indorse a check issued for any class of payment other than one specified in paragraph (a)(1) of this section. Other checks, such as recurring benefit payments and annuity payments, may not be negotiated after the death of the payee. Such checks must be returned to the certifying agency for determination as to whether, under applicable law, payment is due and to whom it may be made.

(b) Handling of checks when an executor or administrator has not been appointed. If an executor or administrator has not been appointed, all checks issued to a deceased payee must be returned to the certifying agency for determination as to whether, under applicable law, payment is due and to whom it may be made.

NO!  The depository bank is responsible for warranting that signatures are genuine.  I recommend that banks have procedures to check deposits to make sure that the endorsements have been properly made.  But payor banks can rely on the fact that the depository bank has the right to transfer simply through possession--even without endorsement!

You do NOT have to check items for endorsement.  The depository bank can transfer the item (as opposed to "negotiate") without an endorsement.  It is making a warranty to you (the payor bank) that the item is properly payable.  If it turns out that a wrong-doer got the check and it was not deposited into the correct account, the depository bank will be on the hook.
 
This change in procedures is all a part of the technology revolution and the need to speed processing up for expedited funds availability.  The amendments to Articles 3 and 4 of the UCC permit a bank to assert that it has the right to transfer the item due to possession (as opposed to endorsement/negotiation).
 
As a matter of your own risk procedures, your bank may still want to train YOUR tellers to check for endorsements as they are processing deposits.  But you do NOT have to monitor other depository banks.

Good question.  The law changed in 1996 to default to “either” where you have this sort of ambiguity!  Here is the text from the UCC:  3.110 of Texas Business & Commerce Code, paragraph (d):

(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.

In your case, the check is ambiguous.  Therefore, it is payable to the persons alternatively, meaning either one may endorse. 

The short answer to your large check is that because it was ambiguous as to whether the check was paid alternatively to the payees, you are able to rely on the indorsement of a single payee.  However, when faced with this ambiguity on a large item, it is probably a good practice to obtain both indorsements to avoid a dispute by the other payee.  The following paragraphs cover the law with respect to multiple payees’ enforcement rights.  Much of this is taken from the UCC Commentary.

A check payable to two payees is governed by Texas Business & Commerce Code §3.110(d) (“subsection (d)”).  If the check is payable to “A or B,” it is governed y the first sentence of subsection (d).  The first sentence of subsection (d) provides:  “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 “A or B,” either A or B is the payee and if either is in possession, then that person is the holder and the person entitled to enforce that instrument. (See Business & Commerce Code § 3.301)

An instrument payable to “A and B” is governed by the second sentence of subsection (d).  The second sentence provides:  “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 is payable to “A and B,” neither A nor B acting alone is the person to whom the instrument is payable. Neither person, acting alone, can be the holder of the instrument.  The instrument is “payable to an identifiable person.”  The “identified person” is A and B acting jointly.  Thus, under §1.201(20), A or B acting alone, cannot be the holder or the person entitled to enforce or negotiate the instrument because neither acting alone is the identified person stated in the instrument.

The third sentence of subsection (d) is directed to cases in which it is not clear whether an instrument is payable to multiple payees alternatively.  The third sentence provides:  “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.”  In the case of ambiguity, persons dealing with the instrument should be able to rely on the indorsement of a single payee.  The Uniform Commercial Code Comment gives the example of an instrument payable to “A and/or B” and says that it is treated like an instrument payable to A or B.

Of course, your check does not have a connecting conjunction, and the commentary does not address instruments payable to two payees without a connecting conjunction.  Despite the lack of commentary, I believe an instrument payable to two or more payees without a connecting conjunction is probably the most ambiguous of all.  Thus, I would apply the third sentence of subsection (d) and treat the instrument like it was payable to A or B.  You can rely on the indorsement of a single payee.

I read somewhere that the law of negotiable instruments is frustrating because it is hard to see the forest for the trees.
 
If the original check writer (drawer) turns to his or her bank for recredit, he/she is entitled to have his/her bank (drawee bank) recredit their account because their bank may only charge their account according to the original terms of the time.  The original terms were that the check was payable to the IRS, not Mrs. X, so, if the bank paid it, it wasn't according to its original terms.  See Business and Commerce Code §4.401(d)(1).  Of course, if drawer has the drawee bank recredit his/her account, the drawee bank will likely turn to your bank for the funds.  Will your bank prevail?  No.  Your bank breached a presentment warranty that the check was not altered. §§ 3.418(c), 3.417(a)(2),  and 4.208(a)(2).  Would you then prevail against the person who altered the check?  Yes, because he also breached a transfer warranty that the check was not altered. See §§ 3.416(a)(3) and (b) and 4.207(a)(3) and (b).
 
When this does happen though, make sure that the drawer notified their bank timely. If they didn't, the drawee bank is not required to recredit the drawer's account, but if they do recredit the account, you do not have to honor the warranty because the drawer did not act timely.

A customer, whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument, is precluded from asserting the alteration or forgery against the bank who, in good faith, pays the instrument.  If the bank (which is the entity asserting the preclusion), fails to exercise ordinary care in paying the instrument and the failure substantially contributes to the loss, the loss is allocated between the customer (the party precluded) and the bank, according the extent to which the failure of each to exercise ordinary care contributed to the loss.  (See Business and Commerce Code §3.406(a) and (b))

Because this customer knew this was going on, his failure to exercise ordinary care substantially contributed to the forgery.  Because of this, I would assert that if the bank had any failure to exercise ordinary care, it did NOT contribute to the loss.  A customer can't just sit back and watch someone forge items and then expect the bank to make it good. It doesn't work that way.  It is his loss.

That depends on whether the checks were forged maker's signatures or forged endorsements. If they were forged maker's signatures, see Business and Commerce Code (UCC) 4.406(c), http://www.statutes.legis.state.tx.us/SOTWDocs/BC/htm/BC.4.htm#4.406 and http://www.statutes.legis.state.tx.us/SOTWDocs/BC/htm/BC.4.htm#4.401. The customer must examine the statement with "reasonable promptness" in order to get reimbursed for a forged item. Reasonable promptness is determined by the deposit contract, or if the deposit contract does not specify the time, then the UCC provides that thirty days is reasonable.  More importantly, a Texas Supreme Court case has determined that a bank may contract so that limitations for forged maker's signature purposes is sixty days. If the issue is a forged maker's signature, the customer has waited too long for the bank to be liable for reimbursement.

If, on the other hand, the ex-wife forged the endorsements of other intended payees, then the checks were not properly payable from the husband's account under 4.401 and he would have a cause of action against the bank for breach of transfer warranties (3.416) http://www.statutes.legis.state.tx.us/SOTWDocs/BC/htm/BC.3.htm#3.416 for a period of three years.

As of 1/4/2010

The rule on forgeries in contained in Business and Commerce Code (UCC) Section 4.406(c) and (d):

(c)  If a bank sends or makes available a statement of account or items pursuant to Subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
(d)  If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by Subsection (c), the customer is precluded from asserting against the bank:

(1)  the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and
(2)  the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

You did not state when the customer notified the bank of the forged checks.  If the customer did not notify the bank with reasonable promptness, interpreted by case law to mean not later than two months after the statement on which the unauthorized item(s) appeared, then the bank can simply refuse to refund the customer's account.  If, on the other hand, and which I am guessing in this case, the customer notified the bank of the unauthorized items with reasonable promptness, then the bank is under an obligation to refund the amount in question.  Please note that Sec. 4.406(c) does not say that a customer has to sign an affidavit or make a statement to the police--they simply have to notify the bank of the unauthorized item.  I know that signing an affidavit  would be the courteous thing to do, but the fact that the customer did not does not preclude the customer from being refunded, nor may the bank now debit the customer's account for the amount refunded..

Rather, I think your problem is with the local police.  Since your bank refunded the customer for the alleged forgeries, your bank is the one who is out the money, the victim of this crime, and the police should proceed with their investigation and try to find the wrongdoer so you can get restitution.  The investigation might even extend to the customer for defrauding the bank!  I think this is a good possibility because of the customer's refusal to cooperate in the investigation.  Because defrauding a bank is a federal crime, the FBI would also have jurisdiction, although because of the amount in controversy is relatively small in comparison to some of the other cases that the FBI is involved in, they may refuse to take action.  But I think I would contact them anyway.   But since neither the police or the FBI can proceed until they have a complaint on file from the bank, I think that should be your #1 priority in trying to recover the funds. 

As of 5/24/2010

First, take the check out of play.  The midnight deadline means that the payor bank (your bank) must either pay or refuse to pay an item by midnight of the day it was presented, which your bank did on March 4, 2009.  The UCC (Texas Business and Commerce Code) Section 4.215(a)(1) says that final settlement has ocurred when the payor bank has paid for the item in cash.  Since final settlement has happened, the check is taken out of play and is not subject to being returned.  The check is a dead shuttlecock and cannot be returned or used for the basis of restitution.

Next, to determine your bank's liability in this matter, take a look at UCC 4.406(c) and (d).  4.406(c) imposes a duty on your customer to review their statement with "reasonable promptness" and to report any irregulatities immediately.  Case law has decided that "reasonable promptness" means not longer than two months.  Depending on the statement cycle, it appears that the statement on which the forgery should have become apparent would be the April, 2009 statement, and the customer did not notify the bank until May, 2010, so the bank does not have to reimburse the customer for the forgery, and any attempts for the customer to get reimbursed must be undertaken by your customer, not through either bank.  If, on the other hand, the customer had notified your bank about the forgery in May, 2009, then the bank would have been required to reimburse the customer the $1,500, and the bank would have to either attempt recovery on its own or (more reasonably) just written off the $1,500 as a cost of doing business.

Yes they can – but a word of warning about accepting checks from fiduciaries:

UCC Section 3-307: When a bank is dealing with a fiduciary, it must exercise caution. [The term fiduciary is defined to mean an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument.] The bank will be deemed to be on notice of a breach of fiduciary duty (and will thus face potential liability) if there is an instrument payable to the represented person or the fiduciary as such and the instrument is (i) taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person.

Sec. 3.306.  CLAIMS TO AN INSTRUMENT.  A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds.  A person having rights of a holder in due course takes free of the claim to the instrument.

Amended by Acts 1995, 74th Leg., ch. 921, Sec. 1, eff. Jan. 1, 1996.

Section 1086 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amends the EFA Act by increasing from $100 to $200 the amount of deposited funds that banks must make available for withdrawal by opening of business on the next day. The effective date of this provision of the act is the ‘‘designated transfer date,’’ which the Secretary of the Treasury has determined to be July 21, 2011. This provision of the EFA Act is implemented in § 229.10(c)(1)(vii). Additionally, the model disclosure forms set forth in current appendix C reflect the requirement that a bank must make $100 of the deposit available on the next business day. When the Dodd-Frank Act’s increase to $200 becomes effective, banks should ensure that their disclosures reflect the new funds availability schedule and that customers are notified of the changes in policy in accordance with § 229.18(e).

Specifically, effective July 21, 2011, a bank basing its funds-availability disclosure on current model C–3, C–4, or C–5 must ensure that its disclosure indicates that the first $200 (rather than $100) of a check deposit will be available on the next business day after
the day of deposit.
 
Per § 229.18(e), a bank must provide a change-in-terms notice to existing consumer customers by August 21, 2011.
 
(e) Changes in policy. A bank shall send a notice to holders of consumer accounts at least 30 days before implementing a change to the bank's availability policy regarding such accounts, except that a change that expedites the availability of funds may be disclosed not later than 30 days after implementation.
 
Appendix E to Part 229 of the Commentary to Reg CC makes it clear that you may send the disclosure as an insert with the period statement.

E. §229.18(e)  Changes in Policy

1. This paragraph requires banks to send notices to their customers when the banks change their availability policies with regard to consumer accounts. A notice may be given in any form as long as it is clear and conspicuous. If the bank gives notice of a change by sending the customer a complete new availability disclosure, the bank must direct the customer to the changed terms in the disclosure by use of a letter or insert, or by highlighting the changed terms in the disclosure.

2. Generally, a bank must send a notice at least 30 calendar days before implementing any change in its availability policy. If the change results in faster availability of deposits—for example, if the bank changes its availability for nonlocal checks from the fifth business day after deposit to the fourth business day after deposit—the bank need not send advance notice. The bank must, however, send notice of the change no later than 30 calendar days after the change is implemented. A bank is not required to give a notice when there is a change in Appendix B (reduction of schedules for certain nonlocal checks).

3. A bank that has provided its customers with a list of ATMs under §229.16(b)(5) shall provide its customers with an updated list of ATMs once a year if there are changes in the list of ATMs previously disclosed to the customers.

First, let’s look at what the Texas Business and Commerce Code says –

§4.401
…

(c) A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating describing the check with reasonable certainty. The notice is effective for the period stated in Section 4-403(b) for stop-payment orders, and must be received at such time and in such manner as to afford the bank a reasonable opportunity to act on it before the bank takes any action with respect to the check described in Section 4-303. If a bank charges against the account of a customer a check before the date stated in the notice of postdating, the bank is liable for damages for the loss resulting from its act. The loss may include damages for dishonor of subsequent items under Section 4-402.

The fact it was presented at a Teller window and has a note in the memo line indicating that the bank should contact the customer before negotiating the check does seem to complicate things.  If the check had paid through the usual automated check collection process it would be easier to argue that notice was not given and therefore the bank could charge it against the account of the customer. However, since the customer did not comply with the specifics of 4-403(b) for stop payment orders they in fact did not provide adequate notice and you can charge it against their account.

You also want to review your account agreements to make sure that it includes language that the memo line is for the convenience and use of the customer and is not binding on the bank.

Prior to 2005, Section 4.403 of the Texas Uniform Commercial Code (UCC) said that a stop payment order was not effective unless it was in writing.  In 2005, the word “writing” was changed to the phrase “authenticated record.”  (We discussed the meaning of authenticated record” in our March 7, 2011, Legal Ease.) Both the word “writing” and the phrase “authenticated writing” were non-uniform amendments to the UCC.  Non-uniform amendments are different from the same sections adopted by other states, unless they adopt the same non-uniform amendment.  The UCC in other states allow for oral stop payments and they are effective for six months, but they lapse if they are not confirmed within 14 days.  Therefore, the UCC Comment on this is incorrect and irrelevant in Texas.  Look at the State Bar Committee Comments, which unfortunately hasn’t been updated to include the phrase “authenticated record,” but you can just substitute it for “written” when you read it.

UCC Section 4.403 doesn’t prohibit your bank from accepting oral stop payment orders, but an oral stop payment would not conform with Section 4.403, as adopted in Texas.  And because it doesn’t conform, accepting oral stop payments would involve additional risk to the bank.

I personally think it would be a mistake to accept oral stop payments, particularly for large items.  If you require conformance with Section 4.403 and receive a stop payment order doesn’t comply with a requirement of 4.403, if your bank then pays the item, you have no liability under the law because your bank isn’t obligated to comply with an oral stop payment.  However, if you accept oral stop payments, there are uncertainties and significant questions of proof.  An oral stop payment dispute becomes a “he said, she said” because there is no authenticated record.  Juries tend to side with customers on “he said, she said” matters.

And who is the customer supposed to give an oral stop payment to?  May your customers just walk in and tell anyone at the bank to stop payment or are there instructions on how to do it in the account agreement?  What if the employee they talk to doesn’t pass it along to the correct employee and the bank pays?  Have all your employees been trained on what to do with an oral stop payment?

The requirement that a stop payment be in writing is as much for the bank’s protection as it is for the customer’s.  If you deviate from it, you and your customer lose those protections.

Agreed. The right to place a stop payment order is not conditional on the payment of a fee.
See the Texas Business and Commerce Code §4.403(a) –
…
(a) A customer or any person authorized to draw on the account if there is more than one person may stop payment of any item drawn on the customer's account or close the account by an order to the bank describing the item or account with reasonable certainty received at a time and in a manner that affords the bank a reasonable opportunity to act on it before any action by the bank with respect to the item described in Section 4.303. If the signature of more than one person is required to draw on an account, any of those persons may stop payment or close the account.…
…
(b) The Texas Business and Commerce Code does not specify that a customer must first pay a fee in order to exercise their right to stop payment. The fee is a contractual issue between the bank and the account holder and has nothing to do with an account holders right to stop payment.   Not accepting a stop payment made in accordance with the Texas Business and Commerce Code exposes the bank to risk.
See Texas Business and Commerce Code §4.403(c) -
…
(c) The burden of establishing the fact and amount of loss resulting from the payment of an item contrary to a stop-payment order or order to close an account is on the customer. The loss from payment of an item contrary to a stop-payment order may include damages for dishonor of subsequent items under Section 4.402.
 

Texas Business & Commerce Code §4.404 states that a bank is under no obligation to pay a check that is presented more than six months after its date, but it may charge the customer's account for a payment made thereafter in good faith.  [Emphasis added.] The question then becomes:  "What is good faith?"  Good faith is defined in Business & Commerce Code §1.201(b)(20) as: "...honesty in fact and the observance of reasonable commercial standards of fair dealing."  I think that it is arguable that the bank acted in good faith because it acted in accordance with reasonable commercial standards when it processed the check using an automated process.  Nevertheless, the UCC Comment to §4.404 says that a bank would not normally pay a stale dated check without consulting with the customer.  Further, the Comment provides that a bank is not required to pay the stale dated item, but it is given the option to do so because it may be in a position to know that the customer wants it paid.  Although I did not find any Texas cases supporting the proposition that payment of a stale dated check through a bank's automated payment system is considered good faith payment (because the bank is using a reasonable commercial standard), there are federal cases from other jurisdictions that have recognized this. [See Scott D. Leibling, PC v. Mellon PSFS (NJ) NA, 311 NJ Super. 651, 710 A2d 1067, 35 UCC Rep. 2d 590 (1998)]

"Authenticate" means: (A) to sign;  or (B) to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.

"Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

A signature qualifies as authentication. But any visual mark that is intended to indicate adoption of the terms is also an authentication.  You can get a signed writing as an authenticated record, but an electronic transmission (email) is sufficient, as well, because  it is stored in an electronic medium and you can retrieve it.  A telephone call is not an authenticated record because, although it can be stored in an electronic or other medium in a perceivable form, I do not believe it can be signed or marked indicating adoption.

Who Must Receive the Notice?
Check 21 requires every bank to provide a notice explaining substitute checks to its new and existing consumer customers who receive original or substitute checks.  The notice must be provided to existing customers, defined as those who are customers of a bank on the effective date of the Act (October 28, 2004).  The notice must be provided to these customers no later than the first regularly scheduled communication with the consumer after the effective date of this Act. The notice must be provided to new customers at the time at which the customer relationship is initiated.  Finally, the notice must be provided to each consumer of the bank who requests a copy of a check and receives a substitute check.

The FRB explains that the bank must provide the notice “to each of its consumer customers who receives paid checks with his or her account statement or who otherwise receives substitute checks.”  Consequently, the notice must be sent both to consumers who did not agree to have their checks truncated and instead receive their canceled checks with their bank statements as well as to consumers whose checks are truncated but who request substitute checks when these are created during processing of the consumer’s original checks.  Banks cannot enter into agreements with consumers to waive the consumer’s right to this notice.

How Notices Are Sent
The bank can send the required notices by U.S. mail or by any other means through which the consumer has agreed to receive account information.  This would appear to allow e mail communication if the consumer has agreed to that form of communication with the bank.

Content of the Notice
The notice must describe that a substitute check is the legal equivalent of an original check for all purposes under Federal and State law, for any other purpose, and for all persons.  The notice must explain that a substitute check is the legal equivalent if it accurately represents all the information on the front and back of the original check as of the time at which the original check was truncated. The notice should state that the check also must contain a legend with the words:  “This is a legal copy of your check. You can use it in the same way you would use the original check.  Finally, the notice must describe the consumer’s recredit rights.

A bank may provide the notices in a language other than English if the bank and consumer have agreed to a non English notice or if the consumer requests a non English notice.  The non English notice can never be made to the exclusion of an English notice, however. The bank is also required to make a complete English notice available at the consumer’s request.

Safe Harbor for Using FRB Model Disclosures
The FRB is required to publish model forms and clauses that banks may use for these notices.  A bank must be treated as being in compliance if it uses a model form or clause as long as it accurately describes the bank’s policies and procedures.  However, a bank is not required to use the FRB’s model language.

When you say a check is made out to a customer’s "DBA" I assume you mean that it is made out to the assumed name of a customer.  Of course, a customer with an assumed name could be an individual (sole proprietorship) or any other business entity (corporations, LLC, partnerships, etc.).  A dba isn't a separate business entity from the person or business entity that is operating under another name.  A person or business entity can operate under another name, but the name that they are operating under does not have an existence apart from the person or business entity that is operating the business.

In Texas, dba accounts are evidenced by assumed name certificates.  An assumed name does not create an entity; rather, it is a name that an entity is operating under.  In addition to sole proprietorships, entities whose authority to exist comes from the Secretary of State must also file assumed name certificates with the Secretary of State.  Before you change your policy on depositing checks written to the assumed name, you might read Business and Commerce Code Chapter 36 to familiarize yourself with the rules pertaining to assumed name certificates.

It would certainly be inappropriate to allow a person to deposit a check written to business entity (e.g. corporation, LLC, partnership into their personal account.  The business entity and the person are not the same entity.  This certainly could be a case of attempted tax evasion because the person and the entity file separate tax returns.  It could also be a case of the person stealing funds from the business entity, and there could be other owners who are being cheated.

With a sole proprietorship, the business and the person are the same entity.  Therefore, it isn't as imperative that checks written to the business not be deposited into the sole proprietor's personal account.  However, there are a couple of issues to consider before you allow this practice:

1)  If you allow these deposits for sole proprietors, your tellers will have to know if the entity that is operating under an assumed name is a sole proprietorship or another business entity that exists with authority of the Secretary of State.  Do you really want your tellers to have to make the determination of whether the dba account is for a sole proprietor?  Do your tellers have time to do this?  Can you train them appropriately to determine this?  It may be that the bank adopted this policy because it is too much to ask that a teller make this call while people are waiting in line.

2) In Texas, being a community property state, the sole proprietorship could be a single person or it could be a husband and wife operating as a sole proprietorship.  If it is a husband and wife sole proprietorship, the spouse trying to deposit the check into the personal account might be trying to steal from their spouse.

There is a lot to consider here when trying to decide whether to repeal this policy.  There is no law that requires this policy, but I would take the above matters into consideration before repealing it.

 

Nothing like contradictory docs!  Obviously, if you are going to pay, there is less problem. Basically, documentary drafts (ones that require review of documents like certificate of title) should be handled in a reasonable period of time. With “Sight + 3” you have three days to review and pay or return. Sight drafts (without the days specified) are demand items and must be handled within the midnight deadline.

Yes.  Check 21 gives you no choice.  But remember that the substitute check is valid proof of payment.  Also, the converting bank provides warranties for the item.

First of all, I know of no special rules for soldiers who are in basic training. If he is sure there is such a rule, you might ask him to get a citation to the law for you from the JAG or the person who told him this.
 
He may be talking about this provision from the Servicemembers Civil Relief Act, but it is not specifically for basic training and he'd have to go to court to request this relief:
 
"If a servicemember fails to perform an obligation arising under a contract and a penalty is incurred arising from that nonperformance, a court may reduce or waive the fine or penalty if 1) the servicemember was in military service at the time the fine or penalty was incurred; and 2) the ability of the servicemember to perform the obligation was materially affected by such military service."  203(b)
 
There is another possibility where SCRA could give a servicemember relief with an NSF.  Let's consider these four possible scenarios with the servicemember you are talking about:
 
1) Prior to him entering the military, your bank charged an NSF fee, but returned the items or items NSF.
 
2) After he entered the military, your bank charged an NSF fee, but returned the items or items NSF.
 
3) Your bank paid the item or items and charged an NSF fee before he entered the military.
 
4)  Your bank paid the item or items and charged an NSF fee after he entered the military.
 
Numbers 1 and 2: If the item or items were returned NSF and you charged an NSF fee, then you are OK because the NSF fee is not related to a loan.  SCRA only applies to lending.  The answer is the same whether the item was returned NSF before or after he entered the military.
 
Number 3:  If your bank paid the item or items, then that is a loan.  The NSF fee is associated with the loan; however, it is unlikely that it is interest subject the 6 % cap in SCRA.  An NSF fee is not interest, so long as:

• it was assessed as a processing fee for the additional work required in connection with handling the bad check;
• the decision to charge the fee was a separate decision from the decision to honor or dishonor a bad check;
• it was charged to all customers, in the same amount, regardless of whether First Bank paid or rejected a check; and 
• the amount had no relationship to the amount of the funds advanced.

If #3 is your scenario and your NSF fee meets all the bullet points, the fee is not interest and you do not need to refund anything.  If your NSF fee does not meet all the bullet points, then it is possible that the fee would be considered interest subject to the 6% cap in SCRA.
 
Number 4:  If your bank paid the item or items, then that is a loan and the NSF fee is associated with the loan.  Because, in scenario 4, it happened after he entered the military, it is not an "obligation" and SCRA does not apply.  There would be no need to refund the fee.

I love it when law students try to practice law.  Well, you can tell him that class is in session and you are the professor.  Unless he has given your bank notice of the postdating describing the check with reasonable certainty, your bank may charge his account for the check. If he gave notice, reasonably describing the check, but you paid it prior to the date on the check, your bank would only be liable for damages, if any, caused by paying the check prior to its date.  However, I think it is unlikely he would suffer any damages by its early payment.  Typical losses would be dishonor of subsequent items.  Look at Business & Commerce Code §4.401(c).  Texas's Uniform Commercial Code (UCC) is contained in the Business & Commerce Code.
 
The UCC does not regulate fees that banks charge customers for a notice of postdating or other services covered by the Act.  You should check the young man’s account contract to see what it says about postdated checks and your fee for that service--your account contract with him can amend the UCC (I wonder if he learned that in school?).  He may owe the bank money for contacting you and using this service.  I am not sure, but I think many banks charge for this service.  He might have been too smart for his own good.
 
If the law student has no intention of ever honoring the check, or if it is written against non-sufficient funds and no attempt is ever made to make it good, then it could be construed to be illegal.  If he paid a bill with that check, he may also have breached an agreement he has with a creditor.
 
Additionally, you, as the professor, could really teach him some law by calling and telling him that (1) you are closing his account; and (2) a check for the balance in his account is in the mail.  I wonder if his law professors taught him that his bank has the right to close his account at any time.  Of course, this is too extreme just to teach him a lesson, but, if either of the propositions in the first sentence of the preceding paragraph is true, you may not want him as a customer.
 
One more thing:  Tell him to pay closer attention in class next time.

The short answer to your large check is that because it was ambiguous as to whether the check was paid alternatively to the payees, you are able to rely on the indorsement of a single payee.  However, when faced with this ambiguity on a large item, it is probably a good practice to obtain both indorsements to avoid a dispute by the other payee.  The following paragraphs cover the law with respect to multiple payees’ enforcement rights.  Much of this is taken from the UCC Commentary.

 

A check payable to two payees is governed by Texas Business & Commerce Code §3.110(d) (“subsection (d)”).  If the check is payable to “A or B,” it is governed y the first sentence of subsection (d).  The first sentence of subsection (d) provides:  “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 “A or B,” either A or B is the payee and if either is in possession, then that person is the holder and the person entitled to enforce that instrument. (See Business & Commerce Code § 3.301)

 

An instrument payable to “A and B” is governed by the second sentence of subsection (d).  The second sentence provides:  “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 is payable to “A and B,” neither A nor B acting alone is the person to whom the instrument is payable. Neither person, acting alone, can be the holder of the instrument.  The instrument is “payable to an identifiable person.”  The “identified person” is A and B acting jointly.  Thus, under §1.201(20), A or B acting alone, cannot be the holder or the person entitled to enforce or negotiate the instrument because neither acting alone is the identified person stated in the instrument.

 

The third sentence of subsection (d) is directed to cases in which it is not clear whether an instrument is payable to multiple payees alternatively.  The third sentence provides:  “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.”  In the case of ambiguity, persons dealing with the instrument should be able to rely on the indorsement of a single payee.  The Uniform Commercial Code Comment gives the example of an instrument payable to “A and/or B” and says that it is treated like an instrument payable to A or B.

 

Of course, your check does not have a connecting conjunction, and the commentary does not address instruments payable to two payees without a connecting conjunction.  Despite the lack of commentary, I believe an instrument payable to two or more payees without a connecting conjunction is probably the most ambiguous of all.  Thus, I would apply the third sentence of subsection (d) and treat the instrument like it was payable to A or B.  You can rely on the indorsement of a single payee.

Section 154.013 of the Texas Family Code (below) addresses the continued obligation of your account holder despite his or her death.  The Texas Probate Code Section 322 give a delinquent child support claim a class 4 in the priority of payment. Provided you are not paying ahead of claim with a higher priority of payment, monies in the account are still subject to the child support levy you received from the TX AG despite the fact the account holder is deceased.

*****

Texas Family Code Sec. 154.013.  CONTINUATION OF DUTY TO PAY SUPPORT AFTER DEATH OF OBLIGEE.  

(a)  A child support obligation does not terminate on the death of the obligee but continues as an obligation to the child named in the support order, as required by this section.

*****
Texas Probate Code - Section 322. Classification Of Claims Against Estates Of Decedent

§ 322. CLASSIFICATION OF CLAIMS AGAINST ESTATES OF DECEDENT.  Claims against an estate of a decedent shall be classified and have priority of payment, as follows:

…

Class 4. Claims for the principal amount of and accrued interest on delinquent child support and child support arrearages that have been confirmed and reduced to money judgment, as determined under Subchapter F, Chapter 157, Family Code.

I can't find anything that speaks directly about advisory directors making motions, but I think that particularly Finance Code §33.104(c) makes the safest courste of action is to not have them make motions.  Although it doesn't look like making a motion is stepping over the boundaries set in federal and state law, if they do step over the boundaries, they could face liability for board decisions.

For national banks, here is what 7 CFR §7.2004 says about advisory directors:

§ 7.2004 Honorary directors or advisory boards.
A national bank may appoint honorary or advisory members of a board of directors to act in advisory capacities without voting power or power of final decision in matters concerning the business of the bank. Any listing of honorary or advisory directors must distinguish between them and the bank’s board of directors or indicate their advisory status.

Here is what Finance Code Section 33.104 says, and I think there is a similar statute in the National Banking Act:

Sec. 33.104.  ADVISORY DIRECTOR.  An advisory director is not considered a director if the advisory director:
(1)  is not elected by the shareholders of the bank;
(2)  does not vote on matters before the board or a committee of the board;
(3)  is not counted for purposes of determining a quorum of the board or committee; and
(4)  provides solely general policy advice to the board.

This is from the OCC's Director's Handbook:

ADVISORY DIRECTORS
Some institutions supplement their boards with advisory directors,
also known as associate directors, honorary directors, and directors
emeriti. Advisory directors may serve the board, directly or indirectly,
through an advisory board. These individuals provide information
and advice but do not vote as part of the board.
A board with advisory directors generally brings a broader perspective
to a bank. Advisory directors are often former directors of newly purchased
banks and may represent a large constituency of customers or
communities that are not otherwise represented on the board. A
bank may use advisory directors in the following situations:
❏ When the operations of the bank are geographically dispersed and
the board wants input from more segments of the communities
served by the bank.
❏ When the board itself is small and the directors want direct
involvement with a broader array of community leaders.
❏ To assist in business development.
❏ To gain access to special expertise to assist the board in its planning
and decision making activities.
❏ To help identify likely candidates for future board openings.

Because of their limited role, advisory directors generally are not
liable for board decisions. The facts and circumstances of a particular
situation, however, as well as whether an advisory director functions
in effect as a full director, are likely to determine whether an
advisory director may have liability for individual decisions, including
factors such as:
❏ Whether advisory directors were elected or appointed.
❏ How advisory directors are identified in corporate documents.
❏ How advisory directors participated in board meetings.
❏ Whether advisory directors had voting authority or exercised significant
influence on the voting process.
❏ How advisory directors were compensated for attending board
meetings.
❏ Whether the advisory director had a prior relationship with the
bank.
An advisory director who in fact functions as a full director may be
liable for board decisions in which he or she participated as if that
person were a full director. Individuals cannot shield their actions
from liability simply by inserting the word “advisory” in their title.

No.  However, the president (principal executive officer for state bank) must be a member of the board.

I am not aware of a model "policy." The OCC has bank director handbooks. That gives you a good idea of the things that directors should be familiar with (like different kinds of reports that they should receive and review). Here is a link to the online version of the handbook: http://www.occ.treas.gov/director.pdf
Here is another booklet that is available online. It is "red flags in director's reports": http://www.occ.treas.gov/RF_Book.pdf
This online booklet for directors is about internal controls:
http://www.occ.treas.gov/IntCtrl.pdf
The booklets are about $10 each if you order print copies. Admittedly, these are not policies, but they are good training tools--whether or not the bank has a national charter.

Yes.  For state banks, remember that dividends must be taken out of unrestricted surplus.  You can't reduce your certified surplus without prior permission from the Banking Commissioner.
 
For national banks, 12 USC 60 provides: "The approval of the Comptroller of the Currency shall be required if the total of all dividends declared by such association in any calendar year shall exceed the total of its net income of that year combined with its retained net income of the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock."  Also, 12 USC 56 provides that no dividends may be paid if losses exceed undivided profits.

Occasionally bankers ask about whether a Texas state-chartered bank is restricted from paying more in dividends than they earned that year (which may be a restriction for fed member and national banks).  The answer is that there is no restriction for nonmember Texas state-chartered banks.  If they earned $500M last year, nothing prevents the board from paying out $1,000M.  Of course, this is all contingent upon the board exercising prudence given their specific circumstances and safety and soundness issues.

State chartered banks in Texas are restricted from paying dividends during their first 3 years of organization without approval of the Commissioner.  Payment of dividends may require approval if a bank is placed under a formal or informal order, such as a Memorandum of Understanding, Determination Letter or a Cease and Desist order.  Otherwise, approval for payment of dividends is only required under the circumstances defined in Texas Finance Code 32.103.  Additionally, if your bank is a member of the Federal Reserve, you will need to review 12 USC 324, which refers to payment of dividends in excess of earnings.
 
You should also be aware that any payment of dividends that reduces capital and surplus would need to receive the prior written approval of the Commissioner under Texas Finance Code 32.103.

Your customer should re-file their assumed name certificate.

Sec. 71.151.  DURATION AND RENEWAL OF CERTIFICATE. 

(a)  A certificate is effective for a term not to exceed 10 years from the date the certificate is filed.

(b)  A certificate is void at the end of the certificate's stated term, unless within six months preceding the certificate's expiration date the registrant files in the office of a county clerk and the secretary of state, if applicable, a renewal certificate complying with the requirements of this chapter for an original certificate.

(c)  A registrant may renew a certificate under this section for any number of successive terms, but each term may not exceed 10 years.

 Source: Texas Business Commerce Code § 71.151

---

The answer is “Yes” – with some additional issues to consider.

The controlling law is at 42 USC 407
…

(a) In general

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. Source

According to Karen Neeley at Cox Smith that protection only extends to court action and does not apply to tax levies or setoff.

Now look at the information from the OCC (although directed specifically at national banks, it is very succinct and on point) -

Under current law, a bank may administer a consumer’s deposit account by making additions to (credits) and subtractions from (debits) the account, and may charge fees for these services.  This is true even when the money in the account is from a Social Security benefits check. Source

Numerous courts have issued opinions on this and there seems to be agreement that, depending on what your deposit agreement says, you can setoff for overdrafts and related account fees.

However if a considerable period of time had passed since you had closed the account AND you had specifically told the accountholder the account was closed, you could have an issue.

So the answer to your question is really it depends on the situation, what your agreements say, and finally what you appetite for risk is (compliance risk and reputation risk). When it comes to setoff and SS benefits are involved we highly advise a consultation with your bank's attorney.

---

A Louisiana notice of levy (or a levy from any other state) that has not been domesticated in Texas under the Uniform Enforcement of Foreign Judgment Act is not enforceable. Domestication is the first step to collecting a foreign judgment in Texas. It is the process by which an out-of-state levy or judgment is "recognized" and becomes enforceable in Texas. The domestication process is governed by Texas Statute. Texas has adopted the Uniform Enforcement of Foreign Judgment Act. Additionally, and a Texas licensed attorney is required to complete this process. The process of  “domestication” is not the responsibility the bank. Foreign levies should be turned over to your bank’s counsel to ensure they are handled properly.

There is an exception for child support collection actions by another state’s Title IV-D agency. The Texas Family Code Section Chapter 231 entitled Title IV-D Services provides for out of state child support collection actions by another state.  Like a foreign levy, a child support collection action from another state should be turned over to your bank’s counsel to ensure they are handled properly.

As of 5/31/2010

The POD account should be distributed to the POD beneficiaries outside of the estate pursuant to Probate Code §439(b):

(b) If the account is a P.O.D. account and there is a written agreement signed by the original payee or payees, on the death of the original payee or on the death of the survivor of two or more original payees, any sums remaining on deposit belong to the P.O.D. payee or payees if surviving, or to the survivor of them if one or more P.O.D. payees die before the original payee. If two or more P.O.D. payees survive, there is no right of survivorship in event of death of a P.O.D. payee thereafter unless the terms of the account or deposit agreement expressly provide for survivorship between them.

The son of the owner of the accounts had no signing authority during the life of his mother, and certainly has no authority after her death, but before his potential appointment as executor.  He is not entitled to copies of the statements of the accounts until such time as he qualifies as executor of the estate and can present the bank with Letters Testamentary.  Upon proof that the son is executor of his mother’s estate, he may request statements and other records of any account owned by his mother as part of his duties.  If the executor determines that there were some improprieties on behalf of the authorized signer, then he may bring a legal action as the executor of the estate against the authorized signer.  The court could order that the authorized signer must make restitution.  Alternatively, the court could decide that the authorized signer did nothing improper.

If the bank is concerned about paying the money to the POD either because the records establishing the account as a POD account aren’t very good or because the bank is afraid of getting sued, you should consult your attorney to discuss other available options, such as tendering the money into the registry of the court (thereby washing the bank’s hands of the entire matter and getting its legal fees paid for doing so).   Because there is a dispute, and in disputes the parties always look for the deep pocket, you should at least alert your attorney of the situation. It is better that you contact your attorney early and handle it like he/she recommends.  By doing so, your attorney can’t charge your bank more money to get you out of a pickle because he/she is having to undo something she wouldn’t have recommended.

The possibilities are endless as to what might happen, but the bank need not worry about that. If the bank minds its own business, and follows the law, it shouldn’t be a party to any lawsuit among the parties.  Be sure that you preserve copies of the documentation whereby the authorized signer was designated, as it will probably become relevant evidence, and someone from the bank may be called on to testify.  But don't attempt to take sides or it could result in bank liability!  Just cooperate and provide whatever is requested by the executor or is subpoenaed by the court.  The bank should not express an opinion on the validity of either side’s claims, unless a bank representative is required to testify in court.

If, in consultation with your attorney, you take these steps and the steps your attorney recommends, the bank should come out of this mess just fine.

I really don’t see a big issue on increasing the overdraft “privilege” amount. Remember, that the bank has not AGREED to pay all overdrafts. So, really, you aren’t amending your “agreement” between the bank and the customer since there is NO agreement! The bank also has the right to withdraw the “privilege” at any time. So, I think that you could go ahead with the OD change. But you may not see a change in customer behavior until the effective date!

The notice period is 30 days for both commercial and consumer accounts.

As you know, Truth in Savings (Reg DD) applies to consumers only.  The rule on subsequent disclosures for consumers is found at 12 CFR §230.5.  "Consumer" is defined at 230.5(h) as "a natural person who holds an account primarily for personal, family, or household purposes, or to whom such an account is offered. The term does not include a natural person who holds an account for another in a professional capacity."

Finance Code § 34.302 sets the notice period for such disclosures at 30 days, but does not distinguish between consumer and commercial accounts.  But because Section 34.302 is preempted with respect to consumers account by 12 CFR §230.5, the Finance Code notice requirement applies only to commercial accounts.

State law permits you to unilaterally amend deposit contracts by sending out a 30 day advance notice. (Section 34.302 of Finance Code)  This applies to commercial as well as consumer contracts in Texas.  If you include the change as a statement stuffer, be sure to allow plenty of time for all customers to receive 30 days notice before implementing the change.

Yes – that remains a requirement for Texas banks.

Sec. 277.002. ACCOUNT INFORMATION REQUIRED. (a) A financial institution shall require, as a condition of opening or maintaining a business checking account, that the applicant or account holder provide:

(1) if the business is a sole proprietorship:

(A) the name of the business owner;

(B) the physical address of the business;

(C) the home address of the business owner; and

(D) the driver's license number of the business owner or the personal identification card number issued to the business owner by the Department of Public Safety; or

(2) if the business is a corporation or other legal entity, a copy of the business's certificate of incorporation or a comparable document and an assumed name certificate, if any.

(b) The financial institution shall request that the account holder inform the institution at least annually of any changes in the information the institution is required to obtain under Subsection (a).

Added by Acts 1999, 76th Leg., ch. 998, Sec. 1, eff. Sept. 1, 1999.

BTW:

Sec. 277.001.  DEFINITIONS.  In this chapter:

(1)  "Business" means a legal entity, including a corporation, partnership, or sole proprietorship, that is formed for the purpose of making a profit.

(2)  "Business checking account" means an account at a financial institution from which withdrawals may be made by a business by check or draft.  The term includes a money market account, a negotiable order of withdrawal account, or other account at a financial institution in which the account holder has check writing privileges.

(3)  "Financial institution" means a state or national bank, state or federal savings and loan association, state or federal savings bank, or state or federal credit union doing business in this state.

You should be able to accomplish this with a simple statement stuffer.

In response to your question, affidavits of heirship are for small estates and should not be used to distribute assets of estates where the total assets of the estate exceed $50,000 and should not take the place of distribution under a will.  For more information and to see what Probate Code Section 137 requires for an affidavit, go to IBAT’s Compliance Forum.

There are some very abbreviated probate proceedings that can take care of a deceased accountholder. You might get an affidavit of heirship, but it isn't a court document and is just one or more people swearing who the heirs are.  If an heir is left out or there is a creditor that is left out, the bank could have some liability for the money it just gave to the heirs named in the affidavit.  If the estate is less than $50,000, it can possibly be handled with a Small Estate Affidavit.  A Small Estate Affidavit is presented to the court and the judge approves the affidavit.  Once the judge approves it, you can pay the money as stated in the affidavit.  If this is done, the bank will have no liability if heirs get left out or debts do not get paid (unlike the affidavit of heirship where there are risks to the bank). There are some other abbreviated probate proceedings the heirs might use, but when the heirs bring the court documents to you, I would recommend that your bank's attorney review them and approve the withdrawal and closing of the account.  If the account is too small to pay your attorney to review documents, it is up to the bank to decide whether to take the risk that it has what is needed.

---

A tax accountant or CPA would be in a better position than I to know how this should be reported.  That being said, report the interest paid until the date of death on the deceased's SSN, then report the interest paid thereafter on the estate's TIN. The bank would send each 1099-INT to the representative of the deceased person's estate, which is not necessarily the beneficiary.  A beneficiary is entitled to the funds in the account at time of death, but not to any other information on the deceased or their account(s).  If the beneficiary wants to see the 1099, they can request it from the representative of the estate.  In any case, the account beneficiary would not be entitled to information regarding interest earned on the account after the death (unless the beneficiary is also the representative of the estate or, perhaps, if the account beneficiary is also a beneficiary of the estate).

As of 7/13/2009

They both should sign the signature card.  When the Letters Testamentary provide for co-executors, then either co-executor may sign on the account unless the co-executors agree that both signatures are required.  However, even if they agree that both signatures are required, I would not make that the bank's problem. I always recommend that if a customer wants to adopt a policy that two signatures are required on checks, then that is their internal bookkeeping policy, and not part of the bank's duty.  I recommend that you make it clear in their agreement that bank is authorized to pay checks that have either signature on them.  In other words, make it the executors' and not the bank's job to perform this duty.  Otherwise, if your bank ever lets a check go through on an estate account with only one executor's signature on it, the bank could be responsible for it. Let them be responsible for it.

Qualified Income Trust Accounts are also known as Miller Trust Accounts.  A valid Miller Trust will provide that any funds in the account when the Medicaid recipient dies must be used to repay the state of Texas for assistance paid on the accountholder’s behalf.  So, when a Texas resident accountholder dies, the state of Texas must be reimbursed for Medicaid assistance the accountholder received.  If there are any funds left in the account after the state is reimbursed, they go to the beneficiaries named in the accountholder’s will. Because the state is reimbursed first when the accountholder dies, it would not be appropriate to have a POD beneficiary.

I am not sure about the documentation required by the state of Texas. You should direct that question to the Health and Human Services Commission’s Medicaid client hotline: 1-800-252-8263.

No.  This is not an asset of the estate.  Rather, it passed by contract (POD designation).  The administrator may be able to go after the new owner of the funds if the estate has insufficient assets to pay expenses.  But that is not YOUR call!

We had to do some research on that as well!  The short answer is that the responsibility for the administration of the IOLTA account will pass to the executor / executrix of the estate. But it is more complicated than that.
We reached out to the Texas Access to Justice Foundation for some added guidance and that information follows:
…
Since attorneys hold the client funds in an IOLTA account in “trust” for their clients, the attorney (or representative) cannot disburse said funds to third parties without the clients’ consent or by law.

In that a client’s trust account is not the property of an attorney, an attorney has the responsibility to properly manage and administer the clients’ funds to effectively safeguard these funds. This includes maintaining complete records (being able to identify each client’s deposits and disbursements and account for them. Records are to be preserved for a period of five years after termination of the representation.

Each client should also have an individual ledger, showing the client‘s deposits and disbursements with a brief description. Recording deposits and disbursements on individual client ledgers should be done close to, or at the same time as the entry in the check register.

Every effort should be taken to attempt to identify those clients that have funds in the account and to contact the client(s) in order to return any funds they are entitled to. Ledgers, check registers, deposit slips and any other records should be reviewed. . If the lawyer has kept his trust account records in order, the task is less overwhelming for the person who has assumed this responsibility.

There is a pamphlet on our web site published by the State Bar of Texas called “Lawyers Guide to Client Trust Accounts” which states:
“Unclaimed Funds
Occasionally, a lawyer‘s trust account may include unclaimed funds because the person to whom the funds belong cannot be located. The lawyer should make all reasonable efforts to locate the person so that proper payment under this rule can be made; including attempting to contact the person at last known addresses and telephone numbers. When all reasonable efforts have been exhausted, the lawyer should make sure to maintain the property in the trust account for a period of at least five years.65 Afterwards, a lawyer is permitted to treat the property as abandoned and may look to the abandoned property provisions of the Texas Property Code for instructions on how to handle disbursing these funds.”

Please keep in mind when closing a trust account; it requires returning unearned fees or paying third parties to whom the client owes money. It also includes notifying the Texas Access to Justice Foundation in writing or electronically within 30 days of closing an IOLTA account. If you have any questions about closing an IOLTA account, please feel free to contact Janice Cappiello, Assistant to Director of Finance & Operations at 800.252.3401 Ext. 108 or at jcappiello@teajf.org.

A Muniment of Title is a unique Texas procedure where the will is filed through a probate proceeding in order to transfer ownership of real estate in Texas to the beneficiaries under the will without a deed or a full probate proceedings.  It is filed in the real estate records, and should not be used as a basis of opening an estate account.  It is the responsibility of the executor/executrix to open an estate account and the evidence for that will be Letters Testamentary.  Any cash payable to the deceased individual or the cash proceeds of any other property that was owned by the decedent and sold by the executor/executrix will go into the estate account and disbursed to heirs according to the provisions of the will by the executor/executrix, not the bank.  It is true that some individuals will try to use a Muniment of Title for this purpose, but that is not correct, and again the Muniment of Title should not be used for this purpose.
 
Sec. 137 of the Probate Code does allow for an Affidavit of Heirship for small estates with assets of a value of $50,000 or less which may be used to disburse estate assets without opening an estate account, but note that it must be sworn to by all of the heirs and signed by a judge.  Otherwise probate must proceed under the provisions of Chapter V of the Probate Code.
 
It is the job of the executor/executrix to determine how the estate is to be distributed to the appropriate beneficiaries, not the bank.  To do so would subject the bank to the penalties of the Unauthorized Practice of Law statutes, and believe me, you do not want to have the Texas State Bar coming down on you.

What happens to a partnership upon death of a partner depends on what the partnership agreement calls for.  The partnership agreement could provide that the partnership continues with the partnership assets belonging to the remaining partner(s).  The agreement could provide that the partnership is terminated with the deceased partner's share going to his or her estate.  The agreement could provide that a new partner be named to replace the deceased partner.  It is also possible that the partners never executed an agreement.  The point is, you don't know.  If the surviving partner had signing authority on the account, you could allow that partner to close that account.  Then it is the surviving partner's responsibility to distribute the money according to the partnership agreement.  If the surviving partner did not have signing authority on the account, then you should freeze the account until you get written instructions as to the disposition of the account.  This will keep the bank out of a potential issue of wrongful payment.  If you cannot get written instructions as to the disposition of the funds, then you should talk with your local attorney about interpleading the funds into the registry of the court.  If you have to interplead, your legal fees come off the top, and that usually persuades the claimants to enter into an agreed order.

---

According to the Texas Probate Code §446, a P.O.D. beneficiary must be living at the time of the account owner's death to be entitled to his/her share of the account. Because there were two beneficiaries and one of them predeceased the account owner, when the owner died, the funds in the account were payable to the surviving P.O.D. beneficiary.  If instead the P.O.D. beneficiary had died after the sole account owner, then your bank could have paid half the funds to the living P.O.D. and half the funds to the personal representative or heirs of the deceased P.O.D. upon presentment of proof of death showing that the P.O.D. payee survived the account owner.  Here is Probate Code §446:

Texas Probate Code Sec. 446. PAYMENT OF P.O.D. ACCOUNT.  A P.O.D. account may be paid, on request, to any original party to the account. Payment may be made, on request, to the P.O.D. payee or to the personal representative or heirs of a deceased P.O.D. payee upon presentation to the financial institution of proof of death showing that the P.O.D. payee survived all persons named as original payees. Payment may be made to the personal representative or heirs of a deceased original payee if proof of death is presented to the financial institution showing that his decedent was the survivor of all other persons named on the account either as an original payee or as P.O.D. payee.

When a person dies, all of that person's rights and assets and liabilities and responsibilities pass to the estate of that person, and the executor is the legal representative of the estate. So on a POD account, although the balance of the account passes to the POD beneficiary by contract and not through the estate, the executor, as the legal representative of the (now) deceased owner, has all of the rights of the owner with respect to the account, even though the executor has no rights to the money that was in the account. For estate tax purposes, the balance in the account as of the date of death must be included in the inventory of the assets of the estate. The executor is also entitled to look at the account history during the lifetime of the owner--for instance, on a DDA account, it is the executor's responsibility to review the monthly statements to check for any forgeries or unauthorized payments made from the account during the life of the owner. Of course any claims may be barred by the "reasonable promptness" duty to inspect the statements (see Business and Commerce Code (UCC) Section 4.406(c), http://www.statutes.legis.state.tx.us/SOTWDocs/BC/htm/BC.4.htm#4.406, (open by chapter and then by section)). In short, the executor steps into the shoes of the owner of the account. You may provide the executor with any information which you would have provided the owner during the owner's lifetime.

In a multiparty account without right of survivorship when one of the parties to the account dies, the interest in the account of the deceased party does NOT pass to the surviving accountholders. The deceased’s interest in the account will pass in accordance with his/her will or by intestate succession if he/she does not have a will.

The bank should allow any surviving accountholders to continue to use the account to transact business after the death of another accountholder.  The bank is not obligated to put a hold on the account. The Texas Probate Code provides cover for the bank because it states that funds in a joint account can be paid out upon request of ANY party, before or after the death of an accountholder.

§ 445. PAYMENT OF JOINT ACCOUNT AFTER DEATH OR DISABILITY.  Any sums in a joint account may be paid, on request, to any party without regard to whether any other party is incapacitated or deceased at the time the payment is demanded, but payment may not be made to the personal representative or heirs of a deceased party unless proofs of death are presented to the financial institution showing that the decedent was the last surviving party or unless there is no right of survivorship under Section 439 of this code.  A financial institution that pays a sum from a joint account to a surviving party to that account pursuant to a written agreement under Section 439(a) of this code is not liable to an heir, devisee, or beneficiary of the decedent's estate.

If there is any question as to ultimate disposition of the funds when one of the accountholders dies, that is between the surviving accountholders and the deceased accountholders estate/heirs.  It is not an issue for the bank to get involved in.

There is no requirement that it be witnessed. Based solely on what you told me and the provisions of Probate Code §440, as long as the customer signed the order or request and you received it during the customer's lifetime, it would create a POD account.  Tread carefully though, the proximity of the date of death to the signing of the order or request might give rise to an heir contesting the order. But that is really not your problem, though an employee's testimony may be required if it is contested.  Although I usually encourage imaging documents, I think I would keep the original of this until you are sure it won't be contested.  Unless there is some other fact that would cause you to question this, after consulting with your own attorney and getting his/her approval, you can pay the account to the POD beneficiaries.

Sec. 440. EFFECT OF WRITTEN NOTICE TO FINANCIAL INSTITUTION.  The provisions of Section 439 of this code as to rights of survivorship are determined by the form of the account at the death of a party. Notwithstanding any other provision of the law, this form may be altered by written order given by a party to the financial institution to change the form of the account or to stop or vary payment under the terms of the account. The order or request must be signed by a party, received by the financial institution during the party's lifetime, and not countermanded by other written order of the same party during his lifetime.

The bottom line is:  A bank is NOT prohibited from issuing a debit card to a guardian.  But I think your question deserves a little more discussion than this.

According to Texas Probate Code §602, "a court may appoint a guardian with full authority over an incapacitated person or may grant a guardian limited authority over an incapacitated person as indicated by the incapacitated person's actual mental or physical limitations and only as necessary to promote and protect the well-being of the person."  What this means is that the court, in crafting the guardianship order, should allow the incapacitated person (the "ward") to act on his/her own behalf to the extent possible, and should only give the guardian the powers necessary to protect the ward's well-being.

Because the guardianship powers must be as limited as is practicable, it is possible that a guardian might not have the authority to open an account and handle the ward's finances. Although I can't imagine a guardianship without this authority, just to be safe, the first thing you want to do is review the guardianship order to make sure the guardian has the authority to open an account and transact on the ward's behalf.

Once you have established that the guardian has the authority to open the account, there is nothing to prohibit the guardian from getting a debit card on the guardianship account.  That being said, it may not be prudent for the guardian to obtain a debit card on the account.  A guardianship is supervised by a court, and the guardian will file, with the court, an annual accounting of where the ward's funds were spent.  With a debit card, it is nearly impossible for the court to trace where the funds were spent. The court may prefer that the guardian exclusively use checks because it is easier to account for the funds.  It is also easier to protect the guardian from false claims of fraud if the guardian uses checks exclusively.

Despite these warnings, it is not the bank's responsibility to warn the guardian or make the decision on whether the guardian should have a debit card. The best the bank can do for its guardian/customer is recommend that the guardian discuss the advisability of a debit card with the guardian's attorney. If the guardian still wants a debit card, regardless of whether it was discussed it with the guardian's attorney, there is no prohibition on issuing the debit card.

Yes.  Remember, though, that sole proprietors are covered by Reg E while business entities are NOT.  Be sure to deal with the liability and responsibility issues through your agreement.

The answer is yes.  This is called “right of offset” or "right of set-off" which is ordinarily provided under state law and recognized in bank closings by the FDIC.  Here is a link to an FDIC Advisory Opinion 91-11 on the issue.  If a bank customer ever faces this situation, he/she should ask his/her attorney to review applicable state law and the customer's deposits and loans in order to determine whether or not offset is available in any particular instance.  According to Texas Finance Code §34.307(c), entitled "Right of Set-off,” a bank may not exercise its right of set-off against an account unless the account is due the depositor in the same capacity as the defaulted credit obligation.  For example, single name ownership accounts may be offset against single name debts to the bank, and joint deposit accounts may be offset against joint obligations.

I asked this question of a contact of mine at the FDIC, and here is his answer:  "Yes, the FDIC considers the $250,000 additional deposit insurance as interim and interprets the rule as such.  Accordingly, based on your example, on January 1, 2010 the deposit insurance coverage reverts back to $100,000."

One way to solve this problem would be to participate in CDARS.  CDARS places funds into certificates of deposit, issued by banks in their network, in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance.  You can learn about CDARS at their Web site:  http://www.cdars.com/index.php.

The answer is $250,000.  The quote below is from page 17 of the Financial Institution Employee’s Guide to Deposit Insurance (Employee’s Guide):

If self-directed retirement funds (for example, an IRA account) are deposited on behalf of an individual by a fiduciary such as a deposit broker, the funds in the account will be insured as the self-directed retirement funds of the principal, added to any other self-directed retirement accounts of the principal at the same bank, and insured up to $250,000.

The answer is $250,000.  The quote below is from page 17 of the Financial Institution Employee’s Guide to Deposit Insurance (Employee’s Guide):

If self-directed retirement funds (for example, an IRA account) are deposited on behalf of an individual by a fiduciary such as a deposit broker, the funds in the account will be insured as the self-directed retirement funds of the principal, added to any other self-directed retirement accounts of the principal at the same bank, and insured up to $250,000.

According to the FDIC: "The extension announced on May 20, 2009, does not apply to the Transaction Account Guarantee Program. The unlimited coverage under the Transaction Account Guarantee Program is only in effect for depositors at participating institutions through December 31, 2009."

http://www.fdic.gov/deposit/deposits/changes.html

No!  According to an Attorney General opinion, you must close the account and reopen.  Remember that there are disclosures distinguishing between individual and joint accounts.

---

It is not a requirement that the other account ownership types or descriptions show up on the account agreement.  However, it is a good idea.  Section 439A of the Texas Probate Code states that if a contract of deposit contains provisions substantially the same as the form provided, it establishes the account type selected.  So, it would be wise to use the form because you'll know that it establishes the account type selected.  If the contract of deposit does not contain provisions substantially the same as in the form, it is governed by the provisions of Chapter XI of the Probate Code, and it will be considered to be the account that most nearly conforms to the depositor's intent.  Here is the controlling provision:

Sec. 439A.UNIFORM SINGLE-PARTY OR MULTIPLE-PARTY ACCOUNT FORM.  (a) A contract ofdeposit that contains provisions substantially the same as in the formprovided by Subsection (b) of this section establishes the type ofaccount selected by a party. The provisions of this part of Chapter XIof this code govern an account selected under the form, other than asingle-party account without a P.O.D. designation. A contract ofdeposit that does not contain provisions substantially the same as inthe form provided by Subsection (b) of this section is governed by theprovisions of this chapter applicable to the account that most nearlyconforms to the depositor's intent.

You know it is the same company. It is "P" Enterprises, formerly known as (f/k/a) ICO Company.   Get a copy of the change to the articles of incorporation (or whatever document was used to change the name) and include that in your files.

You need to look at the declaration of trust.  Most of them provide for a successor trustee when an original trustee dies.  For a husband and wife as co trustees, if one dies, the successor may be the surviving spouse, but it may not.  That is why you need to look at the trust instrument.  Also, if a trustee becomes incapacitated, usually a successor trustee is appointed.  Powers of attorney are not generally used in trust arrangements.

Yes.  Chapter 277 of the Texas Finance Code requires that a financial institution (which includes national banks and savings banks as well as state banks) verify with their commercial depositors that their required information (name, physical and mailing address, and driver's license number) are correct.  You could do this in a statement stuffer or as an information line on the statement.  For online customers, an email notification should be acceptable.

No, in fact, I recommend obtaining the certificate of incorporation from the Secretary of State.  Articles alone don’t mean that the corporation has been actually formed.

Each county clerk and the secretary of state will accept a filing of an assumed name certificate as notice of intent to use of the assumed name without determining whether the registrant has the right to use of the name.  Consequently, there may be the same assumed name on file by more than one organization.  Each county clerk and the secretary of state must keep an alphabetical index of all assumed names that have been filed in their office pursuant to the provisions of Chapter 36 of the Business & Commerce Code (See Section 36.15).  It is up to the business owner to search these records to see if they have a right to use this name.  Section 36.17 provides that the filing of an assumed name certificate does not give the registrant the right to use of the name when contrary to the common law or statutory law of unfair competition, unfair trade practices, or common law copyright.
 
Here is a primer on who needs to file an assumed name certificate and where they must file it:
 
Any person who regularly conducts business or renders professional services other than as a corporation, limited partnership, registered limited liability partnership, or limited liability company in this state under an assumed name shall file an assumed name certificate in the office of the county clerk in each county in which such person has or will maintain business or professional premises or, if no business or professional premises are or will be maintained in any county, in each county where such person conducts business or renders a professional service.  (Section 36.10)  Any business that is not in the "other than" list must follow this requirement, except that, pursuant Section 36.03, it does not apply to insurance companies.
 
Any corporation, limited partnership, registered limited liability partnership, or limited liability company which regularly conducts business or renders professional services in this state under an assumed name, or which may be required by law to use an assumed name in this state to conduct such business or render such services, shall file an assumed name certificate in the office of the Secretary of State and, (1) if such corporation, limited partnership, registered limited liability partnership, or limited liability company is required to maintain a registered office in this state, in the office of the county clerk of the county in which such registered office is located and of the county in which its principal office is located if within this state and not the same county where the registered office is located; or (2) if such corporation, limited partnership, registered limited liability partnership, or limited liability company is not required to or does not maintain a registered office in this state, in the office of the county clerk of the county in which its office within this state is located or if the corporation, limited partnership, registered limited liability partnership, or limited liability company is not incorporated, organized, or associated under the laws of this state, in the office of the county clerk of the county in which its principal place of business in this state is located if not the same as its office. (Section 36.11)

The assumed name certificate is only needed if the customer is using an assumed name.  An "assumed name" is something other than the legal name for a corporation.  For sole proprietors, partnerships, and joint ventures, it is a name that does not include either the legal name or surname of each party.  Also, for these, if the name includes a term like "company, & associates, & brothers, & sons" (which implies other parties), then it is an assumed name.  So, "Molly Smith's Diner" is not an assumed name but "Molly's Diner", which doesn't include her surname would be an assumed name.
 
Question:  The county clerk no longer has sample assumed name certificates.  Is there a form that customers could use?
 
Answer:  Yes.  Remember that neither the county clerk nor the bank should be giving legal advice.  However, there is a form promulgated by the Secretary of State.  Go to: http://www.sos.state.tx.us/corp/forms/503_boc.pdf  Some of the blocks are only relevant for a corporation.

A business basically has an assumed name if it is using a name other than its legal name (e.g. name in its Articles of Incorporation) or for a partnership or sole proprietor it is using a name that does not include the owner's last name.  See section 36.02 of the Texas Business & Commerce Code for details!

An executor can appoint agents.  However, they can’t delegate their fiduciary responsibilities.  Therefore, in this specific question, the executor could retain the CPA firm (or a bookkeeping service) to manage the bill payment function, but the executor should approve and sign the checks. The bottom line is that the CPA should not be added as an authorized signer.  If the executor adopted a stamp as their signature and gave a signature stamp to the CPA, the bank could then negotiate those checks without liability because the checks have an authorized signature on them. However, I think the executor would still be improperly delegating their fiduciary responsibilities to the CPA. (I’d like to thank IBAT General Counsel Karen Neeley for confirming the answer to this question.)

The Texas Probate Code provides for Guardian of the Estate or Guardian of the Person (or both) for persons over 18 that have disabilities.  However, as a practical matter, not all adult persons under a disability have guardians.  It is a legal proceeding, which means attorneys fees (they even have to appoint a guardian for the ward), plus it can be embarrassing for the family.  In your case, if there is a court appointed guardian, you should have a guardianship account.  If there is no appointed guardian, for the purposes of a deposit account, a responsible adult as a cosigner would be appropriate.  I would be more firm about using a guardian in the case of making a loan.

---

Your customer probably heard those commercials by that company that touts the legal advantages of forming businesses in Nevada.  It is likely that your customer is just misinformed and thinks that because he formed his entities in  Nevada, he doesn't need to register them as doing business in Texas.  One problem for the bank in opening such an account is that there is no registered agent in Texas to serve, if that should become necessary.  Additionally, the instructions to the Doing Business Certificate mention that foreign LLPs doing business in Texas are subject to the state franchise tax as well as federal tax, so they are going to be looking for a state franchise tax number as well as an IRC number.  So the customer may be dodging taxes.  Although I do not think you are legally obligated to require the customer register as doing business in Texas, I suggest you price these accounts as you would other commercial accounts.  Unless you can charge a fee large enough to compensate the bank for all of the potential trouble I foresee with this customer, you may not want these accounts.

Since Kinky Friedman is running for Governor of Texas, the Texas Election Code and the rules adopted by the Texas Ethics Commission apply, not the federal rules.  Before accepting campaign contributions or making any campaign expenditures, the candidate must designate a campaign treasurer on Form CTA promulgated by the Texas Ethics Commission. The candidate may designate himself as the treasurer.  The account is opened as a single ownership account.  The account must be styled to include the name of the candidate, "Kinky Friedman Campaign Fund" or "Kinky Friedman For Governor Fund."  The candidate's Social Security Number should be used.  A campaign fund can be a NOW account.  It is the responsibility of the candidate, not the bank, to file monthly reports with the Texas Ethics Commission as to the contributions and expenditures from a candidate account.
 
Question 2:  I understand, but do we need to have a resolution for signors on not?  Do we have to use his SSN if we already have a TIN?
 
Answer 2:  If there is a campaign committee, then you should have a resolution as to signers on the campaign account.  However, it appears to me that Mr. Friedman is the sole organizer of the campaign and is going to be the treasurer.  If that is the case, you can't have a resolution, which implies more than one person resolving to do something as a group and having one or more persons act on behalf of the group.  There is a good explanation of campaign accounts in the Account Documentation Manual.

There are two aspects to this question: a legal one and a business/data processing one!  From “legal” perspective, I believe that you could just give a notice to the customers of the number change, advice re changing auto debits, etc. and go with it. My preference is a 30 day notice—both because that is the time frame in section 34.302 Finance Code http://www.statutes.legis.state.tx.us/SOTWDocs/FI/htm/FI.34.htm#34.302 for amending accounts and because customers need lead time to make these changes. And, they will have to order new checks and notify persons or businesses that they have given pre-authorized debit authority to of the new account number. I don’t see a legal need to close and reopen. Now, from a data processing perspective, you may have other issues. I am not competent to speak to those!

In 2009, HB 3075 was IBAT’s proposal to permit convenience signers on all forms of multi-party accounts.  The legislature passed it into law and it became effective in June of 2009. It does not eliminate the convenience account but simply adds the potential of a convenience signer to joint accounts with right of survivorship, POD accounts and others. The uniform disclosure is amended accordingly.  (Here is a link to HB 3075.)

When new 438B, on convenience accounts, uses the word "accounts," per definition, it includes savings accounts and certificates of deposit.  That account is found in Section 436 and applies to 438B.

 Sec. 436. DEFINITIONS.  In this part:

(1) "Account" means a contract of deposit of funds between a depositor and a financial institution, and includes a checking account, savings account, certificate of deposit, share account, and other like arrangement.

From 10/26/2009

Prior to 2009, there was no legal authority for a POD account (or any other account besides a convenience account) to have a convenience signer.  Our bills in the 2009 Legislative Session included a cleanup to the Probate Code that allows “convenience signers” on any type of account—not just the convenience account. This allows banks to provide a service that many customers desire—the ability to have authorized signers on personal accounts without giving the signer an ownership interest while retaining the flexibility of POD and joint accounts.

This bill was effective on June 19, 2009.  You should change your account agreement forms to conform to the new law.  Amended Probate Code 439A (b) provides a form.  Here is the bill where you can find the form language:  HB 3075.

Now, to answer your question: There is nothing to prevent a convenience signer from being a beneficiary or the beneficiary on a POD account.

A DBA is just a designation that an entity is doing business under a different name than its own. A trust cannot be a sole proprietor.  A trust can open an account for the trust doing business under a name that is not its own. It will be a fiduciary account, not a sole proprietorship account.

The Texas Access to Justice Foundation, a 501(c)(3) nonprofit organization, was created by the Supreme Court of Texas in 1984 to administer the newly implemented Interest on Lawyers’ Trust Accounts (IOLTA) Program.  This is from the TAJF Web site:  The attorney or law firm must take the IOLTA Notice to Financial Institution to the financial institution in which the IOLTA account will be opened. This form instructs the financial institution how to establish an IOLTA account. Once the account is opened, the financial institution must complete the form.  The attorney, law firm or bank must then mail or fax a copy of the completed form to the Texas Access to Justice Foundation.  All IOLTA accounts in Texas will bear the tax identification number of the Texas Access to Justice Foundation, 74-2354575. The account will be exempt from backup withholding and reporting. For additional information or assistance, contact IOLTA, P.O. Box 12886, Austin, Texas, 78711-2886, 1-800-252-3401 (in Texas only), 512-320-0099, fax 512-469-0112.

According to my research on www.irs.gov, the new LLC does not need to apply for a new taxpayer identification number (TIN).  Some financial institutions still require converted LLCs to obtain new TINs.  An IRS Letter Ruling states that the converted LLC is not a termination but a continuation of the partnership.  The exchange of a partnership interest for a different partnership interest in the same partnership as part of a conversion of the partnership from general liability to limited liability or vice versa, is generally a non-recognition event.  See Rev. Rul. 84-52.  Also, the conversion of an interest in a domestic partnership into an interest in a domestic LLC classified as a partnership for federal tax purposes (and vice versa) is treated generally like a partnership to partnership conversion pursuant to Rev. Rul. 84-52.  See Rev. Rul. 95-37.

As of 5/10/2010

When someone signs as the organizer on the Certificate of Formation, he or she is simply stating that the designated registered agent has consented to the appointment and is giving an oath, under the penalty of perjury, that the information on the certificate of formation is true and correct.  The organizer is usually a member of the LLC, but it can be anyone over the age of 18 or a corporation or other legal entity that is authorized to act on behalf of the LLC.  That’s it. There is no further significance, therefore the title “organizer” has no significance for purposes of opening an account.

According to Texas Business Organization Code §101.302, the number of managers is equal to the number of initial managers listed in the certificate of formation.  However, the number of managers can be increased or decreased by amending the company agreement.  See 101.302(b) and (c).  If the number of managers differs from the intial number, check the company agreement.

I have heard of this advice being given. Also, customers are being told not to put their driver's license or SSN on their checks.  The major drawback is that merchants may have a harder time processing them. Also, if the check is stolen, wouldn't it be easier (rather than harder) to forge them? The wrong doer could use any name he or she pleases that fits those initials!  Nothing in the UCC or other law requires checks to have the name, etc. on the top. Reg CC requires information about the bank--but not about the customer!  You might also call your check printer to get their feedback on this.

Your bank must generally back-up withhold if it does not have a TIN for the customer, except in the case of a non U.S. resident who has provided an IRS Form W-8BEN, which is currently effective.

One of the sources of info on backup withholding is IRS Pub. 1281.  On page 8 of the current publication appears the following Q & A #27:

Q. Should I backup withhold on a payee who is a nonresident alien?

A. Yes. A nonresident alien is subject to backup withholding unless you have a signed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, on file for him or her.

The corporate secretary is the official keeper of the corporate records, so that is the one who should sign and attest to the corporate resolutions for account documentation purposes.  Another director's signature is not necessary.  Don't forget, if you are dealing with an out-of-state corporation, they must have a certificate of authority to do business in Texas unless their only activity in Texas is having a bank account!  See Business Corporations Act Part 8, Section 8.01, http://www.capitol.state.tx.us/statutes/butoc.html.

Let’s take these one at a time:

1.    Question: May a legal entity name a POD beneficiary on its account?
Answer:  No. A legal entity might be terminated, but it cannot die, so if it named a POD beneficiary, there would be no death to trigger the transfer of ownership of the funds to the named beneficiary or beneficiaries. (A POD account can have multiple beneficiaries.  For the sake of brevity, the following answers will use the term “beneficiary” to refer to the singular and plural of the word.)

2.    Question: May a sole proprietor account have a POD beneficiary?
Answer: Yes, a sole proprietor account is owned by the sole proprietor who is a natural person. Because natural people die, there can be a triggering event for the funds to transfer to the beneficiary.

3.    Question: May an accountholder name a legal entity as a POD beneficiary?
Answer: Yes, a corporation, non-profit corporations, or any other entity may be the beneficiary of a POD account. The most common entities that we see as POD beneficiaries are charities, trusts, churches, and colleges.

4.    Question: May an accountholder name more than one POD beneficiary?
Answer:  Yes. They can name as many as they want or as many as the financial institution will allow.  I don’t know of any financial institutions that limit this, but I don’t see why they couldn’t if it just got ridiculous.

5.    Question: May the accountholder name several POD beneficiaries who will all receive different portions of the account upon the accountholder’s death?
Answer: No, now you are getting into estate planning, and you don’t want to do that.  If there are two POD beneficiaries, they’ll each get half. If there are three, they’ll each get a third. And so on.

6.    Question: If the POD beneficiary dies before the account holder, does the POD beneficiary’s heirs (or the beneficiaries of his/her will) receive the funds when the accountholder dies?
Answer:  No, if a POD beneficiary dies, the accountholder needs to change the beneficiary designation on the account. Neither the heirs of a deceased POD beneficiary nor the beneficiaries under the deceased POD beneficiary’s will get anything…PERIOD!

7.    Question: If the accountholder dies before the POD beneficiary, but the POD beneficiary dies before the bank distributes the money to the beneficiary,  do the heirs of the deceased beneficiary get the money?
Answer:  Yes, the money belongs to the POD beneficiary upon the death of the accountholder. You’ll need to deal with the representative of the POD beneficiary’s estate to determine what to do with the funds.

8.    Question:  May an accountholder name a substitute beneficiary who will receive the money in the account if the POD beneficiary dies before the accountholder?
Answer: No, do not name substitute beneficiaries.  If an accountholder want to do anything other than name POD beneficiaries who receive equal shares and get nothing if they die before the accountholder, they need to consult an attorney for estate planning purposes. These things can easily be taken care of by an attorney.

9.    Question:  May a right of survivorship account name a POD beneficiary?
Answer: Yes, and when the last of the owners of the account dies, the POD beneficiaries receive the funds. An accountholder needs to be careful though when naming POD beneficiaries through a right of survivorship account. There is nothing that prevents the survivors from changing or removing the POD beneficiaries from the account. And if they do it after you’re deceased, there’s nothing the representative of your estate can do about it because the joint accountholder now owns the money in the account, and can do as he/she pleases with it.

Because of the Armstrong case, I wouldn't do it.

The 2006 court of appeals case of Terry L. Armstrong and Ronald Kemp v. J.C. Roberts, Deceased and Parties in Interest, Mary Lou Garrison, Richard G. Garrison and Pamela Buckley, holds that an agent acting under a power of attorney may not open POD accounts in the name of the owner with the agent naming herself as a beneficiary. The Court analyzed the power of attorney, which granted the attorney-in-fact with very broad powers, including the language, “to do any and every act and exercise any and every power that I might or could do…if personally present…”  Then the Court focused on Probate Code Section 439(b), which governs the creation of a P.O.D. account:

“(b)  If the account is a P.O.D. account and there is a written agreement signed by the original payee or payees, on the death of the original payee or on the death of the survivor of two or more original payees, any sums remaining on deposit belong to the P.O.D. payee or payees if surviving, or to the survivor of them if one or more P.O.D. payees die before the original payee.”  [Emphasis supplied.]

Thus, the Court of Appeals ruled that no P.O.D. accounts were created and the funds therein passed to the heirs through the estate.  Motion for Rehearing was denied by the Texas Supreme Court.

Yes.  But you need to fine tune your agreement to deal with the requirements of NACHA to make sure that your customers comply with the notice and other requirements for truncating checks.

The Texas Probate Code specifically addresses the idea of respective ownership in an account with right of survivorship and multiple survivors. In the event a party to the account dies, his/her interest in the account is divided equally between the surviving parties. 
 
§ 439. RIGHT OF SURVIVORSHIP.  (a) Sums remaining on
deposit at the death of a party to a joint account belong to the
surviving party or parties against the estate of the decedent if, by
a written agreement signed by the party who dies, the interest of
such deceased party is made to survive to the surviving party or
parties.  Notwithstanding any other law, an agreement is sufficient
to confer an absolute right of survivorship on parties to a joint
account under this subsection if the agreement states in
substantially the following form:  "On the death of one party to a
joint account, all sums in the account on the date of the death vest
in and belong to the surviving party as his or her separate property
and estate."  A survivorship agreement will not be inferred from the
mere fact that the account is a joint account.  If there are two or
more surviving parties, their respective ownerships during
lifetime shall be in proportion to their previous ownership
interests under Section 438 of this code augmented by an equal share
for each survivor of any interest the decedent may have owned in the
account immediately before his death, and the right of survivorship
continues between the surviving parties if a written agreement
signed by a party who dies so provides.
 
The only way we could think of to handle it differently would be to not have a right of survivorship and pass the money through a will and make it an issue between the estate and the heirs.  In any event we do not think that bank would want to be involved in making sure x got 75% and y got 25%.

Actually, husband and wife can have a "sole" proprietorship. If two other parties (not married) have a business relationship, then it is either a joint venture or a partnership. But in Texas, spouses do NOT own businesses together as partners but as community property. Thus, the business is a proprietorship. The word "sole" is just doggone confusing.

First, absolutely be sure that you have performed adequate due diligence on this customer.  Reg CC was amended to put the burden of warranties of authorization on YOUR bank--not on the payor's bank.  Thus, if these remotely created drafts are returned as unauthorized, you will have to reimburse and charge back.  Make sure you have good data on the expected volume of activity and then monitor it.  Consider requiring this customer to maintain a reserve for returns or collateral for this "credit" risk that you are undertaking.

Practical answer - the Trust Code one!  Estate planning attorneys are much more likely to provide that document. Furthermore, later law generally trumps earlier law on the same subject.  Also, the Banking Code only applied to banks, leaving a gap as to documentation with other financial institutions. Note, however, that the Trust Code certificate of trust does not include a description of the successor trustees.  In any event, do NOT request a copy of the entire trust document.  If you have the entire instrument rather than the certificate, you have the burden of trying to read the document to figure out its terms, plus you need to protect the confidentiality of the trust agreement.

Question:  So how do we handle a successor?

Answer:  If a person comes in to change the account because (s)he is the successor trustee, require a new certificate of trust.

Yes!  You need trust powers to be a TRUSTEE, but you do NOT need them to handle an account for a trust.

If the customer’s resolution filed with the bank requires two signatures and a check is processed on only one, that is an unauthorized item.  Bank is liable.

Solutions? One approach is to prepare an addendum to the deposit agreement that disclaims the responsibility of the bank to check for two signatures and for limitations on the memo line (e.g. “void after 90 days”).  This addendum should include an indemnity whereby the customer agrees to hold the bank harmless for any checks processed without two signatures (or contrary to the memo line instructions).

The second solution is to establish systems to monitor for two signatures and to assess a fee for that service.

Click here to join a discussion of this topic in IBAT’s Compliance Forum.

You cannot prevent the customer from withdrawing money from his own account, but there are some things you can do.  First, speak to the customer directly.  If the customer seems intimidated by the son or is hesitant to speak, try to get him to talk to a manager alone.  Second, ask a few questions of the customer to determine if he understands what he is doing and the consequences of doing it.
 
If, after doing these two things, the customer still insists on withdrawing the money, you must allow him to do so. It is not the bank’s job to adjudicate the mental competence of its customers.  If you suspect financial exploitation, call Adult Protective Services at (800) 252-5400.  If you think a senior customer could be in immediate danger from another person, alert your bank's security and call the police. Knowingly failing to report suspected abuse of an elderly or disabled person is a Class A misdemeanor.  The person who reports the abuse is immune from civil or criminal liability for the reporting.  Human Resources Code, Sections 48.051(a) and 48.054.

Yes, if their name plus "sensitive" information (e.g. SSN, DL, card number) was acquired by the intruder.  Texas law will directly address this effective 9/1/05.  Meanwhile, the federal regulatory guidance indicates that the notice (which includes tips on protecting oneself) should be given if after an investigation the bank determines that the information has been or WILL BE misused.  Here is a link to the guidance: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050323/attachment.pdf Scroll down to page 62 for the requirements!  It is hard to argue that an intruder doesn't intend mischief, so give the notice.  Also, notify your regulator.

If a person commits an offense under Penal Code §32.51, the accountholder is entitled to have information sent through CANS.  It doesn't matter if the offense occurred through use of a debit card, check, or other item/access device. In fact, it doesn't matter if an item or an access device is used at all.  There doesn't even have to be a loss or an attempt to harm or defraud.
 
It is a violation of Penal Code §32.51 if someone obtains, possesses, transfers, or uses identifying information of another person, with intent to harm or defraud that other person.  Of course, use of another person's identifying information with intent to harm or defraud is an offense.  However, §32.51 provides that merely obtaining, possessing, or transferring identifying information of another person with intent to harm or defraud that person is an offense under §32.51.
 
Once an offense has occurred under Penal Code §32.51, then CANS can be utilized to send information to the registered check verification entities.  Remember, your customer must close an account at your institution before you can send information on the offense through CANS.

As of 3/29/2010

The Social Security Administration (SSA) maintains a Death Master File (DMF) that is available through its official distributor, National Technical Information Service (NTIS).  The NTIS, a division of the Commerce Department, serves as a  central resource for government-funded scientific, technical, engineering, and business related information. You can use the DMF to verify identity as well as to prevent fraud and comply with the USA Patriot Act.  The DMF is offered in several different formats, including online search, negating the need for small to medium sized organizations to maintain and update a large data file.  You can access the online search here.  There is an annual fee that increases depending on the number of users.

Yes, either an attorney or the Attorney General's child support division may file a child support lien. The notice is sent by the attorney (or AG) to the bank and must include the style, cause number and identity of the court having jurisdiction of the child support action; the full name, address and birth date, driver's license, SSN (if these are known) of the obligor; the full name and (if known) SSN of the obligee; the amount of the obligation, payment schedule, rate of interest, name and address of the person or agency asserting the lien, etc.

The financial institution that receives this notice should immediately freeze the account and not release funds within the lien amount until it receives a release of the lien or court order releasing the lien.

If you are holding more than the amount of the lien, then either you or your customer may request release of the excess. Don't release, though, without permission.

GLBA is not applicable to "prevent any State-licensed private investigator, or any officer, employee or agent of such private investigator from obtaining customer information of a financial institution, the extent reasonably necessary to collect child support from a person adjudged to have been delinquent in his or her obligations by a Federal or State court, and to the extent that such action by a State-licensed private investigator is not unlawful under any other Federal or State law or regulation, and has been authorized by an order or judgment of a court of competent jurisdiction." GLBA also does not prevent compliance with a properly authorized civil, criminal or regulatory investigation or subpoena or summons by Federal, State, or local authorities or response to judicial process.

You are right.  The proper encoding is the bank's problem.  However, I don't know enough about the reporting codes to help you.  You might also try the IRS website or contact Michael Generali with the Texas OAG, Child Support Division.  His number is 512 460 6286.

In addition, see:  Family Code 157,317(a), http://www.statutes.legis.state.tx.us/SOTWDocs/FA/htm/FA.157.htm#157.317. The child support lien attaches to "all real and personal property in a retirement plan, including an IRA."  So remit the entire balance.  There is an early withdrawal penalty against the customer, but it is not to be taken out of the account prior to sending it to the AG Child Support Division -- that is not the bank's problem.

No. The scope of the interim final rule does not cover federal benefits deposited by check.  A beneficiary who receives a Treasury check and deposits that check takes on the risk that the funds are subject to garnishment.

No.  Logically, the holder of the card does not have a customer relationship with the bank.  In fact, you don't even know who they are!
 
However, be sure that you perform an appropriate risk assessment for the program.  In particular, review the Electronic Cash section of the BSA/AML Examination Manual.

No.  The Fed has finalized its rule on payroll cards (which are subject, in a modified way, to Reg E).  In that rule making, the Fed concluded that gift cards and travel cards are NOT subject to Reg E.  Effective 7/1/07, however, payroll cards must comply with special provisions in Reg E, including providing periodic statement information online, by telephone response, or 60 days written history in response to an oral or written request.

A gift card!  (Don't even try to buy clothes.  They will be the wrong size, wrong style, and soooo yesterday.)
 
If your bank hasn't looked at this growing product, consider offering gift cards this holiday season.  Remember that the limitations in the Texas Business & Commerce Code do NOT apply to cards issued by federally insured financial institutions.  However, the OCC has issued guidance on "best practices."  State banks should also consider using this to help you with disclosures and practices.  http://www.occ.gov/ftp/bulletin/2006-34.doc
   

“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.

Yes!  However, the parent may give the bank written notice that he or she denies the minor the right to withdraw or write checks without the parent's joinder.  Section 34.305 of the Finance Code removes the minor's disabilities for the limited purpose of being responsible for the account--including responsibility for any overdrafts.  (This does NOT authorize a minor to borrow, however.)

I think it is unlikely that your bank would be liable to the minor if it allowed the custodian to make this deposit.  However, allowing a customer to deposit a check written to them into a third party's account is a bad idea for a number of reasons.  It is unlikely that I can think of all the reasons that this is a bad idea.  One is that there may be some reason the third party does not want this money deposited into their account--maybe it would cause the accountholder to disqualify for certain government benefits.  It is also possible that the accountholder is assisting the custodian in laundering the funds.  It is possible that the third party and the custodian are colluding to steal the funds from the minor.

It is a bad idea to allow a check written to an individual in their capacity as custodian to be cashed or deposited into any account other than the TUTMA account.  This is a good way for the custodian to steal the money.  How would the minor account for those funds or even know that they existed?  A bank policy requiring that checks written to custodians be deposited into the custodial account would protect the minor and allay the bank's concerns about liability.  This same reasoning also applies to fiduciaries; the bank might adopt a policy like this with regard to both custodial and fiduciary accounts.  Of course, this is a bank policy decision, not a legal requirement.

Actually, this is dealt with in the CIP rules.  Look at the definition of "customer" in 31 CFR 103.121.  It means "an individual who opens a new account for: (1) an individual who lacks legal capacity, such as a minor..."  In short, do your verification on the adult.

Here is the bottom line answer: Although there is no prohibition against a minor appointing himself or herself as custodian of a TUTMA, it probably is not a good idea unless the minor has been married.  Also, a transferor naming a third-party custodian cannot name a minor who has not been married as trustee.
 
Now, here is my long trail to get to that strange conclusion:
 
If the transferor is naming an individual, other than himself or herself, as custodian, then Chapter 141 requires that it be an adult.  However, when a transferor names himself or herself custodian, Property Code, Chapter 141, does not require that the custodian be an adult.  That being said, I see a problem with any minor who has not been married being named custodian.  (I'll talk more about that problem later, but first let's talk about this marriage issue that I just brought up out of the blue.)
 
Family Code §1.104 bestows the capacity of an adult on minors who have been married.  If a minor transferor who has been married wants to name himself or herself custodian of a TUTMA, they can do so without concerns because under §1.104 they are not considered a minor.  (This applies whether or not the transferor is the parent of the minor they are setting up the TUTMA for.)
 
But what if a transferor wants to name a third-party minor who has been married as custodian?  Can they do this?  There are two things working against this:  (1) Chapter 141 requires that an individual being named custodian by a transferor be an adult; and (2) Chapter 141 contains a definition of adult that does not include a minor who has been married.  However, Family Code §1.104 provides that a person who has been married is considered an adult unless a statute or the constitution expressly states otherwise.  Chapter 141 does not expressly state otherwise; therefore, a minor who has been married is an adult for purposes of Chapter 141 and can be named custodian by a transferor.
 
Now, let’s talk about minors who have never been married serving as custodians.  Chapter 141 requires a transferor naming a third party as custodian to name an adult.  There is no such requirement when a minor transferor names himself custodian.  As I stated above, there is a problem with naming a minor who has never been married as custodian.  The minor does not have the capacity to contract.  (Under the Civil Practice and Remedies Code Chapter 129 and the Family Code Chapter 31, the usual age of majority is 18 years.)  If the bank allows the minor to serve as custodian, when the donee minor (i.e., the minor the TUTMA was set up for) turns 21 and discovers there are no funds in the account – or even no account, it could expose the bank to some potential liability.  So, it probably is not a good idea for a bank to allow a minor who has never been married to name himself or herself as custodian of a TUTMA.
 
The only thing I can say against a minor who has been married being named trustee is:  Does the minor have good sense?  Are they mature enough to handle this responsibility?  I don't think it is necessarily the bank's job to make these determinations, but they are concerns.  Remember, there is nothing that requires the bank to ever allow a minor to be a custodian – you just need to be consistent.
 
I tried really hard to make this understandable.  I hope I accomplished that task.
   

Yes.   Outside of the Americans with Disabilities Act, there is no law requiring the bank to provide accounts to whoever requests one (unlike the Fair Lending laws, which prohibit discrimination).  Since the rules regarding amending accounts require 30 days notice, I prefer 30 days notice to the terminated customer.  Also, it may be difficult for this business to find another alternative.
 
Please note that the federal banking regulators have urged banks to not overreact to their guidance on MSB accounts and just refuse to handle these customers.  However, they didn't rescind their earlier guidance: http://www.occ.treas.gov/ftp/bulletin/2005-19a.pdf!

First, Texas doesn't license check cashers.  So there is no state licensing requirement at this time.  However, check cashers MAY be an MSB under the USA PATRIOT Act.  But notice that the regs (31 CFR 103.11) exclude a person who does not cash checks in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions.  In other words, if the store is only cashing small checks, it does not have to register as an MSB with Treasury.
 
Still, this makes the customer higher on your risk scale and worth extra monitoring.

According to FinCEN, you need the acknowledgement letter from the IRS Detroit Computing Center.  Merely checking the online site (http://www.fincen.gov/) for lists of registrants is probably not enough.  Confirm that the customer has registered or obtained a license (if needed) with the Texas Department of Banking (http://www.banking.state.tx.us/supreglic_ent.asp).  Comply with your CIP rules.

Both.  The FDIC is “suggesting” that your bank consider not charging a fee at all for a de minimis overdraft, but if you do charge a fee, make it reasonable and proportional to the amount of the original transaction that overdrafted the account.  If a purchase of a $4.00 cup of coffee causes the account to overdraft by $2.00, the FDIC wouldn’t think a $35 overdraft fee is proportional to the original $4.00 transaction. However, if a $250 television purchase overdrafts the account by $2.00, a $35 fee would seemingly be proportional to the original transaction. The FDIC is saying that they don’t want to see the proverbial (and in my opinion mythical) $39 Starbucks cup of coffee.  What everyone, including the FDIC, is forgetting about is that it wasn’t the $4.00 cup of coffee that overdrafted the account, it was all the previous transactions plus the cup of coffee that added up to more than the accountholder deposited into their account that overdrafted the account.

Several media sources have reported that, in response to the guidance, some of the mega-banks have agreed to waive overdraft fees for transactions below a threshold, typically $10.

Early this month IBAT leadership bankers and staff met with the FDIC to express our displeasure with the guidance and ask that considerable changes be considered.  We are still hopeful that meaningful changes will be forthcoming and will continue to press the FDIC accordingly.  In the meantime, IBAT General Counsel Karen Neeley has done a masterful job in creating a white paper guide to assist IBAT member banks in their strategic thinking about overdraft programs and their administration in the bank.  A copy of the white paper can be found here.

Lots!  Be sure that your policies are in accordance with "best practices" published by the federal banking regulators.  Also, remember that Reg DD has been amended, effective July 1, 2006, to require special disclosures with advertising and new info on your periodic statement.  For example, if you promote overdraft protection, your periodic statements must show not only the NSF and OD fees by type and dollar but must include total dollar amount for each for the statement period and year to date.  Be sure that your policies, procedures, and data processing are in compliance.

NO!  A daily charge goes beyond the "service fee" that was vetted by the Texas Supreme Court in the Tony Tortilla Factory case.  Rather, it looks like "interest", which the Finance Code defines as compensation for the use, forbearance or detention of money.

If the bank hasn't guaranteed that it will pay overdrafts, this is NOT an open end line of credit. Therefore, Reg Z disclosures are not triggered.

Follow-up question: We have a Limits and Fee schedule that is handed out with all the other disclosures and the customer signs the account agreement saying that they have received all the disclosures. By adding the verbiage of the 18% on that schedule, is that good enough? Does it need to be an entirely different form that they read and sign? The disclosures leave with the customer and all we have is the account agreement saying they received them. Do we have to keep something on file?
A  It MUST be "contracted for" in writing. Otherwise, the legal rate of interest is 6% AFTER 30 days!

Follow-up answer: The most common way is to include this in the deposit/checking account agreement. Most (I thought all) of the forms companies have language in the boiler plate on the account agreement indicating that the bank has the option of charging interest at 18% per annum in the event that it elects to pay items into overdraft. That makes this a "contracted for" rate. Talk to the forms company about this. I bet that they already have a solution for you.

FYI--Many banks no longer bother with the interest on the overdraft but just collect the NSF fee. The interest normally just doesn't amount to enough to mess with.

As of 7/5/2010

Not knowing the specific issues that are being raised, I think I can assure you that the right of set-off (sometimes called setoff or offset) and overdraft protection are two separate and distinct banking practices, and neither impacts or limits the other.  Let me explain by discussing how each practice works.

Overdraft protection is a practice whereby a bank will extend credit to its deposit customer to cover overdrafts so that checks won't bounce and debits will be processed even though there is no money in the deposit account to cover them.  Credit is being extended by the bank, usually in exchange for a fee or interest on the amount advanced.  Under the recent opt-in provisions, consumer fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions cannot be imposed automatically on a deposit account; the depositor has to ask for it (opt-in), after having been given disclosures as to how much this service is going to cost.

The right of offset is a common law banking practice that has been codified in Texas in Finance Code Section 34.307:

Sec. 34.307.  RIGHT OF SET-OFF.  (a)  Except as otherwise provided by the Truth in Lending Act (15 U.S.C. Section 1601 et seq.) or other federal law, a bank has a right of set-off, without further agreement or action, against all accounts owned by a depositor to whom or on whose behalf the bank has made an advance of money by loan, overdraft, or otherwise if the bank has previously disclosed this right to the depositor. If the depositor defaults in the repayment or satisfaction of the obligation, the bank, without notice to or consent of the depositor, may set off or cancel on its books all or part of the accounts owned by the depositor and apply the value of the accounts in payment of and to the extent of the obligation.
(b)  For purposes of this section, a default occurs when an obligor has failed to make a payment as provided by the terms of the loan or other credit obligation and a grace period provided for by the agreement or law has expired. An obligation is not required to be accelerated or matured for a default to authorize set-off of the depositor's obligation against the defaulted payment.
(c)  A bank may not exercise its right of set-off under this section against an account unless the account is due the depositor in the same capacity as the defaulted credit obligation. A trust account for which a depositor is trustee, including a trustee under a certificate of trust delivered under Section 34.306(b), is not subject to the right of set-off under this section unless the trust relationship is solely evidenced by the account card as provided by Chapter XI, Probate Code.
(d)  This section does not limit the exercise of another right of set-off, including a right under contract

Sure, but remember that Reg DD (revised effective July 1, 2006) requires extensive additional disclosures if you do so!  [See 12 CFR 230.11(b).]

Maybe.  All overdraft balances should be reported as "loans" and all unused privilege amounts should be reported as "unused commitments."  The March call report instructions will explain this further.  According to the regulators, this is not a change but was always required by GAAP!

As of 2/8/2010

The answer is:  No, you cannot do this.  You cannot change the account terms, conditions, and features on accounts where the customer doesn't affirmatively consent to the institutions overdraft service for ATM and one-time debit card transactions.  New Section 205.17(b)(3) provides:

(3) Same account terms, conditions, and features. A financial institution shall provide to consumers who do not affirmatively consent to the institution’s overdraft service for ATM and one-time debit card transactions the same account terms, conditions, and features that it provides to consumers who affirmatively consent, except for the overdraft service for ATM and one-time debit card transactions.

See page 80 of this link.

Updated As of 4/20/2010

This week’s Legal Ease question and answer is from IBAT’s Compliance Forum.  It is a great place to get opinions and answers from other bankers.  If you are not a member of the forum, sign up today. If you have trouble signing up, contact Jennifer Kinzler at jkinzler@ibat.org.  Now, to answer that question:

Originally, the Federal Reserve said the following in the preamble of the adoption of the Reg E overdraft rules pertaining to ATM and one-time debit card transactions (See the bottom of page 55 and the top of page 56.):

"If an existing account holder contacts his or her financial institution in response to the opt-in notice before August 15, 2010 to express a desire not to opt in, the Board expects that the institution would honor the consumer’s choice at that time."

However, the good folks at the Fed have since changed their minds.

If an opt-out decision occurs on or after July 1, then the bank needs to make it effective without delay.  If the bank has an early opt in/opt out program AND it is very clear about the effective date of the decision to opt out, it can delay an opt out  decision to the effective date.  Be sure that the effective date is restated next to the selection box!

As of 3/22/2010

I wish the Fed had not used that in its example because it ignores the variety of state usury laws. The example must be adapted for state law and acutal custom and usage.

I'm concerned that some Texas banks might think that the Fed is approving a daily fee. Alternatively, some banks may adopt the Fed's example without noticing that the fee is in the example or without knowing that charging this fee may be usurious.

The Texas case that we call Tony's Tortilla Factory (because that's the name of one of the parties) holds that a one-time charge on an overdraft is not interest because the formula for interest is:

PRINCIPAL X RATE X TIME = INTEREST.

With a one-time charge, there isn't principal, rate, or time; therefore, there is no interest.

If instead you charge $5 per day after the account is overdrawn for 5 business days, you do have principal (the amount of the overdraft), time (one day or more), and rate ($5 per day).  If $5 per day is more than 18% per year, then it is usurious.  On a $50 overdraft, you could charge $0.02 per day.

By my calculation, in Texas, you may charge $5 per day for overdrafts, but only if the overdraft is $20,277.76 or more.

So, how does BOA get away with charging this fee?  They are using another state's laws.

No – and here is why.

This is from the Official Interpretation of 226.4(c)(3):

Paragraph 4(c)(3) .

1. Assessing interest on an overdraft balance. A charge on an overdraft balance computed by applying a rate of interest to the amount of the overdraft is not a finance charge, even though the consumer agrees to the charge in the account agreement, unless the financial institution agrees in writing that it will pay such items.

So, because it is not a finance charge, unless your bank agrees in writing to pay it, (ii) of the definition of open-end credit isn't met.

Of course, at a maximum 18% interest rate, the interest you receive on an overdraft will be very small.  You can charge a much larger onetime fee for the overdraft because it isn't considered interest under Texas law.  If you charge 18% per year on an overdraft of $200, you will receive less than $0.10 per day.

Texas Finance Code, §277.003, has nothing to do with this, and because this is probably a criminal investigation, it is exempt from Finance Code §59.006(a)(3), which governs the discovery of customer records.  (FYI: Section 277.003(a)(1) applies to dishonored checks.)  It is a good idea to get a subpoena to make sure that this is a legitimate investigation and that the police officer is actually a police officer.  This is easier than trying to find out these things on your own. Then if you question the authenticity of the subpoena, you can always call the judge's office to see if it was actually issued by the judge.

Actually, the father may be helping the customer out, but that doesn't create a fiduciary relationship.  The "representative" capacity would be guardian, executor, custodian.  I would have a hard time giving the dad a receipt if it prints out the balance.  That would be confidential information.  Could you give the father a handwritten receipt?  Other option would be for the customer to add the father to the account as a convenience signer or joint party.

First, it is not prohibited by GLBA.  However, the other bank may be concerned about security.  Therefore, you could offer to have the payor bank call you back, using a publicly listed number.  In that way, they can be comfortable that this is not a fishing effort by a scam artist.

First, the Fair Credit Reporting Act (which governs Chexsystems) does not apply to business transactions.  Therefore, you should make sure that your account application includes written permission to obtain the report with the signers giving their consent for obtaining the report and releasing the result.  (On consumer accounts, this is a permissible purpose.  Thus, no prior written consent is required although it is often obtained.)

Secondly, the GLBA privacy rules do NOT apply to businesses--only to consumers.  So, no GLBA privacy issue.  However, under FCRA on consumer accounts, if you turn someone down because of the Chexsystems report, you must give an adverse action notice.  Again, FCRA does not apply to businesses, so no FCRA requirement to give an adverse action notice.  But since you have obtained consent from the business signers, you could explain that the signer does not meet your requirements.

Also, please note that the final CIP rules do NOT require identification of all signers.  Rather, you must verify the ID of the entity (the business).

No.  Section 131.903 of the Local Government Code provides that the interested party must refrain from participating in the decision.  That means abstaining from voting.  To avoid indirect influence, it is also helpful for this person to leave the room during the debate.

That is the conflicts statement required by HB 914 from last session.  IBAT circulated a Compliance Bulletin on this last January.  Chapter 176 of the Local Government Code requires persons (including banks) to file a conflicts statement as to each local governmental official of the entity for which you are seeking to enter into a contract.
 
Failure to file is a crime (class C misdemeanor).  More significantly, some banks have claimed that failure to file could be a violation of the bidding process.

The law is in effect.  See IBAT's Special Compliance Bulletin for more details.  Basically you will have to get the names of all "officials" from the school and then file a CIQ (Ethics Commission form) on all.  IBAT and the other trade associations are working on a solution, but for now, comply.

Although you flattered me with the title of expert, I can't take credit for this answer.  I received it from a generous contact I have at the Texas Comptroller of Public Accounts.
 
State deposits are placed in state approved depositories through a monthly bid process, so all depositories have an equal chance to secure deposits.
 
The state does not set aside funds for banks located in lower economic areas; however, by state law a bank cannot be approved by the Comptroller to accept state funds if its Community Reinvestment Act rating is below “outstanding” or “satisfactory”.
 
Further information can be found at the following links:
 
To apply to become a state depository: http://www.window.state.tx.us/treasops/depository/
 
To bid on state deposits: https://www.bidtx.com/cd/
 
Community Reinvestment Act: http://www.occ.treas.gov/cra/crasrch.htm

Yes!  Don't forget Equal Credit Opportunity Act (and Reg B).  If the account includes a credit feature that is more favorable, then you have a violation of Reg B based on age.  Examples of more favorable treatment could include a special credit card rate or special treatment on overdraft privilege.  Don't provide a lower NSF charge or higher ODP limit on this account!

There is nothing in Reg D that would prevent you from refunding the fees, but don’t make it a habit to do this for the same customer.  Reg D does not require for a monetary penalty for excess withdrawals, but here is what a footnote to 204.2(d)(2) does require:

In order to ensure that no more than the permitted number of withdrawals or transfers are made, for an account to come within the definition of “savings deposit,” a depository institution must either:
(a) Prevent withdrawals or transfers of funds from this account that are in excess of the limits established by paragraph (d)(2) of this section, or
(b) Adopt procedures to monitor those transfers on an ex post basis and contact customers who exceed the established limits on more than occasional basis. For customers who continue to violate those limits after they have been contacted by the depository institution, the depository institution must either close the account and place the funds in another account that the depositor is eligible to maintain or take away the transfer and draft capacities of the account. An account that authorizes withdrawals or transfers in excess of the permitted number is a transaction account regardless of whether the authorized number of transactions is actually made. For accounts described in paragraph (d)(2) of this section, the institution at its option may use, on a consistent basis, either the date on the check, draft, or similar item, or the date the item is paid in applying the limits imposed by that section.
(3) A deposit may continue to be classified as a savings deposit even if the depository institution exercises its right to require notice of withdrawal.
The most important thing is that you monitor your savings accounts, contact customers who exceed the established limits on more than an occasional basis,  and, for those customers who continue to violate those limits, close their accounts or convert their accounts to NOW or DDA.  Your bank charges the fee to deter customers from continuing to violate the limits.

Here is an article from the San Francisco Chronicle on banks who claimed that the fee was a federal requirement. Those banks got a black eye in the media for not knowing why they charged the fee and that it IS NOT a federal requirement.  The article quoted a Federal Reserve Spokesman:

"Regulation D does not address fees charged by banks for excess transfers from savings accounts," said Andrew Williams, a Fed spokesman. "Banks are not required by law to charge fees for excessive withdrawals."

Read more.

It is limited to six per calendar month or statement cycle (of no less than four weeks). Here is the section of the definition of “savings account” from Reg D, 204.2:
 
...”the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, and no more than three of the six such transfers may be made by check, draft, debit card, or similar order made by the depositor and payable to third parties.”
The ACH is a “telephonic” transfer. More particularly see this interpretation: http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/1997/19970820/

Rather than worry about what is currently required, your bank needs to be getting ready for what will soon be required.  The Federal Reserve Board amended Regulation DD, which implements the Truth in Savings Act, and the official staff commentary to the regulation to require all depository institutions to disclose aggregate overdraft fees on periodic statements, and not solely institutions that promote the payment of overdrafts. The final rule also addresses balance disclosures provided to consumers through automated systems. The rule is effective January 1, 2010.  Go to page 5594 here (this is a final rule): http://www.bankersonline.com/topstory/74fedreg/74FR5584.pdf

I believe that the answer must be "yes" based on section 267 of the Truth in Savings Act.  Paraphrasing, it states that interest on an interest-bearing account shall be calculated on the full amount of principal in the account for each day of the stated calculation period at the disclosed rate(s).

The Fed amended Reg E to permit electronic delivery.  However, compliance is not mandatory.  Rather, the bank must simply comply with E-SIGN Act.  In order to do that, get an agreement to accept delivery, disclose requirements for electronic access, and e-mail customers when new periodic statements or change in terms are available on your web site.

As of 11/16/2009

You do not need to investigate.  This is from the Official Staff Interpretations to 12 CFR 205.11(b)(1):

205.11(b) Notice of Error From Consumer
Paragraph 11(b)(1)—Timing; Contents

…snip…

7. Effect of late notice. An institution is not required to comply with the requirements of this section for any notice of error from the consumer that is received by the institution later than 60 days from the date on which the periodic statement first reflecting the error is sent. Where the consumer’s assertion of error involves an unauthorized EFT, however, the institution must comply with § 205.6 before it may impose any liability on the consumer.

Only for sole proprietors.  This law defines "consumer" as a "natural person."  Therefore, it does not apply to any entities, like partnerships or corporations.  By contrast, Reg DD defines consumer as a natural person who holds an account primarily for personal, family or household purposes.  That qualifying purpose language is missing from Reg E!
 
Question:  Okay, then what rules govern error complaints?
 
Answer:  Your contract and the system rules.  Both Visa and MasterCard have explicit error resolution rules governing debit cards that limit liability.  Be sure that your agreements have incorporated these revised requirements.

It is permissible to use the grantor's SSN on a living trust.  The trustee should get an EIN for the first taxable year after the death of the grantor(s).  That gives the trust (and the bank) a little time to get the correct TIN in place.  Remember that EINs can be obtained by fax and online.

With regard to a person named as attorney-in-fact in a power of attorney signing a trust document on behalf of another and that attorney-in-fact naming himself as trustee under the trust document, there is no "thou shalt not" in the trust laws concerning this.  However, as you probably know, a trustee is a fiduciary and is held to the highest standard of care for the beneficiary.  So having the a person sign a trust document as the attorney-in-fact and also name himself trustee under the trust just looks bad.  It makes it look like a sham transaction.  I suggest you ask the son to consult an attorney about the best way to proceed.

Even if the son’s attorney says it is okay for the son to be the attorney-in-fact and the trustee, be sure to document that and then the bank (and you) will be off the hook if things to blow up.  It would also be a good idea to contact the bank’s attorney to see if he/she recommends against doing business like this.  Depending on what your attorney or management says, you may tell the son that other banks may do this, but your bank’s policies won’t allow it. (If your bank doesn’t contact its attorney, at the very least, be sure to have a member of bank management involved in making this decision.)

Despite this, because the trust you’ve asked about is a Miller Trust that is used to qualify for Medicaid (and the son is not the beneficiary), there is probably no harm and it is not a sham.  That would not be true of standard trusts where all kinds of mischief and self-dealing could ensue with an attorney-in-fact creating a trust and naming himself as trustee (and possibly beneficiary).

A customer is a customer of the "bank"  not of a "branch."  Therefore, when a customer walks into any branch, that is THEIR bank.  Another problem that arises with this is that notice to any branch is notice to the bank.  That is why I recommend appointing an agent for service of process.  (Go to the secretary of state web site for the forms:  www.sos.state.tx.us).  It is also critical for stop payment notices.  Make sure that you have a good procedure for handling them at any branch!  I suppose that you might be able to amend the deposit or loan agreement to require the customer to use their branch.  But you have to give 30 days notice.  That really won't help much since by the time that takes effect, you will be converted!  Your best bet is to make sure that branch managers are trained to handle this scenario.  It may not come up too often at first anyway as people get used to the change.

No.  Now, if you were rejecting because of a consumer report (e.g. a check reporting agency report), you would have to give an adverse action notice under the Fair Credit Reporting Act.  But you are relying on your own experience, so there is no notice required.
 
Remember, too, that there is no anti-discrimination law for accounts as there is for credit...with the exception of the Americans with Disabilities Act.

No.  However, either party may draw all the money out of the account and open a new account.  The bank is not required to know who contributed what to the account.  Any party may close a joint account.
 
Open a new account.

$10.  But remember that waiver or reduction of a fee or absorption of expenses doesn't count.  So a free safe deposit box or traveler's checks would not be included in the definition of bonus.  Also, bonuses do not include discount coupons for goods or services at restaurants or stores.

Get a little creative.  If you still have a gross of coffee cups with the bank's logo on them, stuff the cup with coupons for a local coffee house.

You’ll find your answer in Reg D at 12 CFR 204.130(e).  But you’ll also find that you can’t answer the question without knowing who the beneficiaries are.  Reg D at 12 CFR 204.130(e) provides in pertinent part:  “Under current provisions, funds held in a fiduciary capacity (either by an individual fiduciary or by a corporate fiduciary such as a bank trust department or a trustee in bankruptcy), including those awaiting distribution or investment, may be held in the form of NOW accounts if all of the beneficiaries are otherwise eligible to maintain NOW accounts.”

Individual and corporate fiduciaries (such as trustees, executors, administrators, guardians, conservators, and custodians), if all of the beneficiaries are otherwise eligible to maintain NOW accounts.

Yes.  Among the powers enumerated for attorneys in fact is both opening and closing accounts.  Be sure that the POA is in the statutory form (if possible), which indemnifies the bank for acting upon it!

As of 6/21/2010

I am not sure how the nursing home will be paid if the account of the woman in the nursing home is the only available source of payment, and she is mentally unable to authorize payment.  Although the mother now owns the entirety of the account she owned with her son (because she is the survivor of a survivorship account), the daughter isn’t on the account, doesn’t have a power of attorney for her grandmother, and thus doesn’t have authority to transact on the account.  If the mother were mentally capable to transact on the account or sign a power of attorney, the nursing home could get paid from that account.  Otherwise, I’m not sure how this could be paid from the mother’s account.  There just simply isn’t anyone with authority to transact on the account.  And the bank can’t take money from the mother’s account and just pay it where it sees fit.

Families that don’t take care of this kind of planning often end up with problems that the bank just can’t fix.  The nursing home will have to wait on the guardianship.  Hopefully, they will continue to provide care.

No.  They are just establishing that the customer actually signed it.

No law.  This is a matter of risk management and is recommended procedure--particularly for employees who are in a position to hide cash shortages.  If employees can't take two consecutive weeks, then be sure that you have adequate internal audit procedures to detect embezzlement, kites, or fraudulent loan activity.

“Adverse Action” is defined as, a denial of employment or any other decision for employment purposes based in whole or in part on a consumer report that adversely affects any current or prospective employee. FCRA §603(k)(1)(B)(ii) and FCRA §615.   Employers that take adverse action against an applicant or employee must follow the two notice provisions of the FCRA.

There are two notice requirements under the FCRA.  First, Section 604 of the FCRA requires that employers provide to the consumer, before taking any adverse action based on a consumer report, a copy of the report and a summary of consumer’s rights under the FCRA.  This is referred to as the Pre-Adverse Action letter, since it must be sent before the adverse action is taken.  In other words, if an employer has a report and believes that the information contained in the report may impact the hiring decision, then at that time the employer must send the Pre-Adverse Action letter. 

The second notice must be sent after the employer takes adverse action.  In the Adverse Action letter (the second notice) the employer must notify the consumer of the fact that adverse action has been taken based on a consumer report, and include in that disclosure the following: (1) the name, address, and phone number of the consumer reporting agency that furnished the report, (2) a statement that the consumer reporting agency did not decide to take the adverse action and is unable to provide the consumer with specific reasons for the action, (3) a notice of a consumer's rights to obtain another free copy of his or her report from the consumer reporting agency within 60 days, and (4) the individual has the right to dispute the accuracy or completeness of any information in the report.”  FCRA §615.

To make this determination you and your attorney will need to look at 41 CFR Part 60-2 entitled Affirmative Action Programs.  You'll want to pay particularly close attention to 41 CFR §60-2.1 because it lists those entities that must develop affirmative action programs.  Section 41 CFR §60-2.1(a) provides: "The requirements of this part apply to nonconstruction (supply and service) contractors. The regulations prescribe the contents of affirmative action programs, standards and procedures for evaluating the compliance of affirmative action programs implemented pursuant to this part, and related matters."
Section 60-2.1(b) tells you who must develop a program.  Pay particular attention to §60-2.1(b)(1)(iii) and (iv):

"(b) Who must develop affirmative action programs.

(1) Each nonconstruction contractor must develop and maintain a written affirmative action program for each of its establishments if it has 50 or more employees and:
...

(iii) Serves as a depository of Government funds in any amount; or

(iv) Is a financial institution which is an issuing and paying agent for U.S. savings bonds and savings notes in any amount.

"Government" is defined as the government of the United States of America. "Contractor" means, unless otherwise indicated, a prime contractor or subcontractor. (You'll find both of these definitions in 41 CFR §60-1.3)
If you need additional assistance, you can contact the Department of Labor or go to their website: www.dol.gov. They have a lot of good information there.

It depends.  For qualified retirement plans, employees who meet eligibility requirements and who work 1000 hours in a year must be covered.  However, for benefit plans (i.e. insurance), you could cover just full time employees.  This could be defined as employees who work 30 hours or more per week.

The Fair Labor Standard Act does not require them.  However, the FLSA regs provide that if the breaks are 20 minutes or less, then they are compensable hours worked.  Remember that coffee or rest breaks may be important in assuring that employees stay sharp and that they do not develop occupational problems like repetitive stress syndrome.

Make a demand for the return (or certifiable destruction) of the records.  If they are not returned or properly disposed of, then file a SAR.  According to the regulatory panel at the recent Texas Association of Bank Counsel Annual Convention, this officer's action presents several legal problems.  First, it is a taking of property (customer information) owned by the bank.  Second, it results in a breach of the bank's GLBA procedures protecting customer information.

Remember that you CANNOT disclose the filing of the SAR outside of the bank's board of directors, and they must keep it confidential.

Arguably, you should file the SAR whether or not the records are returned/destroyed.  In any event, do NOT warn the ex-officer that you are filing!

---

No, but there is an alternative. The Official Staff Interpretations to Regulation E state:

Paragraph 10(e)(2)—Employment or Government Benefit

1. Payroll. An employer (including a financial institution) may not require its employees to receive their salary by direct deposit to any particular institution. An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer) or receiving their salary by another means, such as by check or cash.

Yes.  However, there should be a clear discussion of this in the bank's employee handbook/personnel manual.  In addition, each employee should acknowledge receipt of the monitoring policy before it is put into place.

Not exactly. GLBA requires a program to protect consumer information. One component is background checks on employees who handle confidential consumer information. Also, federal law prohibits hiring someone who is a convicted felon. The question of performing checks on ALL employees is one of risk. Consider implementing as to new hires. You may be comfortable with the criminal history of existing employees. Also, check your employee handbook to make sure that you have reserved the right to spot check credit. Then make sure that you have prior written consent to get consumer reports (credit and investigative) as required by the Fair Credit Reporting Act!

Most bank codes of conduct or employee handbooks require employees to handle their personal finances appropriately.  There are several reasons for this.  First, a financially stressed employee is likely to be tempted to embezzle or kite.  Second, you want their behavior to reflect well on the bank.  It may be premature to put this in the personnel file, but I would monitor both the loan and the employee as this situation presents a risk to the bank.

---

No, Texas law does not require an employer allow employee access to personnel files.  However, before you deny an employee access to their personnel file, you should check your employee policy manual to see if there is a policy on employee access to personnel files.  If there isn't a written policy, I would check to see what your bank's practice has been. If you typically allow employees to see their personnel files and then you deny this employee from seeing their file, you could run into trouble--particularly if they are a member of a protected class.   Most companies allow supervised access and copying of contents at the employee's cost - a company should never place anything in a personnel file that it would be ashamed to show other people - remember, anything in any file relating to an employee is discoverable in a claim or lawsuit filed by or on behalf of that employee.  Also, if an employee wishes to respond to negative entries in their personnel file, many companies allow them to write a response for placement in the file.

Annual performance evaluation and credit report.  Neither is actually required by law.  However, I highly recommend both.  Be sure that the appropriate supervisor performs the annual evaluation and ties it back to the job description.  This is also a good opportunity to go over training requirements/expectations for the new year.
 
The regular credit report is a useful tool to detect and prevent internal fraud.  It should be a part of your GLBA information security program.  Be sure that each employee has received the appropriate separate disclosure and consent form as required by the Fair Credit Reporting Act.  It is not enough to simply have this as a part of your personnel handbook.

Wrong! There are a variety of state and federal laws which prohibit discrimination of various sorts. Protected classes include race, sex, age, disability, pregnancy, religion, military status and more. Usually (but not always!) there is a size requirement before the laws apply (e.g. 15 or more employees). See this month's HR newsletter, Human Element, from Coy Lewis for more insights. However, remember that the board of directors has the right to remove officers - all of whom serve at the will of the board. Of course, if the removal violates a law (see above), the board might be facing a lawsuit.

Probably.  Under the Bank Bribery Act, it is a crime for anything "of value" to be given/received in exchange for a banking activity (loan, account, vendor relationship).  This law has been clarified by FDIC guidance.  http://www.fdic.gov/news/news/financial/2005/fil10505a.html  If the gift relates to a family relationship, of course it is okay.  The bank should have a good code of ethics to guide its employees.

It depends.  As with most overtime questions, the key is whether the individual has worked more than 40 hours in the designated work week.  If so, then, yes, they are entitled to time and a half.

However, that is not the complete answer.  Also check your employee handbook.  Some employers provide "bonus" pay for employees who work on what is otherwise a holiday.  If that is in your policy, then you have made a "promise" to pay at that rate, even though it is not required under the Fair Labor Standards Act.

The following five areas of law or regulation mandate training for bank employees. Training standards should be in place to ensure that new employees and as well as employees who are reassigned to take on additional responsibilities receive training.

1.    Bank Secrecy Act / Anti-Money Laundering;
2.    Customer Identification Program requirements (CIP rules);
3.    Minimum Bank Security / Bank Protection Act (physical bank security);
4.    Regulation CC - Expedited Funds Availability
5.    Information Security (Interagency Guidelines for Safeguarding Customer Information).

In addition you may want to provide more job specific training in the following areas:
USA PATRIOT Act, OFAC, GLBA, Right to Financial Privacy, Sarbanes-Oxley (SOX), Reg D, Reg E, Reg Z, Fair Credit Reporting Act, HMDA, CRA, Bank Bribery, and Fair and Accurate Credit Transactions Act.

For directors and executive officers you should always cover Regulation O – Loans to Insiders as well.

For directors you need to make sure they are informed of the banks BSA/AML program, Fair Lending efforts, and the Community Reinvestment Act files. Under the overdraft guidance recently released by the agencies, you will also need to educate the board on any automated overdraft protection program your bank may have.

According to changes to Regulation Z that are effective April 1, 2011 at 12 CFR 226.36(d), a loan originator may not receive compensation that is based on “any of the transaction’s terms or conditions,” including origination fees.  You should probably change your bonuses to be based on something else such as total loan amount. Click for the Fed Final Rule.

Here is the text of 12 CFR 226.36(d):

(d) Prohibited payments to loan originators. (1) Payments based on transaction terms or conditions. (i) In connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction’s terms or conditions.

(ii) For purposes of this paragraph (d)(1), the amount of credit extended is not deemed to be a transaction term or condition, provided compensation received by or paid to a loan originator, directly or indirectly, is based on a fixed percentage of the amount of credit extended; however, such compensation may be subject to a minimum or maximum dollar amount.

(iii) This paragraph (d)(1) shall not apply to any transaction in which paragraph (d)(2) of this section applies.

(2) Payments by persons other than consumer. If any loan originator receives compensation directly from a consumer in a consumer credit transaction secured by a dwelling:

(i) No loan originator shall receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; and

(ii) No person who knows or has reason to know of the consumer-paid compensation to the loan originator (other than the consumer) shall pay any compensation to a loan originator, directly or indirectly, in connection with the transaction.

(3) Affiliates. For purposes of this paragraph (d), affiliates shall be treated as a single ‘‘person.’’

The following are only illustrative examples of  compensation methods that are permissible (unless otherwise  prohibited by applicable law), and not an exhaustive list.  Compensation is not based on the transaction's terms or conditions  if it is based on, for example:
    i. The loan originator's overall loan volume (i.e., total dollar  amount of credit extended or total number of loans originated),  delivered to the creditor.
    ii. The long-term performance of the originator's loans.
    iii. An hourly rate of pay to compensate the originator for the  actual number of hours worked.
    iv. Whether the consumer is an existing customer of the creditor  or a new customer.
    v. A payment that is fixed in advance for every loan the  originator arranges for the creditor (e.g., $600 for every loan arranged for the creditor, or $1,000 for the first 1,000 loans  arranged and $500 for each additional loan arranged).
    vi. The percentage of applications submitted by the loan  originator to the creditor that result in consummated transactions.
    vii. The quality of the loan originator's loan files (e.g.,  accuracy and completeness of the loan documentation) submitted to  the creditor.
    viii. A legitimate business expense, such as fixed overhead  costs.
    ix. Compensation that is based on the amount of credit extended, as permitted by Sec.  226.36(d)(1)(ii).

As of 1-25-2010

Answer 1:  Notaries Public are commissioned by the Texas Secretary of State.  You should begin your education on being a notary in Texas by reviewing the "Notary Public Educational Information" on Texas Secretary of State's Web site.

Answer 2:  A notary public is an appointed public officer for limited purposes. A private employer may limit or prohibit an employee who is a notary public from performing notarial acts during employment hours.

Answer 3:  Because a commission is issued to an individual notary, the notary's private employer may not take possession of or transfer the notary's book and seal after the notary leaves employment.

The answers to questions 2 and 3 are found in Attorney General Opinion GA-0723 issued by Attorney General Greg Abbott on June 17, 2009

As of 6/4/2010

I think that most community banks and commercial banks must post the notice physically and electronically.  Each bank will need to make its own determination as to whether it posts the notice. If your bank offers savings bonds, serves as a Treasury and Tax Loan depositary, or has other government contracts, it should comply with this law.

Executive Order 13496, signed by President Obama on January 30, 2009, requires federal contractors to notify employees of their rights under the National Labor Relations Act (NLRA).  The notice informs employees of Federal contractors and subcontractors of their rights under the NLRA to organize (form, join or support a union) and bargain collectively with their employers and to engage in other protected activity.

If you are required to post the notice, you must do so on or before June 21, 2010.  

Federal contractors and subcontractors are required to post the prescribed employee notice conspicuously in plants and offices where employees covered by the NLRA perform contract-related activity, including places where other  notices to employees about their jobs are customarily posted both physically and electronically.

You can satisfy the electronic posting requirement by displaying prominently a link to the Notice of Employee Rights Under Federal Labor Laws Poster on any external or internal website that you maintain and customarily use for notices to employees about terms and conditions of employment. The text for the link must read, "Important Notice about Employee Rights to Organize and Bargain Collectively with Their Employers'' and it must link to this page.

The Notice (11X17)

The Notice (11X8.5)

To use one of these files as a poster for your place of employment, follow these instructions:

The files are only available in PDF format. In order to view and/or print PDF documents you must have a PDF viewer (e.g., Adobe Acrobat Reader) available on your workstation. Click on the PDF link for one of the Notice of Employee Rights Under Federal Labor Laws posters above and wait for it to load into the viewer.

   1. The size of the poster must be 11x17 inches or larger.
   2. If you have a printer capable of printing to 11x17 inch paper, download the poster in the 11x17-inch one-page format. Be sure to select that paper size when printing.
   3. If you do not have a printer that is capable of 11x17 prints, download the poster in the 11x8.5-inch two-page format. When printing, please ensure that the Page Scaling box reads: Scale to Printer Margins and you haved checked the Auto-Rotate and Center box. The poster will print two 11x8.5-inch landscape pages that must be taped or pasted together to form the 11x17 inch poster

Fact Sheet

Executive Order 13496

Final Rule Implementing Executive Order 13496

If you have questions about E.O. 13496 or its implementing regulations, call OLMS at (202) 693-0123 or send an email to olms-public@dol.gov.

The Fair Labor Standards Act prohibits the use of "comp time" as a means of compensation for a non-exempt employee. The normal rate for paying overtime is at one and a half times the base hourly rate. However, overtime has to be paid only when a non-exempt employee actually works in excess of 40 hours during a given workweek.
 
Question:  Our tellers are not working 40 hours a week - even with the Saturday work.  Now can we give them "comp time"?
 
Answer:  Yes...but don't call it "comp time"!  This is really just a matter of adjusting the work week.  On the other hand, if you want to pay a "premium rate" to reward working on Saturdays (or holidays) even though that work week is still not over 40 hours, that is certainly okay.

No.  The federal employee polygraph act puts very strict limitations on use of a polygraph.  Also, be sure that your labor poster includes the disclosure about this act!

From 10/12/2009

Higher-priced mortgage loans do not include mortgage loans to finance the initial construction of a dwelling, a temporary or bridge loan with a term of 12 months or less, a reverse mortgage, or a home equity line of credit. See section 226.35(a)(3).  There is no exception for a closed-end, home equity loan.

From 10/5/2009

Section 226.3 of Reg Z is entitled "Exempt Transactions" and begins with: "This regulation does not apply to the following: …."   Section 226.3(a) follows that and is entitled "Business, commercial, agricultural, or organizational credit."  Section 226.3(a)(1) simply provides: "an extension of credit primarily for a business, commercial or agricultural purpose."  (Makes you wonder what happened to "organizational," doesn't it?)  So an extension of credit primarily for a business, commercial, or agricultural purpose is exempt from Reg. Z.  That's not very helpful in determining what is considered primarily business when you have mixed use property.

The Staff Interpretations are helpful.  The interpretation of 226.3(a) says that when a loan is made to improve or maintain owner-occupied rental property that contains more than 4 housing units, it is deemed to be for business purposes.  Further, it provides that when a loan is made to acquire an owner-occupied rental property that consists of more than two units, it is considered to be for business purposes.  Under either of these scenarios, your customer's loan would be exempt.  If your customer's rental property had less than the requisite number of units it still isn't necessarily consumer credit.  To make that determination, you would have to consider the factors in the Staff Interpretations at Comment 3(a)-2.

Here is the pertinent section from the Staff Interpretations:

Section 226.3—Exempt Transactions

3(a) Business, commercial, agricultural, or organizational credit.

4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

• Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.
• Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition.
• Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in Comment 3(a)–2.
• 3(a)-2. Factors. In determining whether credit to finance an acquisition—such as securities, antiques, or art—is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered:
• The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
• The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
• The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
• The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
• The borrower's statement of purpose for the loan.
• Examples of business-purpose credit include:
• A loan to expand a business, even if it is secured by the borrower's residence or personal property.
• A loan to improve a principal residence by putting in a business office.
• A business account used occasionally for consumer purposes.
• Examples of consumer-purpose credit include:
• Credit extensions by a company to its employees or agents if the loans are used for personal purposes.
• A loan secured by a mechanic's tools to pay a child's tuition.
• A personal account used occasionally for business purposes.

The answer is found in the Interagency Appraisal Regulations Frequently Asked Questions, which can be found in the FDIC's FIL-20-2005.  More specifically, look at questions numbered 10, 12, and 13.

10. Can an appraisal be transferred from one lender to another and, if so, under what circumstances?

Answer: A regulated institution may accept an appraisal transferred from another regulated institution or from a financial services institution (that is, a non-regulated institution), provided 1) the appraiser is engaged directly by the institution transferring the appraisal, 2) the appraiser has no direct or indirect interest in the property or transaction, 3) the existing appraisal or evaluation remains valid, and 4) the regulated institution determines that the appraisal conforms to the agencies’ appraisal requirements and interagency guidelines and is otherwise appropriate. (A financial services institution describes entities that provide services in connection with real estate lending transactions on an ongoing basis.)

Regulated institutions are expected to perform a more thorough review when accepting an appraisal from another financial services institution to confirm that the appraisal complies with the regulation and has sufficient information to support the lending decision. Moreover, the regulated institution accepting the appraisal should determine whether appropriate documentation is available to confirm that the financial services institution (not the borrower) ordered the appraisal.

12. May an appraisal be readdressed to a regulated institution from the borrower or another institution?

Answer: A regulated institution cannot accept an appraisal that has been readdressed or altered by the appraiser with the intent to conceal that the original client was the borrower. Readdressing appraisals to conceal the original client, whether the client is a borrower or another financial services institution, is misleading and violates the agencies’ regulations and USPAP.

13. May an appraisal be routed from one lender to a regulated institution via the borrower?

Answer: A regulated institution cannot accept an appraisal from the borrower unless the regulated institution can confirm that the appraisal was in fact ordered by another regulated institution or financial services institution. In accepting the appraisal, the regulated institution must also confirm that the appraiser is independent of the transaction and that the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable.

If you have a certified appraisal on the main parcel (which is a restaurant), you can show that the loan would be supported by an appraisal on that parcel of real estate and the earnings of the restaurant, then the liens on the other real estate would be considered taken out of an abundance of caution and would not have to have a certified appraisal, but some kind of an evaluation. 

The regulation on furnishing appraisal reports is found in Reg B, Section 202.14.  The reg states that you don't have to provide the appraisal if requested more than 90 days after the adverse notice or if the application is withdrawn.

On October 27, 2003, the federal financial institution regulators issued a statement entitled "Independent Appraisal and Evaluation Functions. " That statement contained a section entitled "Selecting Individuals to Perform Appraisals or Evaluations." In the first paragraph of that section, you will find this language:  "Institutions also need to ensure that the individual selected is competent to perform the assignment.  Consideration should be given to the individual’s qualifications, experience, and educational background."

You can find this statement at: http://www.occ.treas.gov/ftp/advisory/2003-9a.pdf

Actually, the Fair Credit Reporting Act authorizes credit reports for consumer credit.  The FTC staff wrote an opinion indicating that no report was authorized for an individual guarantor.  However, the banking regulators complained, and a new opinion was issued stating: "...the FCRA would permit a lender to obtain a consumer report in connection with a business credit transaction where the consumer in question is or will be personally liable on the loan, such as in the case of an individual proprietor, co-signer, or guarantor."

5% after 10 days.  HB 955 deleted the word "reasonable" and left a simple permissible late charge of 5% after 10 days.  You had capped your late charge to assure that the borrower couldn't complain about the "reasonableness" of the late charge.

In response to your question, there is no regulation, but it is a generally held interpretation of the Texas rate ceilings by courts and others such as the Credit Commissioner that to charge interest on funds of which the borrower does not have the use is usury per se.  Moreover, you have said that the loan documents do not provide for multiple advances.  So I don't know how you are going to enforce any of this pool loan.  If you are doing a pool loan on a secured basis, it should be done as a homestead improvement loan pursuant to Property Code Section 53.254.  It doesn't sound to me like the pool contractor has had much experience in doing this, or they would have the proper contract forms.  That is a red flag.

A couple of years ago, I met with one of the preeminent construction attorneys in Texas regarding home improvement issues.  He told me that there are a lot of bad contractors and subcontractors in the building industry, but it is epidemic in the swimming pool installation industry.  I am not saying all pool companies are bad or that this company is bad, but be wary when dealing with any of them.  Unfortunately for the good guys in the pool industry, they pretty much all have to be dealt with carefully.

Yes—for the homeowner. For decades, the Property Code has provided that the homeowner should retain back 10% until the project is finished (and until the lien filing period expires). This is intended to cover unexpected claims from subcontractors or suppliers. This provision is at section 53.081 et seq of the Property Code: http://www.statutes.legis.state.tx.us/SOTWDocs/PR/htm/PR.53.htm#53.081

This retainage provision limits the liability of the owner to the amount of the retainage. Lenders are not required to enforce this retainage provision. However, the notice given under the Residential Construction Act includes a discussion of retainage. There are also (as you noted) contractual provisions for retainage. The problem is that often the builder needs the full amount in order to keep current with his subs. Therefore, holding back 10% out of each draw creates a cash flow problem. Some simply hold 10% at the end of the project. And many waive the right of retainage altogether.

Bottom line:  The issue is one for the owner rather than the builder. It protects the owner from subcontractor liens. But your lien will be a priority one anyway.

Yes, individuals could always represent themselves in justice court; now corporations may represent themselves.  This was a 2007 legislative change in Senate Bill 618. The following is the relevant portion of the statute that was amended and is the one you are thinking of:
 
Government Code § 27.031. JURISDICTION.
 
...
(c) A corporation need not be represented by an attorney in justice court.
 
Click on the above link for §27.031 if you want to see it in its entirety.  SB 618 also raised the justice court jurisdiction from an amount in controversy of $5,000 to $10,000.

No.  In 1980, a federal court (Durrett v. Washington Nat. Ins. Co.) held that a forclosure sale that yielded 57% of the property's fair market value could be set aside.  The court indicated that any such sale for less than 70% of fair market value shojld be invalidated. The "Durrett rule" was rejected by the U.S. Supreme Court in the case of BFP v. Resolution Trust Corporation.  The U.S. Supreme Court deemed "that a fair and proper price, or a 'reasonably equivalent value,' for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the State's foreclosure law have been complied with."  Simply comply with all of the requirements Texas' foreclosure law, and the price you receive is considered fair and proper.  Of course, if you have colluded with anyone to keep the price low, that price will not likely be considered fair and proper. Additionally, if you want to take the debtor to court to seek a deficiency judgment, you will likely have to prove evidence of the fair market value of the property (probably and appraisal).  Your deficiency will be the difference between what the debtor owes on the note and greater of: (1) the price paid by the buyer at foreclosure, or (2) the fair market value.   It is unusual for a creditor to seek a deficiency judgment because debtors who can't pay their mortgages rarely can pay the deficiency.

The local authorities can't collect the taxes until the property sells or he dies.  At that time, however, the full amount of deferred taxes plus 8% per year is due in full.  If it isn't paid within 180 days, then penalties are piled on (retroactively).

The best protection against this is to escrow for taxes.  Remember that this lien for the deferred taxes has a super priority.  If the loan goes into default and there is a foreclosure sale, the taxes are going to be a priority lien against the property!

Though your examiners asked for a policy, and you should have a policy, I doubt that it was failure to have a policy that they intended to criticize. What they probably intended to criticize was failure to have a procedure for complying with the Protecting Tenants at Foreclosure Act (the Act).

The Act was signed into law on May 20, 2009, published in the Federal Register on June 24, 2009, and applies to foreclosures after May 20, 2009.  Under the Act:

• All tenants must receive a 90-day notice before being evicted as the result of a foreclosure of any loan by a lien on 1-4 family residential property, including individual units of condominiums and cooperatives.
• With some exceptions, the law requires that in the event of foreclosure, existing leases for renters are honored to the end of the term of their lease.
• The stated exceptions are for tenants without a lease, tenants with a lease terminable at will under state law, or where the owner acquiring the property will occupy it as a primary residence. In these cases, the tenants must still receive a minimum of 90 days notice to vacate the property.
• This law does not affect the requirements of any state or local law that provides longer time periods or other additional protections for tenants.
• A successor in interest to the foreclosure (including a bank) takes title subject to any remaining term on a bona fide lease.
• The new law does not require any agency to issue implementing regulations,

The FDIC, in FIL-56-2009, said that its examiners will monitor and enforce compliance with the requirements of this law in the same manner as other consumer protection laws and regulations.  Although the federal regulators want you to adopt a policy (I found where the Kansas City Fed advised institutions to adopt policies) , I am not sure what a policy would say other than “comply with the Act and follow the bank’s procedures.” Your procedures need to cover the steps the bank will take to comply with the Act when foreclosing on a 1-4 family residential property with a tenant.  The Act is very short (one page), so it should be easy to develop the policy and procedure.

Not a good idea! The Federal Trade Commission (FTC) has made it clear that using social media to collect a debt may run afoul of the Fair Debt Collection Practices Act (FDCPA). In a recent letter the FTC warned that the following practices are of serious concern:

(1) requesting to join debtors' social media networks (for example, by sending a "friend request" on Facebook), or making any subsequent communications, for the purpose of collecting a debt, without making the disclosures required by Section 807(11) of the FDCPA; (2) communicating with third parties other than in the limited circumstances permitted by Section 805(b) of the FDCPA; (3) communicating with third parties to obtain location information about debtors in a manner that violates Section 804 of the FDCPA; (4) utilizing social media in a manner that constitutes a publication of a list of debtors who allegedly refuse to pay debts, in violation of Section 806(3) of the FDCPA; and (5) communicating with debtors or third parties in a false, deceptive, or misleading way, in violation of Section 807 of the FDCPA.
Facebook has also reminded users that use of its service in an effort to collect a debt is a violation of its Terms of Service agreement and may subject the violator to a loss of their account.

So the bottom line here is that both the FTC and Facebook have said don’t do it.

Just because you have picked it up doesn’t mean that you have completed the foreclosure! You still need to comply with Article 9 of the UCC. Typically, you will give 10 days notice that you will sell the item at private sale. (You could sell at a public auction as well. If so, you have to give a notice of the date of the auction.)  The suggested form letter notice is in 9-613 and 9-614. The borrower could redeem the item. Worse, the borrower could file bankruptcy and put the foreclosure on hold!  There are also accounting issues that come into play. Here is a link to a publication from the OCC on accounting practices. It is based on GAAP, so it is equally useful to a state chartered bank: http://www.occ.treas.gov/BA022004.pdf. Also, remember that repossessed but not sold collateral is subject to a writ of garnishment.

Whoa!  Not very far.  Don't forget the lessons of the Farah  case.  There, the bank got too involved in management and lost a lender liability suit, which claimed that the management put in by the bank had harmed the company.  Also, don't slander this person.  Your better angle is to review the bank's loan agreement with this borrower and make sure that you are getting regular financial statements, evaluating the position, and monitoring the collateral.  If the company isn't meeting criteria in the loan agreement, then you could bring that up with the company, but do NOT try to make management decisions.
 

Give the woman an adverse action notice.  According to the Equal Credit Opportunity Act (Reg. B) at 12 CFR §202.9, the notification when an adverse action is taken must contain either:  (i) A statement of the specific reasons for the actions taken; or (ii) A disclosure of the applicant's right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor's notification. The disclosure shall include the name, address, and telephone number of the person or office from which the statement of reasons can be obtained. If the creditor chooses to provide the reasons orally, the creditor shall also disclose the applicant's right to have them confirmed in writing within 30 days of receiving the applicant's written request for confirmation.

You want option (ii) and maybe the applicant doesn’t ask for the reasons for the denial.  However, if she does ask for the reasons for the denial, you can honestly say that you denied the loan because of her abusive behavior toward the staff and officers of your bank.  It might be a good idea to develop your written response with the assistance of your examiner in charge. It will be difficult for your regulator’s examination team to criticize your reasons if they helped write it.  When you send your reasons for the denial, use Form C-5 in Appendix C to Reg. B.

As of 7/12/2010

The short answer to your question about lending where part of the collateral consists of gasoline underground storage tanks is that there are no longer any requirements for environmental impact studies.  However, although the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA),  has been amended to exclude lender liability for foreclosing on environmentally dangerous collateral such as underground storage tanks, the Resource Conservation and Recovery Act of 1976, as amended (RCRA), does apply to secured creditors depending on the amount of control they exercise over the borrower.  And as we have seen lately in the news with the environmental disaster in the Gulf of Mexico, BP is the responsible party for EPA purposes and will have to bear all of the costs, direct and indirect, of the cleanup.  So, if your bank lends to a borrower with gasoline underground storage tanks, in the event of a leak, the borrower is going to be the responsible party and will have to pay for every bit of the remediation.  This probably would not be billions of dollars, but it very well could cost a million dollars or more.  In the case of a convenience store, this will mean that the borrower will expend more cash in regard to the clean-up than they will take in from the sale of beer and twinkies, and depending on the extent of the leak, it could result in the convenience store being shut down altogether, not just the gasoline sales. This makes it less likely that the borrower will be able to repay the loan.  So, every precaution the bank can take to ensure that a leak does not happen, the more likely it is that the bank's loan will get repaid.

The considerations your board should take in approving and servicing the loan and the representations and warranties that should be incorporated into the loan agreement and the amount of time spent monitoring the loan are beyond the scope of this article.  Remember also that in evaluating the risk, there are many factors to be taken into consideration that are unique to to the particular loan in question, such as the amount of the loan (you don't want to expend more in evaluating the risk than the amount of the loan!), whether the underground storage tanks are new or whether they have been in the ground for a number of years and may already be leaking, and if the underground storage tanks are new, whether they are replacing old underground storage tanks that may have been leaking, etc.  I strongly urge you to engage a professional with experience in environmental issues.  But in the meantime, in order to help you get started on a specific course of action, here is an ABI article that you may find helpful.

Regulation B--at 12 CFR 202.9(a)(3)(ii)--provides:
 
With regard to a business that had gross revenues in excess of $1 million in its preceding fiscal year or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, a creditor shall:

(A) Notify the applicant, within a reasonable time, orally or in writing, of the action taken; and

(B) Provide a written statement of the reasons for adverse action and the ECOA notice specified in paragraph (b)(1) of this section if the applicant makes a written request for the reasons within 60 days of the creditor's notification.

The Official Staff Interpretations provide:

5. Timing of notification. A creditor subject to §202.9(a)(3)(ii)(A) is required to notify a business credit applicant, orally or in writing, of action taken on an application within a reasonable time of receiving a completed application. Notice provided in accordance with the timing requirements of §202.9(a)(1) is deemed reasonable in all instances.

There is also a provision in Reg B regarding businesses with gross revenues in the preceding fiscal year of $1 million or less.  You will find it at:  12 CFR 202.9(a)(3)(i).

It would not  be a good idea to deny him based “only” on having a student visa (or a work visa for that matter) - but you can consider that (see ECOA Interpretation below).  Considering an applicant’s national origin or immigration status is not “per se” a violation of fair lending laws - but you should also not totally discount your normal criteria for determining acceptable credit risk and deny the applicant based solely on their immigration status.  

Regulation B – Supplement I (Official Staff Interpretations)

Sec. 202.6 Rules Concerning Evaluations of Applications

…

Paragraph 6(b)(7)

1. National origin—immigration status. The applicant’s immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment. Accordingly, the creditor may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa.

2. National origin—citizenship. A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin.

NO.  The statute says at section 623 that any financial institution that regularly extends credit "and regularly and in the ordinary course of business furnishes information to a consumer reporting agency ...." must give the notice to consumers.  Section 615 of the act provides certain duties on users of consumer reports.  This is the requirement to provide "adverse action notices"..... but that is not a new duty.

Investigate, review all relevant information provided by the consumer and respond within 30 days!  If there is an error, correct it with the credit bureau.

If you do this, I think your bank will be considered a consumer reporting agency. You don't want to run that risk.  Could the applicant obtain their free credit report and provide it to the EDC?   At annualcreditreport.com or by calling the toll-free number, 1-877-322-8228, the applicant can get one report each year from each of the three major credit reporting companies -- Experian, TransUnion and Equifax.

15 USC §1681a(f) The term “consumer reporting agency” means any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

Yes, 15 USC 1681g(g)(1) provides in part (I omitted some of this for brevity – be sure to click the hyperlink and read §1681g(g) in its entirety):

(g) Disclosure of credit scores by certain mortgage lenders
(1) In general
Any person who makes or arranges loans and who uses a consumer credit score, as defined in subsection (f) of this section, in connection with an application initiated or sought by a consumer for a closed end loan or the establishment of an open end loan for a consumer purpose that is secured by 1 to 4 units of residential real property (hereafter in this subsection referred to as the “lender”) shall provide the following to the consumer as soon as reasonably practicable:

(A) Information required under subsection (f)
(i) In general A copy of the information identified in subsection (f) of this section that was obtained from a consumer reporting agency or was developed and used by the user of the information.
(ii) Notice under subparagraph (D) In addition to the information provided to it by a third party that provided the credit score or scores, a lender is only required to provide the notice contained in subparagraph (D).

...

(D) Notice to home loan applicants
A copy of the following notice, which shall include the name, address, and telephone number of each consumer reporting agency providing a credit score that was used:
“notice to the home loan applicant
“In connection with your application for a home loan, the lender must disclose to you the score that a consumer reporting agency distributed to users and the lender used in connection with your home loan, and the key factors affecting your credit scores.
“The credit score is a computer generated summary calculated at the time of the request and based on information that a consumer reporting agency or lender has on file. The scores are based on data about your credit history and payment patterns. Credit scores are important because they are used to assist the lender in determining whether you will obtain a loan. They may also be used to determine what interest rate you may be offered on the mortgage. Credit scores can change over time, depending on your conduct, how your credit history and payment patterns change, and how credit scoring technologies change.
“Because the score is based on information in your credit history, it is very important that you review the credit-related information that is being furnished to make sure it is accurate. Credit records may vary from one company to another.
“If you have questions about your credit score or the credit information that is furnished to you, contact the consumer reporting agency at the address and telephone number provided with this notice, or contact the lender, if the lender developed or generated the credit score. The consumer reporting agency plays no part in the decision to take any action on the loan application and is unable to provide you with specific reasons for the decision on a loan application.
“If you have questions concerning the terms of the loan, contact the lender.”

You will need to read subsection (f) of 1681g entitled Disclosure of Credit Scores.
You might say, "well, we pulled a credit score, but we did not use it.  I still think you should disclose it.  Many examiners are of the opinion that if you obtained a credit score, you must have used it and must disclose it.  It would be very difficult to have a credit score and convince someone that you did not use it in making the credit decision.

The short answer is no.  The operative guidance here is in the scope of the rule that applies if you use credit reports or scores in connection with credit decisions.  If you are not using a credit report or score in connection with a credit decision, like a CD secured loan, you do not have to provide a Credit Score Disclosure to that borrower.

(Being the smart folks we are here at IBAT we turned this one over to Karen Neeley, IBAT General Counsel, who has defended a number of Texas community banks on fair lending matters. Karen Neeley is also of Counsel with Cox Smith Attorneys in Austin, TX)

The current hot topics are pricing differentials for Hispanics and for females.  The critical issue for community bankers is consistent pricing (using a rate matrix) and loan policies dealing with discretion/deviation from pricing (keep limited and small in amount).

No doubt that while routine exams have been essential in the safety and soundness of the banking system, they are not always an effective means to ensuring fair lending.  Bankers need to clearly understand the consequences of a bad exam, including potential referral to DOJ, downgrade of CRA rating (and how that ripples across various areas), remedial action, and civil money penalties.

Training is vital not only for lenders but also for the board of directors!

(We have included the Legal Ease article below that Karen Neeley wrote for the July/August 2008 issue of the Independent Banker magazine. We are adding a link to other articles by Ms. Neeley on the IBAT Compliance Adviser page called General Counsel’s Corner.)

***
FAIR LENDING

The mortgage crisis has created an enhanced interest in fair lending principles.  Congress, regulators, and the press are all expressing concern that predatory lending practices, particularly in the subprime market, have contributed to problems with regard to foreclosure.  Furthermore, the expanded data on the Home Mortgage Disclosure Act (HMDA) reports have provided more fodder for review.  Unfortunately, even with the expanded information on the HMDA report, it still does not include all of the information that reflects a lender’s underwriting decision.  This is a two-edge sword as it would be very expensive for lenders to also track credit scores and include those on HMDA LARS as well as the other information currently required.

We are also seeing more fair lending examinations as the HMDA analysis reflects so-called “outliers.”  Thus, even though a compliance exam has reflected that an institution’s underwriting is nondiscriminatory, a fair lending examination may still be imposed if the HMDA data indicates that there are statistically significant differences in interest rates between different groups.

What is “fair lending”?  There isn’t actually a single “fair lending” act.  Rather, this is a shorthand way of referring to several laws applicable to nondiscrimination in the lending area.  These include the Equal Credit Opportunity Act as implemented by Regulation B, the Fair Housing Act, which prohibits redlining, and the Community Reinvestment Act.  HMDA is the mechanism by which reports are generated to evaluate mortgage compliance with the fair lending laws.

What is prohibited?  Basically, it is unlawful for a creditor to discriminate against any applicant with respect to any aspect of a credit transaction (which includes not only a decision to make a loan but also its terms) on the basis of race, color, religion, national origin, sex or marital status, or age; because all or part of the applicant’s income derives from public assistance programs; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.  These protective classes are found in the Equal Credit Opportunity Act.  The Fair Housing Act is very similar but it also applies to real estate transactions more broadly including sale of property, rental, and advertising as well as lending.  In addition to race or color, national original and religion and sex, the Fair Housing Act also prohibits discrimination based on familial status and handicap.

What constitutes discrimination?  Although the statutes do not explicitly provide for different tests, the regulators have used an employment style analysis with regard to lending discrimination.  Thus, discrimination could be overt, disparate impact, or disparate treatment.  Overt discrimination is fairly straight forward.  This is where an individual transaction decision about credit is made based impermissibly on a prohibited basis.  Disparate treatment can be established either by statements revealing that a lender explicitly considered prohibited factors or by differences in treatment that are not fully explained by legitimate nondiscriminatory factors.  Disparate impact occurs when a lender applies a facially neutral policy or practice equally to all credit applicants but that policy or practice disproportionately excludes or burdens certain persons on a prohibited basis.  An example given by the regulators is a policy by which loans for single family residences are not made for less than $60,000.  If that minimum amount disproportionately excludes potential minority applicants, then this could have a disparate impact on minorities.  [note:  For home equity loans, the bank may have a business reason for setting a threshold size in order to recover costs of making the loan.]  Disparate treatment is often shown where a particular group is steered into a particular type of product that is less favorable than a non-protected class is directed to. 

What are the consequences of fair lending violations?  First, individuals have certain civil rights and can bring a civil suit for damages.  That is not as likely to be a major consideration for most lenders.  The most significant issue is regulatory enforcement.  Depending on the number of violations and whether there is a pattern or practice, a regulator may seek prospective and retrospective relief.  Prospective relief could include adopting corrective policies and procedures, training, community outreach, better internal audit controls and oversight systems, and monitoring of compliance with periodic reports to the primary federal regulator.  Retrospective relief could include identifying customers who are subject to discrimination and offering them credit that they were improperly denied or requiring restitution to injured parties.  Civil money penalties are also possible.

What should banks do to avoid fair lending problems?  First, make sure that you have good policies in place to prohibit discrimination.  Next, consider using internal testing, pairing a minority with a comparable Anglo applicant to determine whether there is any disparate treatment.  Self-testing is protected under Regulation B.  Be sure that you have good training in place to assure that loan officers do not inadvertently steer protected classes into a more expensive product.  In addition, be sure that you have good HMDA reporting systems in place to make sure that the data submitted is as accurate as possible.  Remember that it is HMDA reports that trigger additional questions.  All too often HMDA reporting is inadequate or incorrect.
 
Resources.  The publication “A Guide to HMDA Reporting: Getting It Right!” is an excellent resource.  It is available online at the FFIEC website.  There are also some HMDA training programs available at the FFIEC website.  Also consider reviewing the FDIC publication “Side by Side: A Guide to Fair Lending.”  For national banks, look at the Comptroller’s Handbook on Fair Lending Examination Procedures.  All of these are excellent tools that can assist you in making sure that your programs are in good shape.

I am not aware of any "cure" procedures under Reg B.  However, if you are concerned, you might contact each borrower separately (by phone) and ask if they intended joint credit, prepare a memo to the file, and include with the application file.  Most importantly, make sure that procedures going forward include appropriate documentation!  Training is, of course, critical!  Compliance exams focus more on policies, procedures and training more than on individual file review.

The concern is that a $1,000 loan minimum (or any loan minimum – for example a home equity loan minimum of $50,000), may adversely impact low-income consumers. This is what is defined as disparate impact – a business policy or practice that is applied equally to all applicants but none the less has a disproportionate, adverse impact on a protected group. The intent of the policy is not to discriminate, but evidence of disparate impact does not require an intent to discriminate.

A policy or practice that does adversely impact low-income consumers may not be illegal if:

1)    It is justified by a business necessity; and
2)    A less discriminatory alternative is not available.

The bank can’t rely on a “gut reaction” that loans under $1,000 are not profitable.  An analysis should be conducted to actually determine if loans for less than $1,000 are unprofitable or not.  If the answer is that loans for less than $1,000 are not profitable, the bank should explore alternatives methods to meet the credit needs of applicants that would be impacted if the policy was adopted.  If an reasonable alternative is identified, it must be implemented.  If there is no reasonable alternative, the bank may adopt a minimum $1,000 loan policy.

No – The Final Rule revised Forms C-1 through C-5 to include the disclosures if a credit score is used in taking “adverse action,” such as the denial of credit or an increase in the APR for credit. A bank would be required to provide these disclosures only if a credit score was used in taking an “adverse action.” For example, a bank is not required to provide these disclosures if it uses a consumer report that does not have a credit score.
…
“Use of a credit score. In some cases, a creditor that is required
to provide an adverse action notice under the FCRA may use a consumer
report, but not a credit score, in taking the adverse action. Under
section 1100F of the Dodd-Frank Act, a person is not required to
disclose a credit score and related information if a credit score is
not used in taking the adverse action. Therefore, the proposed
amendments to Forms C-1 through C-5 generally were applicable only if a
credit score was used in taking an adverse action.”

Remember that Reg B (ECOA) applies to business credit as well as consumer credit, so you cannot require a spouse to sign a personal guarantee for the other spouse's corporate debt.  The answer is the same for a sole proprietorship, which is simply an individual running a business.  However, you can tell the credit applicant (both corporate and sole proprietor) that you need a guaranty, and the applicant will likely volunteer his or her spouse to be the guarantor, provided the spouse meets the creditworthiness standards that you would apply to a non-spousal guarantor.

In your first example of the corporate debt, I assume you have the husband personally guaranteeing the debt of the corporation.  If so, the wife probably doesn’t add anything by way of credit worthiness?  Does she have separate property?  In most spousal co-signer or guarantor arrangements, when one spouse can't pay, the other can't either.

In Texas, there is only one situation where a non-debtor spouse must join in the security instrument. Click here to find the answer in our Compliance Forum.

Be very careful here.  The best guidance on spousal signatures is the FDIC Guidance on Regulation B Spousal Signature Requirements FIL-6-2004. 

A person's intent to be a joint applicant must be evidenced at the time of application. Although the mere presence of two signatures on a promissory note may not be used to show an intent to apply for joint credit, signatures or initials on a written application that affirm the applicants' intent to apply for joint credit, as opposed to merely affirming the veracity of data may be used to establish an intent to apply for joint credit.22 Where there is no written application, the applicants' intent to apply for joint credit may be evidenced, for example, by the presence in the file of a written statement by the applicants that expresses such an intent.

Unless the husband and wife expressed their intent to be joint applicants at the time of application, you cannot require the wife to sign the promissory note.  Having a financial statement with both signatures does not rise to the level of intent to apply for joint credit.

In addition to actual damages, Regulation B provides for punitive damages of up to $10,000 in individual lawsuits and up to the lesser of $500,000 or 1 percent of the bank’s net worth in class action suits. Successful complainants are also entitled to an award of court costs and attorney’s fees.

Note: IBAT is working to provide topic specific links to helpful information such as the FDIC guidance above on spousal signatures.  Be sure to check out our Web Links often as we will add links on a regular basis.

As of 2/1/2010

This is the Q&A that you are talking about:

Question:  Which loans may have administrative fees?
Answer:  Administrative fees are explicitly authorized under Chapter 342 of the Finance Code.  So consumer installment loans with rates over 10% (including second lien mortgages) are covered.  Remember too that the bank may elect to treat a consumer loan as covered by chapter 342 even if the rate is less than 10%.  Dealer paper has its own rules.  For example there are "doc fees" for auto dealer paper.  But you aren't going to get it!  The dealer will!

By contrast, section 34.203 of the Finance Code (Banking section) authorizes "loan fees" on loans that are NOT covered by chapter 342.  That would include commercial loans, first lien residential real estate, and consumer loans with rates of 10% or less.  Single pay consumer also fall under that category.  Loan fees could include an administrative fee for various services related to the loan.  (See also 7 TAC 12.32 for the regs.)

First, Chapter 342 doesn't apply to unregulated loans (i.e., loans with an interest rate of 10% or less).

Second, there is an administrative fee allowed by §342.201 of the Finance Code, which is in a subchapter of Chapter 342 (Subchapter E), that relates to interest charges on non-real property secured loans.   Under Sec. 342.201, a lender may charge an administrative fee on a non-real property secured consumer loan with an interest rate of over 10%.  Because Subchapter E covers single-repayment consumer loans (See Sec. 342.202), and §342.201 permits an administrative fee on all loans under Subchapter E, then an administrative fee may be charged on a single-repayment consumer loan.

Additionally, in Subchapter G, there is also an express administrative fee in §342.308(a)(9) for secondary mortgage loans.  It provides in abbreviated form: "(a) A lender [who makes a] … secondary mortgage loan may collect … on or before the closing … (9) an administrative fee…."

Finally, a lender may charge the administrative fee for the loans described above with interest rates of 10% or less if in the loan docs the lender opts to have the loan regulated by Chapter 342.

Administrative fees are explicitly authorized under Chapter 342 of the Finance Code.  So consumer installment loans with rates over 10% (including second lien mortgages) are covered.  Remember too that the bank may elect to treat a consumer loan as covered by chapter 342 even if the rate is less than 10%.  Dealer paper has its own rules.  For example there are "doc fees" for auto dealer paper.  But you aren't going to get it!  The dealer will!

By contrast, section 34.203 of the Finance Code (Banking section) authorizes "loan fees" on loans that are NOT covered by chapter 342.  That would include commercial loans, first lien residential real estate, and consumer loans with rates of 10% or less.  Single pay consumer also fall under that category.  Loan fees could include an administrative fee for various services related to the loan.  (See also 7 TAC 12.32 for the regs.)

Question:  The APR is high.  Do we have a usury problem?
Answer:  The fee is authorized by law.  So even though your APR will look very high, so long as the stated interested rate is within the usury ceilings, the transaction will not be usurious.  However, the Consumer Credit Commissioner has opined that if a lender finances the administrative fee, the interest on the fee should be considered with the contract interest to determine whether the loan is usurious.  So long as the rate is not really close to the usury ceiling (generally 18%) there shouldn't be a problem.  Some processors can set up these loans so that the customer pays the fee with installments but no interest is charged on the fee.

Charging a fee for doing a market evaluation on a real estate loan or for doing a collateral check on a loan secured by personal property under the UCC Article 9 is not covered by the Texas Finance Code or the UCC, but you may contract to charge such a fee.  On loans secured by consumer residential real estate, it will not be considered a kickback for RESPA purposes as long as you can tie the fee to the actual cost to the bank for performing that function.  Thus, the amount of the fee should be the actual cost.  Anything above the actual cost would be considered a kickback and would be considered a violation of law.  RESPA does not apply to loans secured by personal property or commercial loans.

Not unless you are using precomputed interest (Rule of 78s loans). You may charge for the accrued interest, but that is it on a regulated loan (i.e. consumer installment loan with a rate in excess of 10%, made under chapter 342, Finance Code).
However, if you have an unregulated loan (e.g. rate is 10% or less), then under section 34.203 of the Finance Code, you may charge loan fees. Make sure that the fee is reasonable. For example, you might have a $25 doc or processing fee.   By the way, I asked the OCC whether this couldn't be considered a kind of "debt suspension" agreement. The answer? "NO!"

---

The Gramm-Leach-Bliley Act limits sharing of nonpublic customer information. However, there are a number of exceptions. The OCC responded to our questions with a comment letter indicating that financial institutions may provide payoffs and respond to "good funds" questions. Click here for the full letter.

NSF fees (i.e., the fees you charge your accountholder for writing a check when there are insufficient funds in the account) are not regulated.  NSF fees must be disclosed under Truth in Savings on consumer accounts, thus competitive factors are the only consideration.
 
The short answer regarding fees for dishonored checks written to your bank as loan payments is that, for all practical purposes, the maximum is always $30. Now, for the long answer:
 
Finance Code Chapter 342 prohibits all fees and charges that are not specifically authorized in Section 342.502.  Section 342.502 references Tex. Rev. Civ. Stat. Ann. Article 9022 with respect to the fee charged for a dishonored check, but Art. 9022 was repealed in 2001.  In 2003, Texas Business & Commerce Code (BCC) Section 3.506(a) was amended to increase the dishonored check fee from $25 to $30.  Although Section 342.502 continues to reference repealed Art. 9022, BCC Section 3.506(a) expressly authorizes a $30 fee. So, I believe that for a Chapter 342 loan, you may charge a maximum of $30 as a dishonored check fee. Just don't add it on to the loan, as it is not authorized to be added on to the loan per Finance Code Section 342.308.  If you are wondering, Chapter 342 loans are consumer loans, both unsecured and secondary mortgage loans, with interest rates greater than 10% per year.
 
Section 342.005 sets out the loans for which Chapter 342 is applicable.  However, for Chapter 342 loans, except real estate secured consumer loans, Finance Code Section 303.017 provides that "notwithstanding Section 342.005..." on non-real property secured loans, a lender "...may charge all reasonable expenses and fees...."  (Section 303.017 only applies to banks, savings associations, savings banks, or credit unions.)  Although this says you may charge a reasonable fee, there could be some question as to whether it trumps BCC Section 3.506(a).  Because the fee will certainly be "reasonable" if it is $30 or less, most banks apply this  maximum across the board.
 
For commercial loans, a returned check fee also may not to exceed the maximum fee authorized in BCC Section 3.506, Business & Commerce Code ($30), on any check, draft, order, or other instrument or form of remittance that is returned unpaid or dishonored for any reason. [See Finance Code 306.006]
 
For both commercial and consumer loans, you can charge post-maturity interest on the outstanding amount that was not paid timely, which is usually described in the note as the highest rate allowed by law (18%) on the entire balance.  But, of course, you'd need to check your note.

The simple answer is NO you are not required to update a SFHDF every 7 years.  But it is never that simple.

From Page 55 of the Mandatory Purchase Guidelines –

c. Portfolio Review

A look-back or retroactive loan portfolio review, as well as a review made on a prospective basis, which may disclose uninsured risks, is encouraged but not required by the law. The statutory requirements contain no express or implied language that obligates a regulated lender to review its portfolio of existing loans. Under GSE criteria, a lender or servicer is required to monitor loans sold to the GSE.

But let’s look back and see what it says under the determination process.

From Page 37 of the Mandatory Purchase Guidelines -

A previous determination may not be reused when making a new loan. If the loan is not new, i.e., if the transaction pertains to increasing, extending, renewing, or purchasing an existing loan, the determination can be reused if:

• It is less than 7 years old; and

• No new or revised FIRM or FHBM has
been issued in the interim; and

• It was initially recorded on the SFHDF.

So provided you are not increasing, extending, or renewing a loan AND you are not aware of a map change you are not mandated to review your portfolio or update a SFHDF.

There in is the tricky part - just because you are have a SFHDF in the file less than 7 years old and are increasing, extending, or renewing a loan you can’t assume there has not been a map change unless you have a system to monitor for map changes.

And from Page 55 of the Mandatory Purchase Guidelines –

A lender is notified of remapping through publication in the Federal Register of map change information pertaining to an individual community, or through a compendium that lists all changes during a specific time period. FEMA offers a subscription service (for a fee) that provides information on map changes. FEMA also makes map change information available online at http://msc.fema.gov. Some flood zone determination companies provide the service of monitoring map changes that influence the status of loans.

Yes! Elevating a structure above the BFE may reduce the cost of flood insurance for the borrower, but it does not exempt the property from flood insurance requirements.  The first link below has some helpful information entitled “How to Raise Your House Up-And Out of Harm's Way”  on the FEMA website, and the second link is to the mandatory purchase guidelines that address the subject of elevated structures.

http://www.fema.gov/news/newsrelease.fema?id=10679

http://www.fema.gov/government/grant/mitmeasures/elevate.shtm

From Page 17 of the Mandatory Purchase Flood Insurance:

A unique situation arises when a building is initially constructed at a level below the BFE in an SFHA, and its lowest floor is subsequently elevated or raised above the BFE by supporting walls or pilings. Such a structure is then considered an elevated building by the NFIP.

In this situation, there is no basis for the issuance of either a LOMA or LOMR-F. The building is still in the designated SFHA, and its foundation, supporting walls, and pilings can come into direct contact with floodwaters. When an owner of property below the BFE elevates a building so that the lowest floor is above the BFE, the flood insurance purchase requirement continues to
apply. Insurance is required because the foundation on which the house is elevated is still below the BFE, where it remains
exposed to the action of floodwaters. However, because of its reduced exposure to damage, the newly elevated building will be subject to a lower insurance rate and premium.

January - 2012

Require flood insurance.  Notify the borrower that he must obtain flood insurance that is not less than the minimum amount required under the law.  Explain that he has 45 days to purchase.  If he doesn't, then the bank will force place.  Then tickle for the 45 days and force place if necessary.

No!  However, if the owners obtain a Letter of Map Amendment (LOMA) through FEMA, then the insurance could be waived.

I did not find anything directly on point. However, one of the FAQs in the Comptroller's Handbook on Flood Disaster Protection (which I highly recommend) asks whether the reg applies to loans purchased from others. The answer was "no." Here you aren't even purchasing the loan- -you merely have a loan secured by a loan secured by an interest in real estate.  However, you might want to double check with your federal regulator just to be sure. The compliance exams are cracking down on flood violations.

You will find this information at 12 CFR §339.3(a).  When flood insurance is required, the amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act.  Flood insurance coverage under the Act is limited to the overall value of the property securing the designated loan minus the value of the land on which the property is located.

Flood insurance ONLY covers structures  not the land.  No structure; no flood insurance.  HOWEVER, in the FAQs on flood disaster protection in the following handbook: http://www.occ.treas.gov/handbook/flood.pdf, the very first question is about interim loan to construct a commercial building.  The answer was "yes" that if the purpose of the loan is to construct a building (assuming that the loan is secured by the building) the regulation applies.  So does your determination.  On an interim construction loan, flood insurance must be in place at the time construction starts.  They will determine site elevation from the plan drawings but to renew, they require a survey line shot over the slab.  Remember you need to notify your customer in advance.  If this is residential, then this will affect your HUD 1.  The compliance examiners are REALLY cracking down on flood violations!

The bank is lucky that Texas is a non-judicial foreclosure state, where the note and deed of trust survive the foreclosure. In a judicial foreclosure state, the note and mortgage would be merged in the foreclosure order by the court, and if the final order did not include payment of the ad valorem taxes, then the bank would have to deal with that issue when it tried to sell the property and would end up paying the taxes and would not have any recourse against the borrower.

Most deeds of trust have a covenant in them that if the borrower does not pay ad valorem taxes, the lender has the right to do so and add it to the note.  Since the property has already been foreclosed upon and the bank has bought the property, the bank is not going to get clear title in order to sell the property unless the ad valorem taxes are paid. So the bank must pay the taxes, but then they can add that on to the deficiency.

Note: Take this as an opportunity to review your foreclosure sale bidding strategy.  The amount of taxes and repairs are not necessarily added on to the amount of the bid at foreclosure, but rather the taxes and repairs become part of the debt, which is necessary in formulating a foreclosure bidding strategy. Also, the bank needs to do a title run before the foreclosure!

If the proceeds of the loan are to be used primarily for home improvement on a 1 to 4 family unit, even if it is not secured, it needs to be reported.
 
12 CFR 203.2(g) Home improvement loan means:
 
(1) A loan secured by a lien on a dwelling that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located; and
 
(2) A non-dwelling secured loan that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located, and that is classified by the financial institution as a home improvement loan.
 
From the Staff Commentary:
 
2(g) Home improvement loan. 1. Classification requirement for loans not secured by a lien on a dwelling. An institution has “classified” a loan that is not secured by a lien on a dwelling as a home improvement loan if it has entered the loan on its books as a home improvement loan, or has otherwise coded or identified the loan as a home improvement loan. For example, an institution that has booked a loan or reported it on a “call report” as a home improvement loan has classified it as a home improvement loan. An institution may also classify loans as home improvement loans in other ways (for example, by color-coding loan files).

Because these are considered permanent residence, yes, they are HMDA reportable.  This is from the FFIEC Web site, entitled CRA/HMDA Reporter, September 2000:

Q. Are nursing homes, dormitories, fraternity/sorority houses, assisted living and retirement homes to be reported on HMDA?

A. Nursing homes, dormitories and sorority/fraternity houses are viewed as temporary housing and are not HMDA  reportable since they were not built for permanent residency. In addition, a nursing home is more like a hospital in that it provides medical care, which is usually constant and extensive. Assisted living and retirement homes are viewed as  dwellings that individuals reside in permanently and are HMDA-reportable. In fact, in most cases the “home place” has been sold by the individuals who choose these homes as their new “permanent” dwellings.

That is correct. Data collection for loan applications, originations, and purchases is required for transactions of the covered institution that take place prior to the merger. Data collection is optional for transactions taking place after the merger date.  The below information on mergers and acquisitions is from page 5 of the FFIEC publication, HMDA Reporting Getting it Right! 

Mergers and Acquisitions
When a merger or an acquisition of a branch takes place questions often arise about how and when to report HMDA data. The five scenarios described below should answer many questions. You can refer others to your federal supervisory agency for resolution.

Two institutions merge, producing a successor institution whose assets exceed the asset threshold for coverage. Both were previously exempt because of asset size. The successor institution’s first HMDA data collection will be for the calendar year following the year of the merger. No data collection is required for the year of the merger.

Two institutions merge, one covered and one exempt. The covered institution is the surviving institution. For the year of the merger, data collection for loan applications, originations, and purchases is required for the covered institution’s transactions and is optional for transactions handled in offices of the previously exempt institution.

Two institutions merge, one covered and one exempt. The exempt institution is the surviving institution, or a new institution is formed. Data collection for loan applications, originations, and purchases is required for transactions of the covered institution that take place prior to the merger. Data collection is optional for transactions taking place after the merger date.
   
Two covered institutions merge. The surviving or resulting institution must report complete data for the year in which the merger occurred; the institution has the option of filing a consolidated report or separate reports for that year.

No!  A recent FAQ from FFIEC on this clarifies that the temporary financing is financing that will be replaced by permanent financing, such as in construction lending.  It doesn't refer to the length of the note's term!

Of course you can decline a loan if the requested credit does not meet your product limitations.  (And this is one.)  Would this provision have an unintended effect of turning down loan requests from a protected class (e.g. minority) more than an unprotected class?  If so, then you have a fair lending issue.  FYI, American National Insurance Company (an IBAT endorsed vendor) has a monthly premium product.  That solves the HOEPA problem....you just include the first month's premium rather than the entire term.  Check our web site for info on endorsed vendors:  www.ibat.org.

A federal court decision (Marketic v. U.S. Bank N.A.) concluded that a homeowner could designate rural land as ag use at any time and prevent the lender from foreclosing.  As a result of this decision, title companies are reluctant to issue title policies if the collateral could be signated as ag use.  Until this issue is resolved (either with a new constitutional amendment--which IBAT has drafted--or through the appellate process), it is risky to make a loan on rural land.  It is theoretically possible to survey out the home and the surrounding acreage that is excluded from the ag use valuation and take a lien only on that property.  However, the cost of the survey must be considered as part of the 3% fee cap.  Unfortunately, that usually makes the loan not cost effective.  Stay tuned for further developments.  

Not a good idea right now.  First, the In Re Marketic case indicates that the borrower could restore the ag use valuation later and defeat your lien.  Also, the Tax Code provides that the special use valuation can be waived for the current tax year before May 1.  A waiver now would apply to next year.  Although there hasn't been any litigation on the timing issue yet, this point worries us.

Very bad idea.  There is a recent bankruptcy case (which will be appealed) that states that a customer can assert the ag use valuation at any time and defeat the creditor's ability to foreclose!

Actually, on the lines of credit you have a draw period (in which the payments must at least cover the accrued interest) and the repayment period (with substantially equal payments).  The lege really doesn't want homeowners to get into negative amortization.

As of 7/19/2010

Balloon payments are not allowed.  The Texas Constitutional provision (Article XVI, Section 50(a)(6)(L)(i)) that you mention provides:

Sec. 50.  HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS. (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

…snip…

(6)  an extension of credit that:

…snip…

(L)  is scheduled to be repaid:

(i)  in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the extension of credit is made, each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment; or

(ii)  if the extension of credit is a home equity line of credit, in periodic payments described under Subsection (t)(8) of this section;

I think that the first five words of 50(a)(6)(L)(i)—“in substantially equal successive periodic installments”—effectively prohibit balloon payments. However, if this constitutional provision doesn’t clearly prohibit balloon payments, the Finance Commission’s rules interpreting this constitutional provision—at 7 TAC §153.11(3)—does clearly prohibit balloon payments.  I have underlined the pertinent sentence.

RULE §153.11 Repayment Schedule: Section 50(a)(6)(L)(i)
--------------------------------------------------------------------------------
Unless an equity loan is a home equity line of credit under Section 50(t), the loan must be scheduled to be repaid in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the extension of credit is made, each of which equals or exceeds the amount of accrued interest as of the date of the scheduled installment.
(1) The two month time period contained in Section 50(a)(6)(L)(i) begins on the date of closing.
(2) For purposes of Section 50(a)(6)(L)(i), a month is the period from a date in a month to the corresponding date in the succeeding month. For example, if a home equity loan closes on March 1, the first installment must be due no later than May 1. If the succeeding month does not have a corresponding date, the period ends on the last day of the succeeding month. For example, if a home equity loan closes on July 31, the first installment must be due no later than September 30.
(3) For a closed-end equity loan to have substantially equal successive periodic installments, some amount of principal must be reduced with each installment. This requirement prohibits balloon payments.
(4) Section 50(a)(6)(L)(i) does not preclude a lender's recovery of payments as necessary for other amounts such as taxes, adverse liens, insurance premiums, collection costs, and similar items.
Source Note: The provisions of this §153.11 adopted to be effective January 8, 2004, 29 TexReg 84; amended to be effective November 13, 2008, 33 TexReg 9074

The above link to the Finance Commission rules on the IBAT website is to a PDF document that I created that contains all the rules. There is no other place on the Web that I know of where you can get a fully-searchable copy of these rules. The Secretary of State provides the rules on their Web site, but each rule is on a separate page preventing a search of the entire set of rules.  You can get to the rules on the IBAT Web site.

You are not going to find the term “bridge” or “swing” loan defined in any regulation.  Rather they are illustrative terms used to describe “temporary financings”. A financing is temporary if it is designed to be replaced by permanent financing of a much longer type from another lender. Be careful using a “temporary financing” exception - the term of a loan does not necessarily make it a “temporary financing.” For example, a loan to purchase a home due in 12 months (from let’s say an inheritance) is not a “temporary financing” but is a purchase.

Texas has no constitutional provision allowing for a “bridge” or “swing” loan to be secured by a homestead.  That means that if you are advancing new funds secured by the applicant’s current homestead, it is by definition a “home equity” loan.  That also means no balloon terms or additional collateral (for example the home being purchased or constructed taken as collateral).  An applicant would not be able to disavow the present home as their homestead if in fact it is their homestead. So while you could make a “bridge” loan, it must comply with the Texas home equity provisions. You may sometimes find a title company that will agree that the new home is the homestead since the owner has a present intent for that to be the homestead, but that is a very tricky argument to make.

Also take note of the Regulation Z commentary below on the right of rescission in such a transaction. The transaction is rescindable.

...

4.  Special rule for principal dwelling.  Notwithstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in the consumer's current principal dwelling (for example, a bridge loan) is subject to the right of rescission regardless of the purpose of that loan. For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by A is subject to the right of rescission. A loan secured by both A and B is, likewise, rescindable. Source

---

YES!  The official interpretations from the Finance Commission (and prior commentary) agree.  The POA needs to be recorded in the real property records and should describe the property.

This is perhaps one of the easiest problems to "cure."  Make 2 copies of all of the docs and deliver to the borrowers.  Copy their attorney as well.  Do this within 60 days of the notice.

Yes--if the survey was a requirement of the loan. For example, if the owner does not have a good legal description, then the survey would be necessary.

As of 11/23/2009

I do not think that a deed-in-lieu is prohibited. The Constitution, at Article XVI, Section 50(a)(6)(D), says that a home equity loan is a loan that "(D) is secured by a lien that may be foreclosed upon only by a court order..."  However, I don't think that precludes a deed in lieu of foreclosure. If you do take a deed in lieu, you cannot collect from the borrowers if there is a deficiency because by definition (Article XVI, Section 50(a)(6)(C))  there is no recourse against the borrower ((C) is without recourse for personal liability against each owner and the spouse of each owner, unless the owner or spouse obtained the extension of credit by actual fraud;).  However, if there is a surplus, you do not have to apply it to other loans. When they deed to property to you, they are taking the risk that you will make a profit. I think there have been very few deed-in-lieus where the lender actually made a profit, so if you are one of the lucky few, good for you.  After all, you took a risk.  The bottom line:  In my opinion, because the property was deeded to you, you do not need to give them any of the surplus back or apply it to their other loans.  You may want to check with your legal counsel.  If you make what looks like an unconscionable profit on the sale, you might consider refunding some of the funds to the borrower.  You are not required to do this. But that is a decision your bank has to make in consultation with its legal counsel. 

Yes you can.  The 80% LTV test is based on the loan amount at closing.  The advance for taxes is to protect the lender’s collateral and is not a part of the loan per se but is essential in order to preserve the collateral.  Similarly, advances to pay collateral insurance (homeowner’s policy) is not a part of the 80% LTV and can be treated the same way.

Most attorneys take a conservative perspective on this question and say "no."  The other half of the duplex is rental property (which is investment property  arguably not business homestead since investment is not the same as profession or calling).  Therefore, the other half of the duplex is non-homestead property and thus not proper as collateral.  Practical solution:  Check with your local title company to see if they would insure the loan.  If so, transfer the risk to them!  If not, then there is this stumbling block.

7 TAC 153.14 allows modifications of home equity loans.  It does not address the issue of substantially equal payments, which are required by the constitution and the interpretations (See Article XI, Section 50(a)(6)(L)(i) and 7 TAC 153.11).  When a home equity loan is modified, it typically would affect the amount of the payment, thus causing the payment after modification to possibly not be substantially equal to the payments prior to modification. Unfortunately, 153.14 did not deal with this issue.
 
Here is a letter from the commissioners of the state agencies that regulate consumer lending in Texas.  You will notice that the letter is outdated. For instance, it mentions that home equity lines of credit are not allowed. At the time the letter was written, this was true, but home equity lines of credit are now permitted. When this letter was issued, the agencies did not have authority to interpret the constitution.  I am including this letter only because it is instructive on the issue of substantially equal payments.  We believe that the concept in the letter would still apply to modifications, and so long as the payments after the modification are substantially equal to each other, they do not have to be substantially equal to the payments prior to the modification.
 
The rules do not specifically address extensions, but an extension is nothing more than a modification of one of the terms of the loan, and, as stated above, modifications are allowed under the terms of 153.14.  You would not want to extend the same loan too often or it would be what is considered an "evergreen loan" (continually extending without being paid off), and these are frowned upon by the regulators.
 
The Finance Commission has a webpage dedicated to home equity, home improvement, and reverse mortgage lending: http://www.fc.state.tx.us/homeinfo/homeindex.htm

No.  The Finance Commission interpretations clarify this point.  The insurance does not insure "the loan."  Furthermore, the placement is a subsequent event resulting from the customer's default and is in his control.  See 7 TAC 153.5(15) and (16).

It sounds to me like the customer's primary residence is in New York; thus, the home in Cedar Park is not the homestead.  If you determine that his primary residence is indeed in New York, a home equity line of credit would not be appropriate; however, you could extend a secured revolving line of credit under Chapter 346 of the Finance Code, http://tlo2.tlc.state.tx.us/statutes/fi.toc.htm.

If the parcel without the house is part of the homestead, then the lender can make a home equity loan secured by it.  The question really should be: If we make a loan secured by a parcel of the homestead that doesn't include the house, do we have to make it as a home equity loan?  The answer to this question is "yes."  The parcel is still part of the borrower's homestead, so this would be a home equity loan.  As further explanation, the homestead constitutional amendment (Article XVI, Section 50(a)(6)) is a consumer protection.  What kind of consumer protection would it be to say, "no, you can't use your homestead as collateral for this loan unless you also put up your house"?  Your client's homestead loan without the house, does not subject the house to possible foreclosure.

(Question #2 will appear next week.)

If a lender makes what should have been a home equity loan as a conventional real estate secured loan, the lender has serious problems.  The lender can try to cure this violation, but I am not convinced that it can be cured under the constitutional cure provisions.   If the lender can't cure it, then there is a possibility of the loss of principal and interest.   If you find yourself in this situation and the borrower notifies you of the violation,  you should promptly offer to cure under the provisions of Section (a)(6)(Q)(x)(f), but it may be up to a court to decide if this problem can be cured.  You do not want your bank to be the test case.

Let's also look at what happens when the situation is reversed, and the lender makes a home equity loan on nonhomestead property.  In this scenario, the borrower may be inconvenienced, but the borrower is not harmed and the constitution is not violated.   I think it would just be as if the bank and the borrower decided that they wanted to jump through all the hoops of a home equity loan for a non-home equity loan.  It might not make any sense, but there's no law prohibiting it.   Of course, the borrower probably will not be happy with all the formalities and the twelve day wait.  Additionally, you might lose the borrower to another lender who is not requiring the formalities and the waiting period.   If there is any harm, it is to the lender.   In fact, if you made a loan like this, you unnecessarily made a nonrecourse loan, which means that if the borrower defaults, you can look to the property, but not to the borrower to satisfy the loan.  Also, if foreclose becomes necessary, your bank has contracted to go through the home equity foreclosure process rather than a simpler nonjudicial foreclosure.

The bottom line is that it is best not to make an error, but if you err, it is much better to err in making a nonhomestead loan as a home equity loan than it is to make a homestead loan as a conventional real estate secured loan.

First, both the home and the land are a part of the homestead.  So you are not taking "non-homestead" collateral (which is the real prohibition).    Second, consider asking the customer to surrender the title and make the home all real property.  That is the preferred practice.  In fact, until some amendments last session, the Property Code would have forced you to go that route!

You can charge a fee to modify only if you have room under the original 3% fee cap. If not, then no fees may be charged.   See 7 TAC §153.14.  Section 153.14(2)(D) is relatively new and says that when a home equity loan is modified, the original fee cap still applies. So, if you only charged fees in the amount of 2.5% of the original principal amount, when you modify the loan, you could still charge fees in the amount of 0.5% of the original principal amount of the loan.

We have a PDF version of the home equity rules on our web site. This is the only place I know where you can get all the rules on one document. Otherwise, you must go to the Secretary of State's website, but you can only look at one rule at a time.  I don't know why they do it like that. It makes research more difficult.

From 10/19/2009

A home equity loan is described in the Texas Constitution Article 16 Section 50(a)(6), as one of the liens allowed on a Texas homestead.  A homestead is described both in the Texas Constitution Article 16 Section 50, as well as in the Texas Property Code Section 41.002.  The primary attribute of a homestead is that it is a home, which in this case, the home is the travel trailer in which the applicant lives--or doesn't.  More on that later.  The point is that the homestead is not defined as the only property in Texas owned by the homestead claimant.  The "only property owned in Texas" is a title company underwriting standard used to refuse to insure non-homestead property that might possibly later become homestead. 

Having busted the "no other property in Texas" myth, let's turn to the issue of the travel trailer as the primary residence on the one acre.  By definition, a travel trailer is mobile and moves around from place to place.  The one acre would not qualify as a residence if the travel trailer were there only once in a while as it is cleaned up and re-provisioned for another trip.  Ideally, the travel trailer should be affixed to the real estate, pursuant to the Manufactured Housing Rules, Subchapter B.  This would make it a permanent fixture on the real estate like a house or a barn or any other building.  Then, being part of the real estate, the home equity lien would cover the travel trailer as well as the one acre--it would be included in the one acre as a fixture.  However, the loan applicant may not want to do that.  Another alternative to keep the travel trailer more-or-less permanently on the one acre would be to require the borrower to remove the tires and put the travel trailer up on blocks.  This does not make the travel trailer a fixture and part of the real estate, and a home equity lien would not cover the travel trailer, but it would ensure that the one acre was the residence of the applicant and therefore a homestead and not just a temporary parking lot.

With these considerations in mind, the one acre with a travel trailer as the residence of the applicant would support a home equity lien.

As of 3/8/2010

The constitutional restriction that says there may only be one home equity loan at a time follows the property, not the borrower. In other words, there may only be one home equity loan at a time secured by the same homestead property.  You can make the home equity loan secured by this homestead property because it doesn't have a home equity loan secured by it (unless the new wife closed a home equity loan on that homestead within a year of closing this one you are considering.)

Before you make this loan, make sure that you check the county records to make sure that the man really is divorced.  The fact that there are loose ends like this remaining in the divorce makes me a little wary of this second loan.  The man is still on the note, but there is no personal recourse against him. However, if the divorce lawyers didn't take care of getting the house and all debts secured by it into the wife's name, they probably didn't do their jobs properly.  As a result, the home equity loan on his ex-wife's house is going to affect his credit and should be considered in your underwriting if he's to be a signer on the new loan.  The bottom line in this one is:  be careful and consult with your legal counsel because it doesn't sound like the divorce attorneys took care of all the loose ends of the divorce.

See Texas Constitution, Article XVI, Section 50, (a)(6)(K) below…
(6)  an extension of credit that:
…snip…
 (K)  is the only debt secured by the homestead at the time the extension of credit is made unless the other debt was made for a purpose described by Subsections (a)(1)-(a)(5) or Subsection (a)(8) of this section;

Yes. An owelty of partition is a vehicle used to allow one co-owner of property to buy the interest of the other co-owners while using 100% of the interests as collateral for a loan to acquire the property. Common examples are divorces, probates and division of co-owned assets by people who are not partners. In 1995, the Texas Constitution was amended to specifically designate an owelty of partition as one of the permitted encumbrances on a Texas homestead.

This type of loan is not subject to the Texas home equity loan requirements.
...

Sec. 50. HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS. (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

1. the purchase money thereof, or a part of such purchase money;
2. the taxes due thereon;
3. an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;

Source

Comment: The loan will be subject to the right of rescission under Regulation Z.

Sec. 226.23 Right of rescission.

The Federal Reserve Board's Regulation Z (12 CFR Part 226) has been republished effective December 30, 2011, at 12 CFR Part 1026 as one of the regulations transferred to the Consumer Financial Protection Bureau under the Dodd-Frank Act. This section of the FRB regulation was republished as §1026.23 of the Bureau's regulation.

(a) Consumer's right to rescind. (1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section.
Source

---

If the fee is to buy down the interest rate, then it doesn’t count toward the 3% fee cap. If it doesn’t buy it down, then it would count against the 3% fee cap.

However, if it doesn’t buy down the interest rate, then it isn’t points and isn’t an allowable fee under the Finance Code.  Remember, the Finance Code is pretty specific when it comes to fee. In almost all cases, the Finance Code either specifically allows a fee or that fee is disallowed.  So, you can charge the 1% fee provided it is “points” and used to buy down the interest rate, but you can’t charge it if you call it an “origination fee” and it is not used to buy down the interest rate.  If you treat it as an “origination fee” it would be considered additional interest, might make the interest rate go over 18%, and it would certainly make the interest rate not competitive. You could charge the allowable administrative fee instead. This would be different for a first lien mortgage as they aren’t regulated by Texas law. In some courts what you call a charge matters.

As for the fair lending issue, you always run the risk of running afoul of fair lending laws when you do something on an inconsistent basis.  Certainly if it is a fee you don’t normally charge, and the loan was to a protected class, it would be reasonably easy to say it was discriminatory.  If you are stepping outside your policy and procedures, and your actual practice, because the loan officer says you “…aren’t going to make any money off the loan…” you can quickly get into trouble.

Yes!  The interpretations specifically address this.  The consumer advocates didn't like it, but IBAT strongly supported it.  I expect to see more POAs as we have troops overseas for a long period.    Here is a link to the interpretations.  Look at section 153.15(2).  http://info.sos.state.tx.us/pls/pub/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=7&pt=8&ch=153&rl=15

No.  The official interpretations indicate that the constitutional requirement on payments means that at least some principal must be paid with each installment.  You could modify and reduce the payments, but make sure that interest plus some principal is covered by each installment.

After the vote is canvassed, making this official.  That date is December 4.  
 
Question:  What if we have already given the old notice but we are closing the loan after December 4.  Does the old notice suffice?
 
Answer:  To be completely safe, give the new notice (after December 4) and start the twelve days running again.

As of 2/15/2010

It is a violation.  See 7 TAC §153.8(3).   Below is 7 TAC §153.8 in its entirety.  The IBAT Web site has a PDF version of the rules. It is the only version that I know of that is available online where you can view all of the home equity rules at once and run a word search on all the rules. The Secretary of State's office has it online, but each rule is on a separate page, which makes it difficult to find anything.
RULE §153.8 Security of the Equity Loan: Section 50(a)(6)(H)
--------------------------------------------------------------------------------
An equity loan must not be secured by any additional real or personal property other than the homestead. The definition of "homestead" is located at Section 51 of Article XVI, Texas Constitution, and Chapter 41 of the Texas Property Code.
(1) A lender and an owner or an owner's spouse may enter into an agreement whereby a lender may acquire an interest in items incidental to the homestead. An equity loan secured by the following items is not considered to be secured by additional real or personal property:
(A) escrow reserves for the payment of taxes and insurance;
(B) an undivided interest in a condominium unit, a planned unit development, or the right to the use and enjoyment of certain property owned by an association;
(C) insurance proceeds related to the homestead; or
(D) condemnation proceeds;
(E) fixtures; or
(F) easements necessary or beneficial to the use of the homestead, including access easements for ingress and egress.
(2) A guaranty or surety of an equity loan is not permitted. A guaranty or surety is considered additional property for purposes of Section 50(a)(6)(H). Prohibiting a guaranty or surety is consistent with the prohibition against personal liability in Section 50(a)(6)(C). An equity loan with a guaranty or surety would create indirect liability against the owner. The constitutional home equity lending provisions clearly provide that the homestead is the only allowable collateral for an equity loan. The constitutional home equity provisions prohibit the lender from contracting for recourse of any kind against the owner or owner's spouse, except for provisions providing for recourse against the owner or spouse when the extension of credit is obtained by actual fraud.
(3) A contractual right of offset in an equity loan agreement is prohibited.
(4) A contractual cross-collateralization clause in an equity loan agreement is prohibited.
(5) Any equity loan on an urban homestead that is secured by more than ten acres is secured by additional real property in violation of Section (50)(a)(H).
Source Note: The provisions of this §153.8 adopted to be effective January 8, 2004, 29 Terre 84

When dealing with home equity lending questions, it is easy to overlook the interpretations adopted by the Finance Commission.  The Texas Administrative Code at 7 TAC §153.12 (see below), interpreting Article XVI, Section 50(a)(6)(M)(i), only requires one copy of the consumer disclosure to be delivered to married owners. Although a spouse is not an owner of record in the Property Records of the county, he/she may have an ownership interest by virtue of the laws of the state.  However, even if this spouse has an ownership interest, the interpretation only requires one notice per married owners. Give a copy of §153.12 to your application takers, and tell them that it doesn’t make sense that the constitution would require more notice to a non-owner spouse than the official interpretation requires for an owner spouse.

On our Web site, we have a fully searchable PDF version of the Home Equity Lending Interpretations (Chapter 153). It is the only fully searchable version that I know of online.  Here is our URL to the rules: http://www.ibat.org/pdfs/2009/04/21/home-equity-rules. If you work with home equity loans, I suggest you bookmark this page.  You can save the PDF document to your computer, but I don’t recommend that unless you plan to check for updates often.  We will keep the copy on our Web site up-to-date so you don’t have to.  You can also find the Home Equity Lending Interpretations on the Secretary of State’s Web site, but you can only pull up one section at a time and you can’t search across sections.  The Secretary’s Web site also has the Home Equity Lending Procedures (Chapter 151, which are for requesting and adopting an interpretation) and the Home Improvement rules (Chapter 152).

There is litigation pending on the interpretations, but §153.12 is not a part of that litigation. And the sections that are subject to the litigation remain in full force and effect until the litigation is over.  We’ll let you know about that as soon as it happens.  It has been winding through the courts for years.  While it is winding through the courts, if you follow the interpretations as they exist at the time the loan is made, you get the safe-harbor regardless of how the court eventually rules.  That is why it is imperative that you always operate your home equity lending with the current interpretations.  I suggest that you send a link to the interpretations to all your mortgage loan officers and staff.

RULE §153.12 Closing Date: Section 50(a)(6)(M)(i)
--------------------------------------------------------------------------------
An equity loan may not be closed before the 12th calendar day after the later of the date that the owner submits an application for the loan to the lender or the date that the lender provides the owner a copy of the required consumer disclosure. One copy of the required consumer disclosure may be provided to married owners. For purposes of determining the earliest permitted closing date, the next succeeding calendar day after the later of the date that the owner submits an application for the loan to the lender or the date that the lender provides the owner a copy of the required consumer disclosure is the first day of the 12-day waiting period. The equity loan may be closed at any time on or after the 12th calendar day after the later of the date that the owner submits an application for the loan to the lender or the date that the lender provides the owner a copy of the required consumer disclosure.
(1) Submission of a loan application to an agent acting on behalf of the lender is submission to the lender.
(2) A loan application may be given orally or electronically.
Source Note: The provisions of this §153.12 adopted to be effective January 8, 2004, 29 TexReg 84; amended to be effective November 13, 2008, 33 TexReg 9074

As of 6/28/2010

Prior to September 1, 2009, it was questionable as to whether a principal dwelling of a settler or beneficiary that was owned by a living trust was the settler's or beneficiary's homestead.  Because the trust is the owner and a trust doesn't have a principal dwelling, there was a lingering question about whether a home equity loan could be made on that property.  This was quite a quandary because if the principal dwelling wasn't homestead, a lender could make a secured loan without jumping through all the legal hoops of a home equity loan; however, if it were homestead, the lender would have to jump through the hoops or risk its loan and lien.  Lenders weren't sure which way to go. Some lenders refused to make home equity loans to trusts.   Many made home equity loans on such property, but made the loan to both the grantors and the trust or, at least, required the trustee to sign the deed of trust.  Other lenders, at their peril, made the loan to the trust as if the property weren't homestead.

Living Trusts:  In 2009, the Texas Legislature cleared this up with HB 3767, which created new Section 41.0021 of the Texas Property Code.  Property Code 41.0021, allows living trusts to own residential property and have them retain their homestead status for the settlor or beneficiary, whichever is using the property as their principal residence.  This new Property Code section allows a trustee to transfer, by warranty deed, real property designated as a homestead into a living trust without affecting the homestead designation of the property if the trust settlor is a beneficiary of the trust. In addition, this section provides residence homestead protection to settlors, their spouses, and their heirs in a qualified trust for as long as they use the home as a residence homestead.  If the person residing in the dwelling is not a settler or beneficiary, the property is not homestead, and the lender may make a loan to such a trust secured by the property as a non-homestead, not owner-occupied, dwelling.

Irrevocable Trusts:  Because, pursuant to Property Code §41.002, only a family or single person can have a homestead, and the Property Code doesn't allow principal dwellings owned by irrevocable trusts to retain their homestead status for residents of irrevocable trust owned principal dwellings, it is safe to say that principal dwelling owned by an irrevocable trust cannot be a homestead. Therefore, the lender may make a loan to such a trust secured by the property as a non-homestead, not owner-occupied, dwelling.

Definitions:

Settlor: : A person who creates a trust. (called also grantor)

Beneficiary: The person or entity named or otherwise entitled to receive the principal or income or both from a trust.

Trustee:  A person that holds legal title to property placed in a trust and administers it for the benefit of the beneficiaries.  (If the trustee is a corporation, it must have the power to act as trustee in Texas. TX Property Code §112.008(a).)

Living Trust: A trust that becomes effective during the lifetime of the settler (called also inter vivos trust).

Irrevocable Trust:  A trust that cannot be revoked by the settlor after its creation except upon the consent of all the beneficiaries.  A living trust becomes an irrevocable trust upon the death of the settlor(s).

Keeping this Web page up-to-date is a challenge.  As of August 25, 2008, it is not up-to-date, and the FC is aware that it is out-of-date.  It is very important; however, that you are using only the most recent information--particularly when it comes to the Constitution and the interpretive rules.

First, you do not want to rely on the version of the Texas Constitution, Article XVI, Section 50, that is found on the Texas Legislature's Web site and is linked to from this site. It has not been updated for the 2007 amendments.  Click here to see the version we prepared for the IBAT Web site. This will be current at least through late 2009.  I think it is highly unlikely, although possible, that the home equity provisions of the Texas Constitution will be amended in 2009.  You will need to check again after the 2009 Legislative Session to see if any amendments were sent to the voters.

Secondly, the link to 7 TAC Chapter 153 on the FC Web site does not include the amendments that were adopted this year.  This is because the FC Web site links to the Secretary of State's (SOS) Web site, and the SOS hasn't updated their site for these amendments.  When you consider how many amendments there are to the rules of all the state agencies in each week's Texas Register, it is understandable that the SOS hasn't had time to update this yet.  Because it is not updated, the following rules are out-of-date: on the SOS Web site: 7 TAC §§153.22 and 151.84.  Click here to find the current versions of those rules.

The latest Home Equity Lending Report and the latest pleadings in the ACORN v. Finance Commission law suit have also not been updated, but this is not of great importance to our bankers' day-to-day home equity lending activities.  I have provided links to the latest Home Equity Report that I could find and to the latest pleadings in the ACORN lawsuit.

Amendments have been proposed to the following sections:

7 TAC §§151.1, 151.3, 151.7, and 151.8
7 TAC §153.11, 153.14, 153.51, and 153.95

It is likely that these sections will be amended substantially, if not entirely, as proposed at the October 2009 meeting of the FC.  We will keep you apprised of whether these sections are amended.

Below is my attempt to update the sections of the FC's home equity Web page that are currently out-of-date. It is hyperlinked throughout. I know that the Finance Commission is working diligently to get this information updated.

Although it is not nearly as important as the above updates, there are also the following matters that have not been updated:

Studies Related to Section 50:

2006 Home Equity Lending Report

Litigation:  ACORN v. Finance Commission

1/15/2008 Response filed (Appellee)
1/4/2008 Motion to abate appeal filed (Appellant)
12/21/2007 Letter received (Appellant)
6/8/2007 Motion to file post submission brief filed (Appellee)

If there are Home Equity Lending Reports for 2007 and 2008, I can't locate them. Although the pleadings filed on June 8 and December 21 of last year are also missing, I have not hyperlinked to them because do not have copies of them.

---

The constitution provides that you can't close before the anniversarydate. You can take the application prior to the anniversary date, andthe 12 days can begin running prior to the anniversary date.  Here isthe constitutional language of Texas Constitution, Article XVI, Section50(a)(M): "(M) is closed not before: (iii) the first anniversary of theclosing date of any other extension of credit described by Subsection(a)(6) of this section secured by the same homestead property, except arefinance described by Paragraph (Q)(x)(f) of this subdivision..."There is an emergency exception that follows that language.

The vast majority of IBAT members make mortgage loans, and a substantial portion of those loans are kept “in-portfolio”.  Additionally, many of these loans do not have an escrow arrangement for insurance and taxes.  As property tax due dates are upon us, we wanted to make sure you were “covering your bases” with your customers responsible for paying their own taxes, especially with respect to tax lien loans.

In recent years, there has been a proliferation of entities and individuals offering “tax lien loans”.  In many cases, these companies scour the tax records, and solicit those who have not yet paid their property taxes.  While improvements have been made to this situation over the past several legislative sessions, there are still some significant pitfalls for you as a lender.

First and foremost, these lenders take a priority lien position in the property just as if they were the taxing authority.  Your collateral value will clearly be diminished in virtually all of these situations.  The loans generally are at high interest rates, and come with hefty fees, potentially impacting your borrower’s ability to repay.  Thus, both your customer and your bank will be adversely affected if such a loan is used for taxes.

While most of you already have a good system in place, please consider some or all of the following actions to mitigate some potentially expensive problems:

~ Prior to January 31 of each year, contact your mortgage loan customers (as necessary) to remind them that evidence of paid taxes is a requirement of the loan covenants.  You may also wish to advise them that if they are having potential problems paying the taxes due, they should visit with their loan officer to discuss possible options, like adding the taxes on to their existing loan.  Additionally, you might wish to remind them that allowing a priority lien to be imposed on the property (such as a tax lien) violates one of the promises in the deed of trust.

~ Please remember that evidence of taxes paid does not divulge the source of the funds utilized to pay said taxes.  If your customer has contracted with a tax lien lender, there is simply no way to tell other than to check the public records.  A notice of tax lien transfer must be sent to the first lienholder of record under state law, but only “after the fact”.

~ Your home equity loan portfolio is obviously also subject to risk in this area.

Proper procedures and proactive measures can clearly alleviate potential problems in this area.  Tax lien lenders are licensed and regulated by the Office of the Consumer Credit Commissioner, 512/936-7600 or feel free to call Shannon Phillips at IBAT (800/749-4228) if you have questions or comments. 

You will see on Page 6 of the OCC's Home Mortgage Disclosure Comptroller's Handbook, that civil money penalties can be assessed for noncompliance.

I am not totally clear on your facts.  It sounds as though you allowed a buyer to assume an existing loan.  If that is true, then the terms should be the same.  However, if you refinanced for the new owner, then the terms could (and would) change.  You would need a new deed of trust showing the correct term.
 
On the appraisal question, I looked at the commentary to Reg B.  It covers the question of renewals (no disclosure necessary if you relied on the old appraisal), but doesn't deal with assumptions.  If you reviewed the appraisal in making the decision to accept the assumption, then I would give the appraisal disclosure.  However, since the decision had already been made, logically you would not make the appraisal available.

First lien residential loans are subject to the federal preemption, 12 USC 1735f 7, which says state law does not apply to interest rate, fees or charges.  If that is the case, the deferment or extension charge would be calculated however you contracted to do it.  If the note does not contract for it, then your need an agreement for the extension.

As of 11/30/2009

The "contract"  mentioned in Section 50(a)(5) can be the Builder's and Mechanics Lien Contract.  In order to evaluate the loan, the bank needs a copy of the proposal or “contract” from the builder.  The Builder’s and Mechanic’s Lien Contract that will be filed in the real property records to create the lien cannot be signed until five days after the owner makes written application for the extension of credit for work and materials.

The interpretations in Title 7 of the Texas Administrative Code at Chapter 152, define the term "contract" from the Constitution as the contract for work and materials to: (A) construct new improvements, or (B) to repair or renovate existing improvements, or (C) to do both.  When it comes to home equity and home repair, you always need to look at the interpretive rules adopted by the Joint Texas Financial Regulatory Agencies.  Below is the definition of contract, but you should read Chapter 152 in its entirety, particularly the definitions of "new improvements" and "existing improvements.".

The definition of "contract" in 7 TAC §152.1 reads as follows:

Any reference to Section 50 in this interpretation refers to Article XVI, Texas Constitution, Section 50. Words and terms have these meanings when used in this chapter, unless the context indicates otherwise:

(1) Contract--A contract for work and material, that complies with the Texas Constitution and the Texas Property Code, used to:
(A) construct new improvements;
(B) repair or renovate existing improvements; or
(C) both subparagraphs (A) and (B) of this paragraph.

You may recall that ACORN sued the Finance Commission and Credit Union Commission over the home equity rules. When these rules came out, one of the attorneys in the ACORN lawsuit told me that he didn't like the home improvement rules, but that they wouldn't file a law suit because the rules followed Texas law accurately.

Under Truth in Lending (TILA), the critical fact here is the number of ‘housing units,’ in this case three.  The Official Staff Interpretations (below) to TILA classifies owner-occupied rental property as a ‘business purpose loan’ for disclosure purposes if the rental property has more than 2 housing units, and business purpose loans are exempt from TILA under Section 226.3.

Supplement I to Part 226—Official Staff Interpretations

Section 226.3—Exempt Transactions

...

5. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

…

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

RESPA, at Section 2606(a)(1), exempts loans for ‘…business, commercial, or agricultural purposes.’ and defers back to TILA for determining if a loan is in fact for business, commercial, or agricultural purposes. Based upon the loan being treated as a business purpose loan for TILA, RESPA will not apply.

This loan is a HMDA reportable loan.  HMDA does not look at whether the purpose is consumer or business. If the purpose of the loan request meets the definition of a home purchase loan at 203.2(h), home improvement loan at 203.2(g) or a refinancing at 203.2(k)(2) the loan request is subject to HMDA reporting.

That is correct, but there is an important twist in Texas law that may require your bank to escrow real property (ad valorem) taxes on all purchase money loans secured by manufactured homes. The bottom line of the Texas law is:  If your bank requires escrow of taxes, insurance premiums, fees, or other charges in connection with ANY loans secured by residential real property, then you must escrow real property taxes for all loans to purchase manufactured homes.  You must do this because of a little known provision that was added to  the Finance Code in 2007—Section 347.254(c).

In 2003, the legislature passed SB 521.  SB 521 amended Finance Code §347.254 to require lenders to escrow for real property taxes on loans to purchase manufactured homes.  IBAT was successful in getting an exception for many federally insured financial institutions.  Under 347.254(c), federally insured financial institutions that did not otherwise require escrow of taxes, insurance premiums, fees, or other charges in connection with loans secured by residential real property are exempt.  There were a lot of banks that didn’t require escrow for any of these items in 2007, but now do because of the HPML escrow requirements.  The result is that many banks that were exempt prior to 2010 because they didn’t require escrowing of any of the items listed in §347.254, are now subject to the requirements of §347.254 because they now require escrow for HPMLs.

So, if you require escrowing of any of the items listed in §347.254(c) for any loans secured by real property, then you must escrow for real property taxes on manufacturing home purchase money loans.

If the real property is included in the cash price of a credit transaction, the lender may elect to treat the manufactured home as if it were real property and the escrow requirement will not apply to the transaction (because Finance Code Chapter 347 will not apply).  See Finance Code §347.455.

The 5-day waiting period is in Texas Constitution at Article XVI, Section 50(a)(5)(B). It is further fleshed out in 7 Texas Administrative Code §152.9.  If you are repairing or improving existing improvements, then the contract for work and materials can’t be executed before the fifth calendar day after the owner makes written application for the extension of credit for the work and materials.  The 5-day waiting period and/or the 3-day rescission period (contained in Rule §152.11) may be waived under 7 TAC §152.13, if the homeowner signs a statement: (1) describing why the homestead needs immediate repairs, (2) describing how it affects the health and safety of the owner or resident, and (3) stating that the owner is waiving the 5-day waiting period, the 3-day rescission period, or both.

You will see that Rule §152.3 pertains to new improvements. New improvements are defined in Rule §152.1(3).  If the construction involves working on existing improvements, using materials on existing improvements, or physically attaching materials to existing improvements, it is not a new improvement, and instead is a repair or renovation of an existing improvement.  If it is construction of a new improvement, the five day waiting period does not apply.

Here is 7 TAC §152.9:

7 TAC §152.9  Five Day Waiting Period for a Contract Before Executing Work and Materials for Repairs or Renovation: Section 50(a)(5)(C)
________________________________________
The contract for work and materials may not be executed before the fifth calendar day after the owner makes written application for any extension of credit for the work and materials except as provided in §152.13. To count the five days, the day after the application for extension of credit is made is day one. If the fifth calendar day falls on a Sunday or federal legal public holiday, then the contract for work and materials may not be executed until the next calendar day that is not a Sunday or federal legal public holiday.

Here is the constitutional provision I mentioned above (in particular, Article XVI, Section 50(a)(5)B)):

Sec. 50.  HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS.  (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

…snip…

(5)  work and material used in constructing new improvements thereon, if contracted for in writing, or work and material used to repair or renovate existing improvements thereon if:

(A)  the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead;
(B)  the contract for the work and material is not executed by the owner or the owner's spouse before the fifth day after the owner makes written application for any extension of credit for the work and material, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing;
(C)  the contract for the work and material expressly provides that the owner may rescind the contract without penalty or charge within three days after the execution of the contract by all parties, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; and
(D)  the contract for the work and material is executed by the owner and the owner's spouse only at the office of a third-party lender making an extension of credit for the work and material, an attorney at law, or a title company;

I don't think it is prudent for a bank to make a loan where the payment of the loan, in whole or part, is dependent on an anticipated tax credit (or the receipt of any other anticipated funds), which the borrower may or may not receive.  It is possible that the homebuyers will also get a refund and thus more than $8,000 from the IRS.  However, it is also possible that they'll get nothing back or will actually owe money to the IRS. What if the borrowers don't get the tax credit? What if the borrowers miscalculated something and the IRS takes a big bite out of the tax credit?  The more conservative approach would be to make the loan on the real purchase price of the home.  If the homebuyers do get the tax credit, then they can voluntarily apply it to the loan.

If the borrower doesn't qualify based on their ability to repay the loan without considering the tax credit, then this probably isn't a loan the bank wants to make.

If you do decide to make the loan, I think you would calculate the APR based on the original loan balance with the regular payments and the required $8,000 payment, then prepare a payment schedule that includes the $8,000 payment.  It would probably be easiest to calculate the payments prior to the $8,000 payment as if the $8,000 payment wasn't going to happen. And then calculate the payments due after the $8,000 payment as if the amount then owing was the beginning amount of a loan.

Homeownership counseling by creditors is required by 12 U.S.C. § 1701x which was enacted as part of the Housing and Urban Development Act of 1968.  The requirement expired on September 30, 2000, but was reinstated on November 26, 2001.

The statute requires creditors servicing loans secured by a borrower's principal one-family residence [including manufactured home (mobile home) and lot, membership interest and occupancy agreement in a cooperative housing project, or condominium] to provide notice of available homeownership counseling when the eligible borrower fails to pay any amount by the date the payment is due.  The notice must be provided before expiration of the 45-day period beginning on the date on which the payment is due.  Additionally, a notice must be sent to each homeowner every time the homeowner becomes delinquent.  If the homeowner is delinquent, then catches up, and then becomes delinquent again, the notice is required again (and as many times as that happens).

The notice must describe any homeownership counseling offered by the creditor and also must either (1) state that homeownership counseling provided by HUD-approved nonprofit organizations is available, or (2) provide the toll-free telephone number through which a list of approved nonprofit organizations may be obtained.

The requirement to provide the notice of availability of homeownership counseling does not apply if: (1) the reason for delinquency is other than an involuntary decrease in the homeowner's income, or (2) the homeowner pays the amount overdue before the expiration of the 45-day period.  However, since a creditor may not be able to readily determine the reason for each delinquency, a notice may be provided to all applicable delinquent borrowers.  (I think a lot of banks send this out without regard to the reason for the delinquency because it is easier than trying to determine the reason.)

Refinances of liens against a homestead are specifically permitted by the Texas Constitution Article XVI, Section 50(a)(4).  However, you must not advance additional funds when you refinance the loans unless you are ready to comply with the home equity provisions in Section 50(a)(6), which would leave you with a home equity loan.  You can then advance additional funds for reasonable costs necessary to refinance the home improvement loans.  (See Section 50(e))

Here is the text of Texas Constitution Article XVI, Section 50(a)(4):

(a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

...

(4) the refinance of a lien against a homestead...

Yes!  Within ten days of receipt of  the insurance proceeds, you must notify the insured of your requirements for release of the funds (e.g. receipt of invoice from roofer, inspection of repairs by the bank, or whatever these might be).  Then not later than ten days of receipt of a request from the insured for a release, you must turn over the funds or explain why they are not being released along with requirements for the release.  [This law is found at sections 557.002 thru 557.004 of the Insurance Code.]

Get a mortgagee policy UNLESS you are financing a spec house for the builder.

Mortgagee policies can't be transferred.  However, if a different lender is handling the permanent financing, Procedural Rule 18 provides important relief.  The permanent lender can get a new mortgagee policy issued for $237 (the current minimum premium).  If the permanent loan is for an amount greater than the interim loan (not likely), the premium is the greater of $237 or the difference between the interim mortgagee policy premium and the premium for the greater amount.

Under the Property Code, the landlord has a lien that has priority over your UCC lien.  Therefore, it is critical to get a landlord's waiver before the home is installed on the property.  If that is not possible, then monitor rent payments or be prepared to pay off the landlord in the (hopefully unlikely) event that you have to foreclose.

First, send an adverse action notice to the applicant in order to insure compliance with Reg B.  Next, file a SAR.  Mortgage fraud is perhaps the fast growing item on the SAR list.  Try to determine exactly who provided the incorrect information on the original application.  Then, contact your local prosecutor to determine whether criminal sanctions should be pursued.  Check your internal procedures to determine whether you need better verifications or controls.  Then, take deep breaths and thank the stars that this one didn't get closed!

No.  In order to understand the scope of this new requirement, note that it is added to chapter 343 of the Finance Code, which has its own definition of "home loan" and its own exceptions.  Thus, the requirement applies to purchase money, construction and home equity loans secured by property used or to be used as the primary dwelling of the borrower.  It does not apply to a reverse mortgage, HELOC, second home loan, or rent house loan.  It does apply to manufactured housing and one- to four-family dwellings that fit within these criteria.

Wouldn't it be nice if there were better definitions in the FCRA?
 
"Mortgage Lender" and "home loan" are not defined terms. However, section 609 (g) says that it applies to closed end and open end loans for a consumer purpose (omit rent houses!) that is secured by 1 to 4 units on residential real property. I don't see that the section is limited to primary dwelling.
 
Bottom line: this appears to apply to purchase money, home equity, home improvement and refinancings thereof.

According to a HUD FAQ, it must be shown on lines 204-209 of the HUD-1, reflecting "items paid by or on behalf of the borrower."  There is no Reg Z disclosure for this "bonus."  However, if it is $600 or more, then you need to give the customer a 1099.

The renewal of a balloon note is a refinancing.  The original obligation has ended at the end of the balloon period (five years, for example) and is being replaced with a new note (15 years, for example).  See Reg Z 226.20(a).  You must give all new disclosures.  If this is a refinancing of a purchase money loan, there is no right of rescission on the original and no right of rescission on the refinancing.  Make sure you have a Renewal, Extension and Modification Agreement filed in the real estate records to keep the position of the original lien but extend it out until the end of the refinanced term.

Yes, that is what it should have said; and we regret the error and any confusion it may have caused.  The word “registration” should have been “licensing.”  Here is that information again with the correction marked.

What about employees of a bank or holding company subsidiary?
Employees of a bank subsidiary are exempt from licensing, but not the employees of a holding company subsidiary.  See Texas Finance Code §180.002(16)(A)(ii).

Tip:  If you want to avoid licensing of employees of a bank holding company subsidiary, you may want to move their jobs to the bank or to a subsidiary of the bank.

Click here for more information.

As of 12/14/2009

There is nothing to do until late 2010.   In late 2010, the residential mortgage loan originators employed by your bank or your its subsidiaries will need to register with the National Mortgage Licensing and Registry System (NMLRS).  A "residential mortgage loan originator" is defined in Finance Code 180.002(19) as an "individual who for compensation or gain or in the expectation of compensation or gain: (i)  takes a residential mortgage loan application; or (ii)  offers or negotiates the terms of a residential mortgage loan."  Those who perform purely clerical or administrative duties are exempt.   An individual is generally considered to be an employee only if the manner and means of his or her performance of duties is subject to the control of an employer, and if his or her income is reported on a W-2 form.

The "residential mortgage loan originators" who work at your bank or its subsidiaries and are registered with the NMLRS will not be subject to the state licensing requirement.

IBAT will communicate with our member banks when we know more about when to register.

While mortgage loan originators who do not work for depository institutions will need to obtain a license from the Texas Savings and Mortgage Lending Department (TSMLD), no one working for a federally insured depository institution will need a license.  However, next year Conference of State Bank Supervisors (CSBS) will establish a National Mortgage Licensing System and Registry (NMLSR).  The mortgage loan originators at your bank will have to register with the CSBS NMLSR by the later of 7/31/2010 or a date approved by HUD.

The term "loan originator" is defined in state law as an individual who: (1) takes a residential mortgage loan application; or (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.  (This compensation or gain merely means that they are paid for the work they are doing, regardless of whether their pay is tied directly or indirectly to the number or dollar amount of the mortgage loans.  There was some confusion about this with at least one banker I spoke with.)  The definition does not include persons who perform purely administrative or clerical tasks.  It additionally does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law (with some exceptions).  It also does not include a person or entity solely involved in extensions of credit relating to timeshare plans. You need to use the state law definition of loan originator because if you use the federal definition (which includes fewer people), you may fail to register some folks who are loan originators under state definition but not under the federal definition. Any folks on your staff who are loan originators under the state definition, but are not registered with the NMLSR, must get a state license. You don’t want that.

Employees who fit the definition of loan originators will need to register with CSBS's NMLSR.  There will not be any additional regulation on the registered persons--it is merely a registry.  As I said above, the TSMLD will license any mortgage originators who do not work for federally insured depository institutions.

You will not have to worry about any earlier than July 31, 2010 . I can't tell you exactly when, but we will get something out as soon as we know. Stay tuned.

Actually, according to its terms, HB 10 is effective immediately.  However, there is an exemption from Finance Code Chapter 180 for mortgage loan originators acting for a depository institution that is registered and maintains a unique identifier through the National Mortgage Licensing System and Registry (NMLRS). (See Finance Code § 180.003 in HB 10) . There is nothing to do yet. Your mortgage loan originators will need to register the later of July 31, 2010 or a date approved by HUD.  For loan originators at depository institutions, this will merely be a "registration" with the NMLSR.  Stay tuned.

Here is our write-up on HB 10 from out 2009 Legislative Session White Paper:

HB 10 by Solomons/Averitt

Relating to the regulation of mortgage loan originators.

This bill amends the Finance Code to add a new Chapter 180 on mortgage loan originators. In
addition, it amends a variety of other sections such as Chapters 342, 347 and 348 to specify that
mortgage loan officers must be licensed. There is an exception for persons who only engage in clerical
or support duties.  A mortgage loan originator is an individual who takes a residential
mortgage loan application and offers or negotiates the terms of a residential mortgage loan for
compensation or gain. Outside of loan secretaries, this would appear to capture all mortgage loan officers in a bank or a bank’s subsidiary.  However, the bill (in conformity with the SAFE Mortgage Act) exempts employees of banks and bank subs.  Rather than become licensed, these employees will register with the new National Mortgage Licensing Registration System, which will be operated by CSBS.

There are exemptions for licensed attorneys (unless they take residential mortgage loan
applications and offer or negotiate terms of a mortgage loan). This exception was inserted to make it
possible for bank counsel to assist with loan workouts!

Effective Date: June 19, 2009

Here are the pertinent portions of new Finance Code Chapter 180:

Sec.180.003.AAEXEMPTION. The following persons are exempt
from this chapter:
(1) a registered mortgage loan originator when acting
for an entity described by Section 180.002(16)(A)(i), (ii), or
(iii);


Section 180.002
...

(16) "Registered mortgage loan originator" means an
individual who:
(A) is a residential mortgage loan originator and
is an employee of:
(i) a depository institution;
(ii) a subsidiary that is:
(a) owned and controlled by a
depository institution; and
(b) regulated by a federal banking
agency; or
(iii) an institution regulated by the Farm
Credit Administration; and
(B) is registered with, and maintains a unique
identifier through, the Nationwide Mortgage Licensing System and
Registry.

Sec.180.002.DEFINITIONS. In this chapter:

…

(12) "Nationwide Mortgage Licensing System and
Registry" means a mortgage licensing system developed and
maintained by the Conference of State Bank Supervisors and the
American Association of Residential Mortgage Regulators for the
licensing and registration of state residential mortgage loan
originators.

Okay, let's break this out:

1. First lien - okay.  See Finance Code section 34.203 (which authorizes loan fees); regulation found at 7 TAC 12.32.
2. Second lien at rates of 10% or less - okay.  Again, see Finance Code section 34.203 and reg.
3. Second lien at rates over 10% - not okay.  Unfortunately the addition of "reasonable" fees in HB 955 (new section 303.017) does NOT apply to real estate secured transactions.  Therefore, you are limited to the fees that are authorized in section 342.307 and 342.308.

Now let's address the home equity piece.  If the charge is on a home equity transaction, it should be counted against the 3% fee cap.

FYI, chapter 342 simply applies if the lien is a second lien and is at a rate exceeding 10%.  It does not draw a distinction based on purpose of the proceeds.  The second could be for purchase money (down payment), home improvement, home equity, or federal or state tax lien payoff.

Yes.  In fact, the FDIC has published material in Supervisory Insights (Linking International Remittance Flows to Financial Services: Tapping the Latino Immigrant Market) that provides more info on ITINs and how to use them.  For a non-US citizen, this number (which is issued by IRS) can be used as the identification number under the CIP rules.
 
Question:  But what if the applicant has both an ITIN and SSN?
 
Answer:  Now you have a potential SAR issue.  Under the IRS rules, the ITIN is only available to persons who don't qualify for a SSN.  Thus, possession of both could be an indicator of identity theft or fraud, according to the May 2007 SAR Review from FinCEN.

Boy, that was a hot potato in 1993!  IBAT circulated a special compliance bulletin on it, which I still have in my files if you need that faxed to you.  A California bank raised this issue of preparing 1099 MISCs on contractors because of the peculiarities in the way that they manage improvement loans there. In California, the banks act as escrow agent and control disbursements. Therefore, the bank must send 1099 MISCs to all of the subs. In Texas, I think that very few banks have the degree of control necessary for the Rev Ruling 93‑70 to apply.

In order to increase your lending limit, you must increase your certified surplus and the Board must approve the increase.

Yes. And here is why.

Finance Code Sec. 342.454.  RETURN OF INSTRUMENTS TO BORROWER ON REPAYMENT.  Within a reasonable time after a loan is repaid in full or an open-end account is terminated according to the terms of the contract, a lender shall cancel and return to a borrower any instrument, including a note, assignment, security agreement, or mortgage that:

(1)  secured the loan;  and

(2)  does not secure another indebtedness of the borrower to the lender.

Added by Acts 1999, 76th Leg., ch. 62, Sec. 7.19, eff. Sept. 1, 1999.  Amended by Acts 1999, 76th Leg., ch. 909, Sec. 2.18, eff. Sept. 1, 1999.

If it is a home equity loan, see Article XI, Section 50(a)(6)(Q)(vii):

Sec. 50.  HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS.  (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:
…snip…
(6)  an extension of credit that:
…snip…
(Q) is made on the condition that:
…snip…
(vii)  within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit;

Follow-Up Question: What if we imaged the original note and do not have an original document to return?

Answer:  We don’t know of a “legal” answer to this question, but you certainly are entitled to image your documents, including the note.  A “best practice” would print out a copy of the note, stamp it paid, and include it in an envelope with a nice letter thanking them and saying that the loan was paid in full. Don’t look at it as a chore; look at it as another opportunity to “touch” the customer. You might even use it for a bit of marketing … though you may want to make it subtle.  Maybe a sentence that starts:  “Your Texas Community Bank appreciates your business and we hope that when you next have a financial need, you’ll….”  

Additionally, Under the Uniform Electronic Transactions Act (UETA) the evidence of a record or signature may not be excluded solely because it is in electronic form.  Return of an electronic copy evidencing it was paid in full would be acceptable.

Below are sections from the Texas Finance Code, Chapter 157 that defines what a “mortgage banker” is and what is exempt from Chapter 157.

Although a bank is a “mortgage banker” under Chapter 157, as a federally insured bank they are specifically exempt from compliance with Chapter 157.

*****

Section 157.002. Definitions. In this chapter:
…

(2)  "Mortgage banker" means a person who:                                   
                                              (A)  accepts an application for a mortgage loan or
makes a mortgage loan;  and
                                              (B)  is an approved or authorized:                                          
                                                             (i)  mortgagee with direct endorsement
underwriting authority granted by the United States Department of
Housing and Urban Development;
                                                             (ii)  seller or servicer of the Federal
National Mortgage Association or the Federal Home Loan Mortgage
Corporation;  or
                                                             (iii)  issuer for the Government National
Mortgage Association.          
                               (3)  "Mortgage loan" means a debt secured by a first
lien on residential real property designed principally for
occupancy by one to four families that is created by a deed of
trust, security deed, or other security instrument.

Sec. 157.004.  EXEMPTIONS.  This chapter does not apply to:
(1)  a federally insured bank, savings bank, savings and loan association, Farm Credit System Institution, or credit union;
(2)  a subsidiary of a federally insured bank, savings bank, savings and loan association, Farm Credit System Institution, or credit union;
(3)  a person licensed as a mortgage broker under Chapter 156;
(4)  an authorized lender licensed under Chapter 342; or
(5)  the state or a governmental agency, political subdivision, or other instrumentality of the state, or an employee of the state or a governmental agency, political subdivision, or instrumentality of the state who is acting within the scope of the person's employment.

This is the second time I’ve had this question within a week. It makes me think that folks are a bit gun shy on fair lending issues.  Fair Lending Paranoia?  No, it’s only paranoia if they aren’t out to get you.  Banks are wise to examine all of their loan practices for fair lending issues.

This is really more of a Reg O issue.  Fortunately, if handled properly, this is neither a Fair Lending nor a Reg O issue.  Reg O answers this in 12 CFR §215.4(a)(2).  So long as this is part of a benefit or compensation plan and insiders are not given a better deal than your other employees, you can do this.

§ 215.4   General prohibitions.

(a) Terms and creditworthiness —(1) In general. No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:

(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and

(ii) Does not involve more than the normal risk of repayment or present other unfavorable features.

(2) Exception. Nothing in this paragraph (a) or paragraph (e)(2)(ii) of this section shall prohibit any extension of credit made pursuant to a benefit or compensation program—

(i) That is widely available to employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, is widely available to employees of the affiliates at which that person is an insider; and

(ii) That does not give preference to any insider of the member bank over other employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, does not give preference to any insider of its affiliates over other employees of the affiliates at which that person is an insider.

YES! Look at this section of Reg O: http://a257.g.akamaitech.net/.../12cfr215.5htm
Note that you attribute 100% of the partnership debt to the executive officer and that the limit is $100,000 on “other” debt.

No.  That is your Christmas present from the regulatory relief bill passed this fall!  But remember that the restrictions on loans made to exeuctive officers still apply.

The answer is found in 15 USC §1640(b) and (c).   If you determine from those sections that you do have liability, you'll want to look at all of 15 USC §1640.

The answer to your question is, the creditor has no liability if:

The creditor notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower, or

The creditor shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. (Error of legal judgment with respect to creditor's TILA obligations not a bona fide error.)

Here is 15 USC §1640(b) and (c):

(b) Correction of errors
A creditor or assignee has no liability under this section or section 1607 of this title or section 1611 of this title for any failure to comply with any requirement imposed under this part or part E of this subchapter, if within sixty days after discovering an error, whether pursuant to a final written examination report or notice issued under section 1607 (e)(1) of this title or through the creditor’s or assignee’s own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.

(c) Unintentional violations; bona fide errors
A creditor or assignee may not be held liable in any action brought under this section or section 1635 of this title for a violation of this subchapter if the creditor or assignee shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person’s obligations under this subchapter is not a bona fide error.

You need to notify them of the error and reimburse them for the amount that was charged in excess of what was disclosed within 60 days of discovering the error.  There is no need to send a corrected TIL disclosure because the reimbursement makes the original TIL disclosure accurate.  You also need to do it before you get notice from the obligor or they institute an action against your bank.

From the TILA:

15 USC §1640

Correction of errors

A creditor or assignee has no liability under this section or section 1607 of this title or section 1611 of this title for any failure to comply with any requirement imposed under this part or part E of this subchapter, if within sixty days after discovering an error, whether pursuant to a final written examination report or notice issued under section 1607(e)(1) of this title or through the creditor's or assignee's own procedures, and prior to the institution of an action under this section or the receipt of written notice of the error from the obligor, the creditor or assignee notifies the person concerned of the error and makes whatever adjustments in the appropriate account are necessary to assure that the person will not be required to pay an amount in excess of the charge actually disclosed, or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower.

Yes...and no.  First, chapter 343 of the Texas Finance Code applies the federal HOEPA interest rate and fee tests to determine whether a loan is high cost.  However, unlike HOEPA, the high cost loan prohibited practices apply to "residential mortgages," a technical term meaning purchase money and original construction loans.  The prohibited practices include balloon notes with a term less than 60 months, prepayment penalty (already prohibited for loans over 12%), making loans without consideration of borrower's ability to repay, negative amortization, and charging for a product or service not received.

No.  That part of Chapter 343 of the Texas Finance Code sunsetted.  But don't forget to check home loans for HOEPA coverage under Reg Z.  If the loan is "high cost" for Reg Z purposes, you need to give the following notice: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan."   The disclosures must be clear and conspicuous but need not be in any particular type size or typeface, nor presented in any particular manner.  The disclosures need not be a part of the note or mortgage document.

12 CFR 226.35(a)(3) exempts loans for the initial construction of dwellings.  It does not distinguish between a construction only or a construction/permanent loans, and the Commentary doesn’t address 226.35(a)(3).

226.35(a)(3) Notwithstanding paragraph (a)(1) of this section, the term ``higher-priced mortgage loan'' does not include a transaction to finance the initial construction of a dwelling, a temporary or ``bridge'' loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-mortgage transaction subject to Sec. 226.33, or a home equity line of credit subject to Sec. 226.5b.

It isn’t completely clear, but here is what I think:

If you do this as two separate loans, you would not test the construction loan to see if it is a HPML, but you would test the permanent to see if it is a HPML subject to escrow requirement.

If you have a one-time-close construction/permanent (one promissory note), you would test the entire term of the loan to see if it is a HPML subject to the escrow requirement.

As of 12/21/2009

The answer to questions one and two is "no."  The instructor is correct with respect to manufactured homes.

This is from the preamble to the final rule:

Manufactured housing industry commenters were particularly concerned because, as described in Part IX.D, currently a limited infrastructure is in place for escrowing on manufactured housing loans. Accordingly, the requirement to establish an escrow account for taxes and insurance (§ 226.35(b)(3)) for higher-priced mortgage loans is effective for such loans for which creditors receive applications on or after April 1, 2010. For higher-priced mortgage loans secured by manufactured housing, however, compliance is mandatory for such loans for which creditors receive applications on or after October 1, 2010.

This is from Supplement I to Part 226--Official Staff Interpretations

Section 226.1—Authority, Purpose, Coverage, Organization, Enforcement and Liability

* * * * *
1(d) Organization.

Paragraph 1(d)(5).

1. Effective dates. The Board’s revisions to Regulation Z published on July 30, 2008 (the ‘‘final rules’’), apply to covered loans (including refinance loans and assumptions considered new transactions under 226.20), for which the creditor receives an application on or after October 1, 2009, except for the final rules on advertising, escrows, and loan servicing. The final rules on escrows in § 226.35(b)(3) are effective for covered loans, (including refinancings and assumptions in 226.20) for which the creditor receives an application on or after April 1, 2010; but for such loans secured by manufactured housing on or after October 1, 2010. The final rules applicable to servicers in § 226.36(c) apply to all covered loans serviced on or after October 1, 2009. The final rules on advertising apply to advertisements occurring on or after October 1, 2009. For example, a radio ad occurs on the date it is first broadcast; a solicitation occurs on the date it is mailed to the consumer. The following examples illustrate the application of the effective dates for the final rules.

i. General. A refinancing or assumption as defined in 226.20(a) or (b) is a new transaction and is covered by a provision of the final rule if the creditor receives an application for the transaction on or after that provision’s effective date. For example, if a creditor receives an application for a refinance loan covered by 226.35(a) on or after October 1, 2009, and the refinance loan is consummated on October 15, 2009, the provision restricting prepayment penalties in § 226.35(b)(2) applies. However, If the transaction were a modification of an existing obligation’s terms that does not constitute a refinance loan under § 226.20(a), the final rules, including for example the restriction on prepayment penalties would not apply.

ii. Escrows. Assume a consumer applies for a refinance loan to be secured by a dwelling (that is not a manufactured home) on March 15, 2010, and the loan is consummated on April 2, 2010, the escrow rule in 226.35(b)(3) does not apply.

iii. Servicing. Assume that a consumer applies for a new loan on August 1, 2009. The loan is consummated on September 1, 2009. The servicing rules in 226.36(c) apply to the servicing of that loan as of October 1, 2009.

Yes - if the lot is for personal, family or household purposes.  However, if the lot is for investment property, like a rent house to be built, then it is commercial and exempt.

In two cases:  when a different institution is doing the refinancing or when the refinancing involves an advance of additional funds.  If the same bank is refinancing the debt, then the right of rescission applies only as to the new funds that are advanced.  A refi with new money could occur not only with a home equity loan but also when home improvements are added to an existing loan or after a divorce when one person is paying off the ex.  In the latter scenario, the transaction with the ex is supported by an "owelty" lien (which is one of the permitted liens against the homestead).

As of 4/5/2010

The FDIC, in its Summer 2009 Supervisory Insights did say that these short-term balloon notes were effectively prohibited by the changes to Reg Z.  However, in response to questions regarding compliance with this underwriting standard, the Federal Reserve Board (FRB) clarified its “ability to repay” requirement as it relates to the balloon payment of a short-term, higher-priced balloon mortgage loan (loan with a balloon payment due in less than seven years,). The FRB clarified that the requirement for a creditor to assess a consumer’s ability to repay a loan is satisfied if the creditor has verified the consumer’s ability to make regular monthly payments and verified that the consumer likely would be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral. Specifically, on November 9, 2009, the FRB issued written guidance to its examiners clarifying Regulation Z’s “repayment ability” standard as it applies to balloon mortgage loans. See FRB CA Letter 09-12.

The FRB clarifies: (1) short-term, higher-priced balloon mortgage loans that are prudently underwritten (i.e., based on a consumer’s repayment ability from sources other than the collateral) are not prohibited, (2) a creditor does not have to verify that the consumer has other assets and/or income at time of consummation sufficient to pay the balloon payment when it comes due, and (3) in addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan (or through income or assets other than the collateral).

As of 5/3/2010

Look at the definition of "Federally related mortgage loan," which is the fundamental principle upon which the RESPA regime is based.  Here is what RESPA, at 24 CFR §3500.2(b), says:

Federally related mortgage loan or mortgage loan means as follows:
    (1) Any loan (other than temporary financing, such as a construction loan):
    (i) That is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property upon which there is either:
    (A) Located or, following settlement, will be constructed using proceeds of the loan, a structure or structures designed principally for occupancy of from one to four families (including individual units of condominiums and cooperatives and including any related interests, such as a share in the cooperative or right to occupancy of the unit); or

...

So a loan to purchase a vacant lot where, following settlement, a one-to-four family dwelling is not going to be constructed using the proceeds of the loan is not a federally related mortgage loan.  If it is not a federally related mortgage loan, then no GFE is necessary.

It is not legal to pay a referral fee unless actual services are performed. HUD interprets a referral under RESPA as having no value. A payment for a referral - no matter who pays it - to a lender who has done nothing of value would be a kickback and as such is illegal.

Sec. 3500.14  Prohibition against kickbacks and unearned fees.

    (a) Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. 2607) and is subject to enforcement as such under Sec. 3500.19.

    (b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in Sec. 3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.

Where changed circumstances occur and they result in one of the following situations, the lender will be allowed to provide a revised GFE:

1.    Changed circumstances that increase the cost of a settlement service. If the changed circumstances result in increased settlement service fees to the point that they would exceed the allowable tolerances, you can issue an amended GFE;

2.    Changed circumstances affecting the loan. If the changed circumstances result in a change in the borrower‘s eligibility for the specific loan terms identified in the GFE, you can issue an amended GFE;

3.     Borrower requested changes. If the borrower requests changes to the mortgage loan that change the settlement charges or the terms of the loan, then an amended GFE is allowed.

See 24 CFR 3500.7(f)(1-3)

The bottom line is that a change that results in decreased settlement service cost is not an instance in which the lender is specifically allowed to provide a revised GFE.  I don’t think there is any harm in providing a revised GFE if the borrower is actually paying less in settlement services than was disclosed on the initial GFE,  but then again why would you want to? Better to let the initial GFE stand.

See the HUD RESPA FAQs, page 28 for the answer.  This FAQ is invaluable in getting the GFE and the HUD Settlement Statement correct.

…

6) Q: Are attorney‘s fees charged to prepare loan documents for the lender considered part of the charge for origination services disclosed on Block 1 of the GFE?

A: Yes, attorney‘s fees charged to prepare loan documents for the lender are considered part of the charge for origination services disclosed on Block 1 of the GFE and should not be separately itemized.

The bank, if it is the servicer of the loan, may estimate the amount of escrow items to be disbursed as follows (see 24 CFR 3500.17).

• If the next year’s charge for an escrow item is know, then that amount should be used.
• If the next year’s charge is unknown, the servicer may base the estimate on the preceding year’s charge, or the preceding year’s charge modified by an amount not greater than the most recent year’s change in the consumer price index.
• If the property is unassessed new construction, the charge may be an estimate on the assessment of comparable residential real property in the same area.

Recently, HUD issued a RESPA Roundup dedicated to compliance guidance for RESPA as it applies to the Federal Reserve Board’s Mortgage Loan Originator Compensation Rules.  Generally, you might also seek guidance from HUD’s New RESPA Fule FAQs.  You are always welcome to call the IBAT Legal/Compliance Hotline on any compliance issue. Just call 800-749-4228 or email IBAT’s Deputy General Counsel Shannon Phillips Jr. at sphillips@ibat.org.  Also, there is a Compliance Forum on the IBAT Web site where you can post your questions for other IBAT member compliance professionals to assist you. To get to the Compliance Forum,  go to the IBAT home page, click on the Legal/Compliance tab (which will take you to the Legal Department page), and click on “Compliance Forum.”  You will need a username and password, which are both initially your email address.  If you don’t have a username and password, you can contact Jennifer Kinzler at jkinzler@ibat.org.

If the settlement costs listed on the HUD-1 exceed the amounts listed on the GFE by more than the applicable tolerance, “the lender is responsible for curing tolerance violations” (April 2, 2010 FAQs, p. 41, Q2). Regarding the amount that must be refunded and its timing, §3500.7(i) specifies that “if any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerance violation by reimbursing to the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement.” This is known as the right to cure. The lender must also disclose the corrected settlement amounts on a revised HUD-1 (April 2, 2010 FAQs, p. 42, Q9).

The entire note is now due and payable. If you are replacing the note with a new note, then it is a "refinancing." If you are merely renewing and extending, then it is NOT. However, I believe that the FDIC considers this a refinancing. Therefore, do new RESPA and Reg Z disclosures.   I believe that the title insurance company has an endorsement that extends the coverage.

Okay, here is my understanding. . . . first, the definition of "deposit account" includes nonnegotiable certificates of deposit (which includes uncertificated time deposits). Next, the scope section (9.109) excludes consumer deposit accounts EXCEPT for nonnegotiable CDs. Perfection of the lien on these is by control. A perfected lien on these accounts will win out over a later filed tax lien or levy.

No there is no law, state or federal, that prohibits using property owned by a business entity to be used as collateral on a personal loan.  But just because there is no law prohibiting the practice does not mean it is a good thing to do.  Consider this:  property owned by a business entity, even if the business is solely owned by an individual, belongs to the business entity, not the individual.  Presumably that's why the individual formed a business entity--to keep the business assets and liabilities separate from the individual assets and liabilities.  If the business entity is willing to use business assets to secure the individual's loan, then there must be a resolution from the business entity to pledge the assets--normally called a consent to pledge--authorizing that property to be so used.  However, you cannot force the business entity to permit business assets to be used unless the business is on the note.  In other words, it is like dealing with two separate individuals. A lender may not care, but there are huge potential downsides to the business entity co-mingling business and personal transactions. As I said, many people form a business entity to keep the liabilities separate. If the owner mixes business and personal, the business' liabilities might just become the owners'.

As an aside, if the business you are talking about is a sole proprietorship, and not a separate business entity, then the two aren't separate entities, and you should be able to make a personal loan secured by property used in the business because the sole proprietor is more than likely the owner of the property.

Use the driver's license or identification issued by the individual's state of residence.  You'll find this answer in Texas Business & Commerce Code, Section 9.503(a)(4) (Chapters 1 through 11 of the Business & Commerce Code are the Uniform Commercial Code, with some non-uniform Texas amendments.):

Sec. 9.503.  NAME OF DEBTOR AND SECURED PARTY.  (a)  A financing statement sufficiently provides the name of the debtor:
(1)  if the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the debtor's formation documents that are filed of public record in the debtor's jurisdiction of organization to create the registered organization and that show the debtor to have been organized, including any amendments to those documents for the express purpose of amending the debtor's name;

(2)  if the debtor is a decedent's estate, only if the financing statement provides the name of the decedent and indicates that the debtor is an estate;

(3)  if the debtor is a trust or a trustee acting with respect to property held in trust, only if the financing statement:

(A)  provides the name specified for the trust in its organic documents or, if no name is specified, provides the name of the settlor and additional information sufficient to distinguish the debtor from other trusts having one or more of the same settlors; and

(B)  indicates, in the debtor's name or otherwise, that the debtor is a trust or is a trustee acting with respect to property held in trust;

(4)  if the debtor is an individual, if the financing statement provides the individual's name shown on the individual's driver's license or identification certificate issued by the individual's state of residence; and

No.  A "buyer in the ordinary course of business" (which these buyers would be) takes free of your lien.

Random, good inventory inspections.  Make sure that these are not on a predictable schedule.  In one recent case, the car dealer knew the inspection was coming.  So he called the buyers and had them bring their cars in for a free car wash!

As of 11/9/2009

The Probate Code section on creditor's rights in multiple party accounts (section 442, Probate Code) was amended in 2003 (proposed by IBAT).  Although many bankers prefer to get a pledge or consent to pledge from ALL owners in an account, the law permits ANY owner of a multiple party account to pledge the account.  However, the bank must give notice by certified mail to the other owner(s).  Below is a brief discussion from the IBAT 2003 White Paper on point, which includes a sample notice.  There was no statutory sample notice.

H.B. 1590 by Paxton. This IBAT proposal provides that a party to a multiple party account may pledge that account without the joinder of any other party. However, a convenience signer or POD beneficiary may not pledge an account. Furthermore, if the other party does not join in the pledge, the creditor must send a notice to that party.

Action: Review loan procedures. Either continue to require joinder of all owners or accept pledge of one party with required notice to other(s). Send a notice by certified mail. The following is suggested language only. There is no statutory model notice.

NOTICE: The co-owner of your account [describe] has pledged that account as collateral on a loan in the original principal amount of $_______ to [name of lender]. This note matures on [date]. Until the note is paid in full, neither party will be able to withdraw funds from this account.

Effective Date: September 1, 2003

As of 12/7/2009

Because U.S. Savings Bonds are not assignable and should not be take as collateral.  Savings bonds are non-marketable registered securities that cannot be transferred, negotiated, or pledged as collateral.

You want the financing statement to include the debtor’s exact, full, legal name.  See UCC 9.503.  You can amend the financing statement by filing a UCC3 to include the debtor’s full name.  The debtor’s name is the most important part of the financing statement because the debtor’s name is how someone will find that a financing statement was filed on a secured loan with that debtor. For more information about financing statements and names of debtors who are individuals, click here to go to IBAT’s Compliance Forum.

No!  Article 9 requires you to use the legal name of the debtor.  See section 9.503 of the Business & Commerce Code. 

First, typically the JAG Corp will provide information to the servicemembers.  Thus, the guards members have probably received some briefing.  However, their spouses may find themselves bewildered as time goes on.  There are several good sources of information.  In 2008, the OCC published a brief synopsis for banks: http://www.occ.treas.gov/ftp/bulletin/2008-30.html.  The FDIC issued an FIL in 2007: http://www.fdic.gov/news/news/financial/2007/fil07083.html.  The Department of Defense has information:  http://www.defenselink.mil/specials/Relief_Act_Revision/.

Understand that the rate protection applies only to contracts entered into before the person starts his or her active military service. Contracts entered into once that active service has begun are not covered. The purpose of the law is to prevent the loss of a home, a car, or the like contracted for on the basis of a (higher) civilian income, when the obligor has now, voluntarily or involuntarily, been forced to live on a (lower) military pay. Obviously, a contract signed after the person has gone into active military service ought to have been made on the basis of the military pay rate.

Sec. 527. MAXIMUM RATE OF INTEREST ON DEBTS INCURRED BEFORE MILITARY SERVICE.

(a) INTEREST RATE LIMITATION-

(1) LIMITATION TO 6 PERCENT- An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent --

(A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or

(B) during the period of military service, in the case of any other obligation or liability.

 (2) FORGIVENESS OF INTEREST IN EXCESS OF 6 PERCENT- Interest at a rate in excess of 6 percent per year that would otherwise be incurred but for the prohibition in paragraph (1) is forgiven.

(3) PREVENTION OF ACCELERATION OF PRINCIPAL- The amount of any periodic payment due from a servicemember under the terms of the instrument that created an obligation or liability covered by this section shall be reduced by the amount of the interest forgiven under paragraph (2) that is allocable to the period for which such payment is made.

The HUD Act requires a notice to servicemembers or their dependents who are delinquent on residential mortgages.  There is a sample notice, HUD-92070, that was issued by HUD.  HUD also issued Mortgagee Letter 2006-28.  The servicemember does not even have to be an obligor.  You need to send the notice to delinquent borrowers within 45 days after they miss a mortgage payment.  Because anyone could be the dependent of a servicemember, many lenders send both the Homeownership Counseling Notice and the servicemember notice to all delinquent mortgage borrowers. If you do send the notice to all delinquent mortgage borrowers, remember that it only applies to those mortgage borrowers who are servicemembers or their dependents.

If a person is 65 years of age or older or is disabled, they can defer their property taxes pursuant to Texas Tax Code §33.06.  However, your contract with the borrower seems to prevent the senior from opting for deferral of the taxes.  Your deed of trust requires that the borrower keep the taxes current.  That means that the borrower has voluntarily agreed to pay the taxes when due.  If the borrower defers the taxes, then the taxes aren't paid when due.  Your deed of trust most likely allows you to pay the taxes that are due and unpaid, add them to the balance of the note, and charge interest on that amount.   The borrower's failure to pay the taxes is also likely an event of default.  You could always agree in writing to allow the borrower to defer the taxes, but then there would be growing taxes and interest due on the property. Most lenders would not do that.  One thing to be aware of:  Some tax appraisal districts are not accepting payments from lenders on deferred taxes. So, call the tax appraisal office before sending them a check to pay the taxes.  Most importantly, communicate with your borrower. They weren't trying to pull anything on you; they were merely trying to save some money by deferring their taxes until they no longer own and occupy the house.  I also encourage you to contact the bank's legal counsel before taking any action on this loan.

Usually in a fiduciary relationship the custodian has what is called “naked possession”. That means that the custodian has possession of the asset but not ownership and to pledge as security takes ownership.  If have a loan secured by an TUTMA account you have an unsecured loan. The specifics are in the Texas Property Code Chapter 141.

Yes.  Be sure to disclose the method to avoid a complaint that the method is deceptive.  However, on second lien mortgage loans with a rate over 10%, only use actual day calculation.  Chapter 342 of the Finance Code requires that.

Do not confuse APR with usury.  APR is a Truth in Lending disclosure concept. Section 226.4 tells what is supposed to be included in the "finance charge", which in turn results in an APR.  In addition to the contract rate of interest, there are certain other fees and charges that must be included.  There is no limit to the APR.

Usury is interest that exceeds the amount authorized by law.  The Texas Constitution permits interest in the amount of 10%.  Higher rates are permissible if authorized by the legislature.  The legislature created higher rates in the credit title of the Finance Code (which begins with chapter 301).

The Competitive Equality Banking Act of 1987 required caps on adjustable rate mortgages.  It says:  "Any adjustable rate mortgage loan originated by a creditor shall include a limitation on the maximum interest rate that may apply during the term of the mortgage loan."
 
It seems to me that post maturity interest is being applied AFTER the term of the mortgage loan.  Also, you are clearly contracting for that rate.  I am not aware of any court cases interpreting this.   Also, I looked at 12 CFR 34.20 et seq to see if the real estate loan regs of the OCC spoke to it. Again, nothing on this point.  Unless your attorney is aware of some specific court case interpreting CEBA, I believe that a post maturity rate at the usury ceiling  does not violate the requirement that there be a maximum cap during the TERM of the loan!

Many of the banks that have active overdraft privilege programs no longer charge interest on the overdraft amount....they just impose the NSF charge. However, the NSF charge is NOT interest under Texas law. The Texas Supreme Court decided that in the Tony Tortilla Factory case decided several years ago. In order to charge interest on the overdraft, the bank must have a written agreement for the rate. But typically that agreement will also make it clear that the bank is paying the overdraft at its option and is NOT obligated to do so. The Fed Consumer Advisory Council discussed this issue at its last meeting. There may be more clarifications coming down the road. Meanwhile, the Fed has some “best practices” out for comment right now.

The amount of the “extension of credit” is the overdraft amount plus the fee. The customer owes the entire amount. So, I don’t see a usury issue—you are not charging interest on interest. Beware of daily minimum amounts, such as $5.00 per day…that could be usurious. But the bank should be very clear in its disclosures and agreement that this is the practice.

Let me also be very clear that I think that this is a bad idea from a business perspective!  Also, all of the consumer advocates and regulators are really “down” on overdraft privilege programs. Why cause more questions?  So I would discourage adding the interest.....but it is not illegal!

It is probably legal.  Let me explain why.  First of all, you are probably confusing APR with the "highest rate allowed by law."  In Texas, the highest rate allowed on most loans, with some exceptions, is 18% which is provided in the Finance Code, Credit Title.  APR which is defined by Reg Z is the cost of the loan to the borrower which is reflected as a percentage rate.  It is a combination of the interest costs plus other fees and charges in connection with the loan as compared to the principal of the loan.  There is no upper limit to an APR, however, it must be disclosed so the borrower understands what the true costs of the loan are.  So, for instance, a $1,500 loan at 18% interest and a filing fee for a UCC-1 financing statement might have an APR of 18.5% which is legal because there is no upper limit on APRs and the interest rate is only 18% which is also legal.  One of the exceptions from the 18% interest rate cap for loans made in Texas is the Finance Code 342.251 loan.

But there is more at work here than simply an APR that is considerably higher than Texas’ interest rate cap.  In fact, your customer’s loan probably does exceed Texas’ 18% interest rate cap. And it is completely legal.  The lender simply exported the higher rate from South Dakota, which has extremely liberal usury laws. 

Click here to join a discussion of this topic in IBAT's Compliance Forum.

As of 6/14/2010

First, the APR has nothing to do with usury. It is strictly the interest rate that determines whether something is usurious.  However, you can’t merely look at the stated interest rate, you must determine if any fees, when spread over the full term of the loan, cause the interest to exceed the usury limt.

Ultimately, whether a fee is interest is a fact question for a judge (in a non-jury trial) or jury to decide.  However, a lender doesn’t want to end up in court to determine whether a fee is interest.    Fees in connection with servicing or extending loans are interest, and an origination fee is a fee to service or extend a loan; therefore, an origination fee is interest.  To avoid being usurious, all interest charged on a loan, when spread over the full term of the loan, must not exceed the usury limit—which is currently 18%.

Because Chapter 83 of the Texas Administrative Code is adopted by the Finance Commission for the Office of Consumer Credit Commissioner, it only applies to non-bank consumer lenders.  Nevertheless, it is instructive.

For secondary mortgage loans, see 7 TAC §83.707 .  It says that an origination fee is treated as interest, and that an origination fee is aggregated with other interest charges for the purposes of a usury calculation.  

7 TAC §83.102(20) defines prepaid interest as:

“Interest paid separately in cash or by check before or at consummation in a transaction, or withheld from the proceeds of the credit at any time. Some common terms such as points, discounts, and origination fees have been used to identify this charge.”

7 TAC §83.701 provides:

(b) Interest-bearing loans. In an interest-bearing secondary mortgage loan, an authorized lender may contract for, charge, or receive any rate of interest that does not exceed the applicable amount authorized by Texas Finance Code, Chapter 303, Subchapter A, as calculated under the true daily earnings method or the scheduled installment earnings method. Prepaid interest in the form of points, such as origination or discount points, may be contracted for, charged, or received by an originating lender, so long as the total amount of interest contracted for, charged, or received, when spread over the full term of the loan as permitted by Texas Finance Code, §302.101 does not exceed the applicable interest limit in Texas Finance Code, Chapter 303, Subchapter A.


(c) Method of calculation. An authorized lender making loans under Texas Finance Code, §342.301(c) may calculate the rate and amount of interest by any method of calculation as long as the amount of interest charged does not exceed the maximum rate or amount of interest set forth in Texas Finance Code, §342.301, calculated using the specified earnings methods contained in Texas Finance Code, §342.301.

In response to your question, APR is irrelevant to whether or not you have usury.  APR is merely an arbitrary calculation created by Truth in Lending Act.  But you have a bigger issue, and that is whether it is permissible to charge a $50 operation fee!!!!
 
If the loan is a consumer installment loan with a rate exceeding 10%, the answer is no!  See the late charge and fee chart on our web site.  This isn’t one of the permissible fees!  http://www.ibat.org/ch_legal_consumer_credit.asp.  Chapter 342 of the Finance Code applies to these loans.  Only enumerated fees are permissible.  You could have an administrative fee, but it is capped at $25.
 
If the loan is a commercial one, then the answer is yes.  Section 34.203 of the Finance Code permits the bank to charge "loan fees."  I am not happy about your categorizing it as an "operation" fee.  That really makes it sound like additional interest rather than a loan fee.  Look at the regulation (which implements this section) for more detail on what is appropriate:  http://info.sos.state.tx.us/pls/pub/readtac$ext.TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_ploc=&pg=1&p_tac=&ti=7&pt=2&ch=12&rl=32.  Then revise your operations to reflect the $50 as a loan fee.

For national banks, part 2 of the regs caps the bonus/incentive comp at five percent of the recipient's annual salary or five percent of the average salary of all loan officers participating in the plan.  There is no comparable regulation for state banks.  However, the state examiners generally use that same guideline.

The answer to your question is, yes the bank can do as it chooses in certain circumstances.  If the loan is a single payment simple interest loan, there is no statutory or code language prohibiting it.  If it is a Finance Code Chapter 342 loan (consumer loan, non-real estate), there is language prohibiting it (unless a condition of the demand is that the borrower is in default).  Under Chapter 342, the borrower is granted a right to repay the loan in installments according to the provisions of the chapter.  Any clause giving the lender the right to demand payment violates the borrower’s codified right to repay the loan in installments.  This would in effect be a waiver of this right, and §342.507 strictly prohibits this for consumer loans.  Sections 343.406 and 344.506 formerly prohibited demand clauses for home loans and secondary mortgage loans, but §343.406 and Chapter 344 were repealed.
 
Of course, a loan bearing interest at ten percent per annum or less is not governed by Chapter 342 and may be made without regard to the disclosure, licensing, and other limitations in Chapter 342.
 
So a lender is permitted to have the demand feature in first lien real estate loans (to which Chapter 342 does not apply) and secondary mortgage loans (Subchapter G of 342), and loans under 10%.  Additionally, the lender may not have a demand feature in real estate loans subject to HOEPA in Reg Z, §226.32(d)(8).

No.  That was eliminated effective September 1, 2007.  The lending limit is 25% of tier one capital.

This is permitted under the Texas election laws, provided that the loan is on normal terms and conditions and rates.  If you gave a favorable interest rate or terms, then that could be construed as an in-kind contribution.  So handle this at arms length and you are okay.

In a letter dated May 22, 2000 from the Office of Consumer Credit Commissioner to IBAT’s General Counsel Karen Neeley, Commissioner Leslie Pettijohn indicated that the Texas courts have recognized three methods for counting days and calculating interest in Texas.

1)    360/360 day calendar;
2)    360/365 day calendar; and
3)    365/365 day calendar or 366/365 day calendar.

The letter goes on to state that “…in the absence of a definitive position by the Texas Legislature, the Texas courts have required the creditors to utilize a 365/365 day calendar or a 366/365 day calendar (leap year).”

Chapter 342 defines the "scheduled earnings method" and the "true daily earnings" method.

(a) The scheduled installment earnings method is a method to compute an interest charge by applying a daily rate to the unpaid balance of the amount financed as if each payment will be made on its scheduled installment date. A payment received before or after the due date does not affect the amount of the scheduled principal reduction.

(b) The true daily earnings method is a method to compute an interest charge by applying a daily rate to the unpaid balance of the amount financed. The earned finance charge is computed by multiplying the daily rate by the number of days the actual principal balance is outstanding.

(c) For purposes of Subsections (a) and (b), the daily rate is 1/365th of the equivalent contract rate.

In other words, a consumer loan under Chapter 342 must use a 365/365 day calendar or a 366/365 day calendar. While a 360/360 day calendar or a 360/365 day calendar yields a higher interest charge, they are not permitted under the Texas Finance Code for consumer loans.

In 1997, the Texas Legislature modified the Finance Code to allow the utilization of a 360/360 day calendar on commercial loans. Section 306.003 of the Texas Finance Code reads as follows:

“A creditor and an obligor may agree to compute the term and rate of interest for a commercial loan based on a 360-day year consisting of 12 30-day months. For purposes of this chapter, each rate ceiling expressed as a rate per year may mean a rate per year consisting of 360 days and of 12 30-day months.”

It is worth noting that that the 360/365 day year can be used on first lien residential mortgage loans since the usury ceiling for those transactions is preempted by federal law.

Your bank wants to permit consumer installment loan customers to skip a payment.  Chapter 342 of the Finance Code governs this transaction if the rate is over 10%.  It has a deferral fee formula  but only for precomputed loans.  I have reviewed this issue with the Consumer Credit Commissioner.  The bank may only collect the interest for the deferral period.  Chapter 342 authorizes certain fees and prohibits any fee that is not authorized.  Outside of a precomputed loan, no deferral fee is authorized.  Therefore, no fee may be charged for the "skip a payment" service.  Not content with that, I went to the OCC to try to get some relief.  National banks have authority to charge fees under 12 CFR 7.4002.  However, I am still waiting on a response from Washington DC as to whether that permits a national bank to ignore the explicit limitations in Texas law and charge a fee.  Commissioner James may NOT issue a parity letter for state banks even if the OCC authorizes the fee.  His problem is that the parity section of the constitution (for state banks) conflicts with the constitutional provision that gives the legislature (not a regulator) the authority to define what is and is not interest!  Now, the next issue is whether the bank could simply waive the interest for the deferral.  This could trigger a 1099 to IRS if the interest waived was $600 or more.  (Not likely on a consumer loan, but possible on a commercial one!)  Also, examiners typically want to see interest kept current.  "Evergreen loans" have always been taboo.  Collecting the interest at the end of the loan is possible.  But it will compound.  You need to be sure that the customer understands and agrees to this and realizes that there will be a larger final payment as a result!  My "best practices" recommendation is that you collect the interest for the skipped period.

Yes. GLBA privacy rules permit getting a payoff.  These is made clear in a letter that IBAT received from OCC attorney, Liz Corey: http://www.ibat.org/pdfs/2001/01/05/funds-verif-svcs-loan-payoff-amts.  The procedures for payoff are spelled out in section 32.06 of the Tax Code http://www.statutes.legis.state.tx.us/SOTWDocs/TX/htm/TX.32.htm#32.06.

There isn't a specific time period for returning these items for real estate secured loans, except Chapter 342 loans and home equity loans.

• For Chapter 342 Loans: §342.454. RETURN OF INSTRUMENTS TO BORROWER ON REPAYMENT. Within a reasonable time after a loan is repaid in full or an open-end account is terminated according to the terms of the contract, a lender shall cancel and return to a borrower any instrument, including a note, assignment, security agreement, or mortgage that:(1) secured the loan; and (2) does not secure another indebtedness of the borrower to the lender.
• For home equity loans: Texas Constitution, Article XVI, Section 50 (a)(6)(Q)(vii) within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit;

For loans secured by consumer goods and non-consumer goods, UCC 9.513 gives the correct time periods for terminating financing statements.

• Consumer goods: File a termination statement within one month after there is no obligation secured by the collateral and no commitment to make an advance, incur an obligation or otherwise give value. If the debtor sends an authenticated demand to you, file the termination statement within 20 days of the receipt of the demand, if the expiration of the 20 day period is earlier than the expiration of the one month time period.
• Non-consumer goods: You are not required to file a termination statement unless you receive an authenticated demand from the debtor. Within days 20 days of receipt of a demand, you must, either file a termination statement or send the termination statement to the debtor.

Hearkening back to days of yesteryear...... the consumer credit code had a requirement that the first payment on a consumer loan had to be no later than one month plus 15 days in order to be a "regular" transaction.  If it wasn't "regular", then you couldn't get late charges.  Now you can get late charges on any type of loan, and we don't do precomputed loans any more.  So all of that is largely irrelevant.  But it was very important at one time.

Get a copy of his orders.  Then modify the loan so that the rate is 6%.  (The interest differential is written off.)  When the customer is de-activated, the rate goes back to the contract rate.  Note that the law was amended in 2003 and is now the Servicemembers Civil Relief Act.  Additional protections for leases and dependents were added.  But the key provisions are the same.

Not a great idea.  The theory behind setoff is that there must be a mutuality of indebtedness (you owe the customer, the customer owes you).  There is an Alabama case that arguably supports setoff, but I would not recommend the practice.

From 11/2/2009

Your bank wants to permit consumer installment loan customers to skip a payment.  Chapter 342 of the Finance Code governs this transaction if the rate is over 10%.  It has a deferral fee formula but only for precomputed loans.  We previously reviewed this issue with the Consumer Credit Commissioner.  The bank may only collect the interest for the deferral period.  Chapter 342 authorizes certain fees and prohibits any fee that is not authorized.  Outside of a precomputed loan, no deferral fee is authorized.  Therefore, no fee may be charged for the skip-a-payment service.  Now, the next issue is whether the bank could simply waive the interest for the deferral.  This could trigger a 1099 to IRS if the interest waived was $600 or more.  (Not likely on a consumer loan, but possible on a commercial one.)  Also, examiners typically want to see interest kept current; evergreen loans have always been taboo.  Collecting the interest at the end of the loan is possible.  But it will compound.  You need to be sure that the customer understands and agrees to this and realizes that there will be a larger final payment as a result!  Our best practices recommendation is that you collect the interest for the skipped period.

No.  Regulated loan companies are required to provide a Spanish translation of terms if a loan was negotiated primarily in Spanish.  However, this does not apply to banks and savings banks (based on an earlier opinion of the Texas Attorney General).  Please note that because the law refers to loans it missed the target on auto dealer paper--which is a retail installment contract, not a loan!

As of 7/26/2010

You do have to post a physical notice on the machine and inform the consumer either through paper notice or on-screen of the amount of the fee before the consumer commits to an ATM transaction.  There have been recent class action law suits filed in federal court against Texas commercial banks alleging that the banks' ATMs did not disclose the transaction fees in accordance with Reg E.  These lawsuits allege that although the banks disclosed their fees on the onscreen menus of their ATMs, they didn't also post the notice in a prominent and conspicuous location on or at the automated teller machine.  I have seen the filed complaint from one of these law suits. In it, the plaintiff asks the court to certify the class, award statutory damages pursuant to 15 U.S.C. §1693m, disgorge the bank  of all revenue from electronic transfers obtained in violation of the law during the class period, payment of costs of suit and attorneys fees, and a permanent injunction from engaging in the conduct.  The statutory provision on civil liability, states that "the total recovery ... in any class action or series of class actions arising out of the same failure to comply by the same person shall not be more than the lesser of $500,000 or 1 per centum of the net worth of the defendant."  See 15 U.S.C. § 1693m(a)(2)(A)(ii), below.  The liability provisions also provides for an award of costs and attorneys fees against the defendant, which could range from tens to hundreds of thousands of dollars.

I don't think any of these law suits have concluded yet, but I'll keep our members informed as I get more information. In the mean time, take immediate steps to assure that all of your ATMs have the required fee notice posted on them. Every ATM in Texas that doesn't have the required notice has a target on it, and, at any time, some personal injury attorney may take aim at it and pull the trigger on class action litigation.

To answer your second question:  If the notice is posted, but something later happens to it, there is no liability to the bank. See the text of 15 USC 1693h(d), below.

Here are the statutory and regulatory provisions:

The Electronic Funds Transfer Act, 15 U.S.C. § 1693b(d)(3), provides:

(3) Fee disclosures at automated teller machines

(A) In general

The regulations prescribed under paragraph (1) shall require any automated teller machine

operator who imposes a fee on any consumer for providing host transfer services to such

consumer to provide notice in accordance with subparagraph (B) to the consumer (at the time

the service is provided) of--

(i) the fact that a fee is imposed by such operator for providing the service; and

(ii) the amount of any such fee.

(B) Notice requirements

(i) On the machine

The notice required under clause (i) of subparagraph (A) with respect to any fee

described in such subparagraph shall be posted in a prominent and conspicuous

location on or at the automated teller machine at which the electronic fund transfer

is initiated by the consumer.

(ii) On the screen

The notice required under clauses (i) and (ii) of subparagraph (A) with respect to any

fee described in such subparagraph shall appear on the screen of the automated teller

machine, or on a paper notice issued from such machine, after the transaction is

initiated and before the consumer is irrevocably committed to completing the

transaction....

C) Prohibition on fees not properly disclosed and explicitly assumed by consumer

No fee may be imposed by any automated teller machine operator in connection with any

electronic fund transfer initiated by a consumer for which a notice is required under

subparagraph (A), unless--

(i) the consumer receives such notice in accordance with subparagraph (B); and

(ii) the consumer elects to continue in the manner necessary to effect the transaction

after receiving such notice.

This is the section from Reg E mandating a physical sign and an on-screen notice:

12 CFR § 205.16 Disclosures at automated teller

machines.

(a) Definition. Automated teller machine

operator means any person that

operates an automated teller machine

at which a consumer initiates an electronic

fund transfer or a balance inquiry

and that does not hold the account

to or from which the transfer is

made, or about which an inquiry is

made.

(b) General. An automated teller machine

operator that imposes a fee on a

consumer for initiating an electronic

fund transfer or a balance inquiry

shall:

(1) Provide notice that a fee will be

imposed for providing electronic fund

transfer services or a balance inquiry;

and

(2) Disclose the amount of the fee.

(c) Notice requirement. To meet the requirements

of paragraph (b) of this section,

an automated teller machine operator

must comply with the following:

(1) On the machine. Post in a prominent

and conspicuous location on or at

the automated teller machine a notice

that:

(i) A fee will be imposed for providing

electronic fund transfer services or for

a balance inquiry; or

(ii) A fee may be imposed for providing

electronic fund transfer services

or for a balance inquiry, but the notice

in this paragraph (c)(1)(ii) may be substituted

for the notice in paragraph

(c)(1)(i) only if there are circumstances

under which a fee will not be imposed

for such services; and

(2) Screen or paper notice. Provide the

notice required by paragraphs (b)(1)

and (b)(2) of this section either by

showing it on the screen of the automated

teller machine or by providing

it on paper, before the consumer is

committed to paying a fee.

(d) Temporary exemption. Through December

31, 2004, the notice requirement

in paragraph (c)(2) of this section does

not apply to any automated teller machine

that lacks the technical capability

to provide such information.

(e) Imposition of fee. An automated

teller machine operator may impose a

fee on a consumer for initiating an

electronic fund transfer or a balance

inquiry only if

(1) The consumer is provided the notices

required under paragraph (c) of

this section, and

(2) The consumer elects to continue

the transaction or inquiry after receiving

such notices.

[Reg. E, 66 FR 13412, Mar. 6, 2001, as amended

at 71 FR 1659, Jan. 10, 2006]

Here is the civil liability provision of the EFTA:

§ 1693m. Civil liability

(a) Individual or class action for damages; amount of award

Except as otherwise provided by this section and section 1693h of this title, any person who fails to comply with any provision of this subchapter with respect to any consumer, except for an error resolved in accordance with section 1693f of this title, is liable to such consumer in an amount equal to the sum of-

(1) any actual damage sustained by such consumer as a result of such failure;

(2)

(A) in the case of an individual action, an amount not less than $100 nor greater than $1,000; or

(B) in the case of a class action, such amount as the court may allow, except that

(i) as to each member of the class no minimum recovery shall be applicable, and

(ii) the total recovery under this subparagraph in any class action or series of class actions arising out of the same failure to comply by the same person shall not be more than the lesser of $500,000 or 1 per centum of the net worth of the defendant; and

(3) in the case of any successful action to enforce the foregoing liability, the costs of the action, together with a reasonable attorney's fee as determined by the court.

As I said above, if the notice is posted, but later something happens to it, there is no liability to the bank:

15 USC 1693h(d) Exception for damaged notices

If the notice required to be posted pursuant to section 1693b (d)(3)(B)(i) of this title by an automated teller machine operator has been posted by such operator in compliance with such section and the notice is subsequently removed, damaged, or altered by any person other than the operator of the automated teller machine, the operator shall have no liability under this section for failure to comply with section 1693b (d)(3)(B)(i) of this title.

The short answer is don’t do it – or if you are going to do it consider the following issues:

The first issue you need to address is what does your contract with the credit reporting agency (CRA) say about sharing those reports?  I would be shocked if that contract did not require the providers express consent before you shared the credit report with any other party not jointly involved in a credit transaction (a provision allowed under the Fair Credit Reporting Act). So start by reading what your contract says.

The second issue to consider is do you want to be considered a credit reporting agency? By providing a credit report you are acting as a CRA and may subject yourself to all the requirements that go with the designation. Generally speaking you do not want to be a CRA regardless of the fact you may be sharing a report for a permitted purpose.

Finally is the issue of what your privacy policy says. If your privacy policy does not indicate that you share information and allow an opt-out, you would need to change those disclosures before you shared any information on an individual that was also a customer of the bank.

The cashier's check is an irrevocable promise to pay, but if you have sent it to the state, then your customer will have to deal with the Texas Comptroller of Public Accounts.  There is no time limit for your customer to make a claim with the state.  You or your customer can search the state's unclaimed property records by clicking here.  There is also a phone number:  800.654.FIND (3463).  They will perform 3 searches per phone call.  They should be able to tell you if the money was escheated to the state.  Here is the Web site address:  http://www.window.state.tx.us/up/

You (or your customer) can perform the search here:  https://txcpa.cpa.state.tx.us/up/Search.jsp