By Kristen Stogniew, Esq
Last week, the Consumer Financial Protection Bureau published final rules that acknowledge the critical role that community banks and credit unions play in our economy through financing home loans.
We really should all be grateful.
In a move that American Banker magazine called a "Home Run," the Bureau crafted a few key exemptions to the Dodd-Frank Act's "ability-to-pay" rules that will become effective in January 2014. The rules as proposed would have opened community banks and credit unions up considerably to regulatory and legal attack on their portfolio loans, which, by definition, consists primarily of non-conforming, balloon mortgages, or loans that are higher-priced than those typically found in the residential secondary market. In response to the perceived regulatory burden (and, much to our chagrin, since we make it a priority to explain and document compliance requirements so they can be understood and applied on a day-to-day basis), many smaller institutions seriously considered getting out of residential mortgage lending, if they haven't already done so. That would be a shame for our communities and for those of us who don't fit "inside the box" of securitized financing.
The rule's final exemptions let the air out of the pressure cooker, and I hope the affected institution (under $2 billion in assets who originate less than 500 1st mortgage loans annually) understand that this is a competitive advantage....which is a very nice thing in this current environment.
Unfortunately, this hard-won award is not a cure-all for the regulatory burdens affecting residential lending. There are many regulatory changes coming next January thanks to the Dodd Frank Act. Truthfully, none are complex or deal-breakers, but their sheer numbers will present a challenge for residential lenders of all sizes to implement. In breaking them down, all can be managed by one or more common processes: (1) core or loan document system updates; (2) policy and procedure revisions and associated staff training; and (3) internal audit and monitoring program updates to periodically check under the hood.
A couple examples of the more onerous changes....ARMs (adjustable rate mortgage loans) will require significantly more advance notice of interest rate changes, and tellers and other employees who refer prospective home loan applicants for even a token referral fee (i.e., $25) will be considered "loan originators" for purposes of compensation and qualification requirements.
We will be providing support through these times to financial institutions via one-on-one and group workshops, so stay tuned. In the meantime, take a second to say "Thank You", then continue on the course (and, you may want to refer back to my prior "Inspirations" blog ... I'm just sayin').Founded in 1944, Saltmarsh, Cleaveland & Gund provides a full range of services, including auditing, accounting, management and marketing consulting, corporate and individual tax planning and preparation, business valuation, litigation support, financial and estate planning, computer systems evaluation, and employee benefits design, implementation, and administration. In the performance of these services, Saltmarsh maintains a high degree of shareholder involvement, which provides our clients with maximum assurance of quality.
Kristen J. Stogniew is a Shareholder of the firm and works out of the Tampa office in the firm's Financial Institution Advisory Group. She provides compliance risk management, policy and procedure drafting, and compliance reviews and monitoring in areas such as: BSA/AML, Loan and Deposit Compliance, Marketing and Retail Delivery, Trust, Governance, and ACH. Kristen also provides one-on-one mentoring and customized training to staff, management and Bank Directorate. She can be contacted at 813-287-1111 or firstname.lastname@example.org.
By Theodore (Ted) J. Hamilton, Esq.
The debtor’s bank account is flush with cash! After months of searching and work you finally have it, a payday! You get the garnishment paperwork done the same day and serve it on the neighborhood bank. But the banker looks at it differently. The banker says, hold on a minute. What is wrong with my client? They can’t pay their bills? How did this judgment happen without my knowledge? What about me? What am I to do? Although that loan I have to the debtor isn’t in default and they are current, my loan documents say that a judgment or garnishment results in a default. I have to protect myself. As a result, when the banker receives the garnishment, they freeze the account and file a response to the garnishment stating there are no funds available due to the bank lien on the account. Who gets the money is what both the lawyer for the bank and the lawyer for the creditor are asked. The answer lies in the Uniform Commercial Code and in the facts of each case. A. Perfecting a security interest in a bank account.
The Uniform Commercial Code outlines how to perfect a security interest in a bank account. Particularly UCC section 9-314 states that a security interest in a bank account is perfected by control and the security interest is lost when control is lost. UCC section 9-104 defines control of a bank account and states as follows:
A secured party
has control of a deposit account
(1) the secured party is the bank
with which the deposit account
(2) the debtor
, secured party, and bank
have agreed in an authenticated record
that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account
without further consent by the debtor; or
(3) the secured party becomes the bank
's customer with respect to the deposit account
Thus, once the account is an account at the bank, the bank has control of the account sufficient to establish a security interest if the loan documents so provide for such a security interest. B. What controls the right of a Bank with a security interest to set off against the deposit account?
But what controls whether the bank can setoff the amounts in the deposit account against a debt due to the bank? Uniform Commercial Code section 9-340 gives the bank who has “control” over the deposit account the right to setoff amounts in the account against amounts due to the bank. C. When can the bank exercise its setoff rights?
If at the time garnishment hits, all loan amounts due to the bank are current, how can the bank claim a setoff right that would take priority over the garnishment lien on the account?
Assuming the bank’s documents give the bank the right to a setoff upon default and the loan is in default at the time of the garnishment, the bank will have the right to set off against the deposit account in the bank’s control.
But what if the loan is not in default at the time the garnishment hits? The language of the Bank’s loan document must be reviewed on a case by case basis to determine whether the bank takes priority. In the case of In re Szymanski
, the court found the term “material adverse change” as defined in loan documents did not allow the bank claim priority over a garnishment on a non-demand note where no evidence existed that the judgment impaired the debtor’s ability to pay the forty thousand dollar loan which happened to also be secured by real property worth over 1.2 million. In re Szymanski
, 413 B. R. 232 (Bankr. E.D. PA 2009).
Other courts have determined that only if the debt has matured can a setoff occur. See Carbajal V. Capital One
, 219 F.R.D. 437 (N.D. Ill E. Div , 2004). Some courts have said that if the debtor is insolvent the bank has a setoff right. Elizarraras v. Bank of El Paso
, 631 F.2d 366 (C.A.5. Tex., 1980).
In the case of All American Auto Salvage v. Camp’s Auto Wreckers and Citibank, South Dakota, N.A.
, the New Jersey Supreme Court considered whether the bank had the right to set off funds on deposit against the fees the bank charged on the account as a result of the execution writ hitting the account. 679 A.2d 627 (N.J. Sup Ct., 1996). The court, going through an excellent analysis of the right of the bank to setoff, determined that in equity the bank should have the right to set off for such fees. Id
. at 633.
The Florida court in the case of Barsco, Inc. v. H.W.W. Inc
., examined cases from both Florida and out of Florida for a determination as to whether a bank could prevail against a garnishment of an account. 346 So.2d. 134 (Fla. 1st DCA, 1977) In this case, the holder of the account was not in default on the loans at the time the garnishment hit. The court examined one line of cases involving the loans which gave the bank the right to off-set the depositor’s account without demand or notice. In such cases, this line of cases held the bank still has the duty to take some affirmative action to accelerate when the note has not matured prior to the time of the service of the garnishment writ. Id
. at 135. The Barsco
court found the UCC leaves it to the security agreement to determine what constitutes an event of default. The Court also found the bank note required the borrower not to dispose of the security without written consent of the bank. Ultimately, the court held the bank’s setoff right took priority over the right of the garnishee to the funds.
Each state will have a different version of the Code as adopted and may also have a specific code section dealing with the priority issue on a garnished bank account. These must be reviewed for the state at issue.
A levy or garnishment on a bank account may take priority over a bank’s set off claim against the account if the bank documents are not specific as to the right to set off when the loan is not in default. For bankers this means they must ensure their loan documents give them the right to set off upon a garnishment or execution. Loan documents should include broad language creating a security interest in the account and ensuring the entire amount of the loan will be due if the garnishment hits or if the banker is insecure in the discretion of the bank. The creditor attorney will want to review the loan documents and state law to ensure the bank has the right to set off and claim priority over the garnishment. In the end, the account may still be flush with cash and you may still be entitled to it.
Ted Hamilton is a frequent contributor to InsideBanking and Inside Banking - Lending Group on LinkedIn. Ted is AV Rated by Martindale Hubbell, its highest rating. His practice focuses on business representation, business planning, real estate transactions and litigation, commercial litigation, bankruptcy and business litigation, secured transactions and loan documentation and transactions.
Attorneys at Law
Theodore J. Hamilton, Esq.
P.O. Box 172727
Tampa, FL 33602
813-225-2918 ext 14
This article will appear in the Fall edition of the Commercial Law League publication, Commercial Law World.
Permission to reprint provided by Commercial Law World
In July 2011 the Federal Trade Commission (FTC) issued a staff report entitled, “Forty Years of Experience with the Fair Credit Reporting Act”. The purpose of the report was and is to provide an overview of the agency’s role in enforcing and interpreting the FCRA. The 100-plus page report also includes a section-by-section summary of the FTC’s interpretations of the FCRA.
In the following article, we’ll take a look back, and a look ahead, at the FCRA and how it impacts both consumers and credit reporting agencies (CRAs).First, some background.
So, what exactly is the FCRA? Originally passed in 1970 as an amendment to the Consumer Credit Protection Act, the FCRA “governs the collection, assembly and use of consumer report information and provides the framework for the credit reporting system in the United States”. In other words, the Act provides protection of consumer information, including credit data.
According to the staff report, initially the FCRA imposed requirements exclusively on CRAs, such as credit bureaus, except for the sections requiring consumer report users and other third parties to provide certain notices to consumers. And although the Act’s fundamental principles and goals are still the same, the FCRA has undergone several changes over the years to extend its effect, including two of the more significant amendments: the Consumer Credit Reporting Reform Act of 1996 and the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”). As a result, responsibilities and requirements have expanded for CRAs and report users, while consumers now have easier access to their own information.Privacy, restrictions and more.
As currently constructed, the full scope of the FCRA involves a multitude of individual requirements, limitations and restrictions for CRAs and consumer report users. In fact, there are too many to list in this article alone. We have, however, taken the time to provide some of the more pertinent provisions mandated by the FCRA:
- CRAs and users must have, and keep on file for at least 25 months, a “permissible purpose” signed by the consumer allowing access to their personal credit history.
- Before a CRA or user can be given direct access to any credit bureau database, an on-site inspection is required to confirm that security requirements are met, as well as to verify the commercial nature of the company and the amount of time in business.
- CRAs and users must notify consumers when/if an adverse action is taken on the basis of their personal information.
- CRAs and users must identify the company that provides reports to ensure accuracy and completeness of the report.
- CRAs and users may not retain negative information for an excessive period of time. Exact terms are defined by the FCRA.
Any CRA or consumer report user who does not comply with FCRA requirements could be faced with fines and/or imprisonment.What’s next.
Along with the FTC’s new staff report containing updated interpretations and amendments, it also has withdrawn its previous commentary from 1990. That report, now more than two decades old, had become outdated and partially obsolete and did not include more recent provisions such as the previously referenced Consumer Credit Reporting Reform Act of 1996 and FACT Act of 2003.Under recent legislation signed by the President and U.S. Congress, the authority to enforce and interpret the FCRA has transitioned from the FTC to the Consumer Financial Protection Bureau (CFPB). This makes the creation of the new staff report necessary, so the 1990 commentary and interpretations do not also transfer to the CFPB.
The FCRA’s long history continues but not without these recent developments and significant changes. It should not be forgotten, however, that the FCRA still operates with the same purpose as when it was conceived: to protect consumer information. To read more about the FCRA and its updated interpretations, download the FTC’s report
, “Forty Years of Experience with the Fair Credit Reporting Act”.Reprint of blog post by NCO Financial Investigative Services. NCO Financial Investigative Services (FIS) is a worldwide commercial due diligence firm, providing in-depth background investigations, public record research and detailed analysis to the global business community. Special thanks to Christina Grenga, Vice President - Business Development Ph: 914.213.1698,Christina.Grenga@ncogroup.comwww.ncofis.com
Commercial Credit Reports
Commercial credit reporting has changed dramatically over the last 35 years. Gone are the days of relying on credit references provided by the company in question or waiting days or weeks for a response. (Besides, who would provide a vendor that wasn’t paid promptly as a reference?). Using standard credit applications is always recommended to obtain the proper billing address, contact person and phone number of the new customer; however, to make a truly informed decision more efficient options are necessary and readily available. Computer databases now gather, compile, classify and present pertinent credit data, allowing businesses to anticipate future payment behavior of their customers based on historical information.
Thousands of companies across the country in a wide variety of industries contribute accounts receivable information monthly to various credit bureaus, including terms, recent high credit, current balance and aging. This accounts receivable data is typically broken down by industry and credit activity level so only the most current data is used in calculating the current days beyond terms. By reviewing this past payment behavior, identifying trends and cycles, future behavior may be anticipated.
Many commercial collection agencies submit information to commercial credit bureaus about debtors placed, commonly the first step taken by a business in seeking outside help with outstanding accounts. The presence of recent collection activity can indicate that a company is experiencing cash flow problems. Multiple placements for collections over a longer period of time can be a key indicator of a business that is in the habit of defaulting on financial obligations, certainly not a good candidate for open terms. It is important to review the details on collection accounts to determine if the dollar amount, response time and payments justify excluding the extension of open terms. Legal filings and records are gathered on a daily basis for judgments, liens, bankruptcies and UCC filings. Whether a company had a dispute with a vendor or was sued for negligence, an open judgment is a financial liability and the seizure of funds by a plaintiff could create a serious cash flow problem. Tax liens at the local, state or federal level can be enforced at any time and also put a financial burden on a company, resulting in vendors not being paid. Stressed or failed businesses that have sought bankruptcy protection in the past may have done so as the result of poor business models or decisions and may be doomed to repeat this type of action. UCC (Uniform Commercial Code) filings allow leasing and financial institutions to secure movable equipment, vehicles and business loans. While the filing of UCC’s is a normal business practice, a multitude of filings may represent a business that has little or no assets of their own. Insolvent businesses with many UCC filings leave little to nothing for unsecured creditors to claim. All commercial credit decisions should be made based on factual, impartial information so that further concerns and complications can be minimized. Consumer Credit Reports
While commercial credit reports may be requested for any business entity without the knowledge or consent of the business, consumer credit information is protected by the Fair Credit Reporting Act (FCRA) and requires a signed authorization by the individual. Consumer credit reports provide a complete history of an individual’s credit activity including mortgage, automotive, medical, credit card and revolving accounts, as well as personal judgments, tax liens, bankruptcies and collection activity. All the information is used to generate a score between 350 and 850 with relative risks outlined below: Score Range Score Description
700-719 Very Good
619 and below Bad to Very Bad
Consideration must be applied to all scores for the relative size, activity levels and end results for the reported details. A collection issue from years past may have been the result of a dispute or medical insurance issue that should not be used as the basis for denying open terms. Using credit reports to gain valuable insight on the history of a potential new customer (or on existing customers requesting higher credit limits) leads to more informed decision-making. Access to past payment, legal and collection information will help increase confidence in extending open terms to those companies that add more to the bottom line. Combining the speed and accuracy of 3rd party verified information with the minimal costs of the reports; the credit inquiry process is now fast and affordable. Excerpt from original article titled “How Far Out on a Limb are You Willing To Go ? By Richard Bostwick, Senior Investigative Consultant for NCO Financial Investigative Services. NCO Financial Investigative Services (FIS) is a worldwide commercial due diligence firm, providing in-depth background investigations, public record research and detailed analysis to the global business community. Special thanks to Christina Grenga, Vice President - Business Development Ph: 914.213.1698, Christina.Grenga@ncogroup.comwww.ncofis.com
Repost - Trinovus Blog
We can’t promise your candle wishes will come true. We can help clarify the burning confusion over which adverse action or risk based pricing notice to send. Next to the massive RESPA changes last year, the changes to adverse action notices (AANs) and risk based pricing notices (RBPNs) have caused more confusion than ever before. Then, add in the Notice to Home Loan Applicant (NHLA) for a bit of icing on the cake, and you end up with well over 100 questions!
What could be, or should be, pretty straight forward, has fast become a tangled web among bankers. So, let us help clarify the what and when of those pesky notices!
First, a major point many have forgotten – Regulation B, the Equal Credit Opportunity Act, is not just a consumer regulation; it also applies to commercial customers. Keep that in mind for your adverse action notices.
Second, the adverse action model forms in Regulation B incorporate the required FCRA adverse action disclosures. The risk based pricing model forms are in Regulation V. The Notice to Home Loan Applicant requirements are from the FACT Act.
Third, here are the basics:
- The content of Regulation B has not changed, only the model forms. The content of Regulation V does have changes, including the model forms.
- Under Regulation V, an individual is a consumer.
- If you use the credit score in taking an adverse action, then, the FCRA credit score disclosure is required in your AAN.
- If you use a consumer report for granting consumer credit and based (in whole or in part) on that consumer report, you give materially less favorable material terms, you provide a RBPN. Depending on which RBPN you use, and if you use a credit score in setting the material terms for the credit, you may have to add the credit score disclosure.
- If the applicant is a consumer, the loan is for a consumer purpose, secured by a 1-4 family residential real property, send the NHLA. If you must send the NHLA, and you use a credit score in your decisioning, you also send the credit score notice in FACT Act.
Now, some specifics.
Credit DenialsRegulation B’s adverse action model forms C1 – C5 are for consumer credit; C6 – C7 are for business credit; C8 is for the right to request specific reasons for credit given at the time of application. These are the most frequently used model forms. Adverse action notices must be sent within 30 days of a completed application.
- Begin with the applicable adverse action model form.
- If you don’t use a credit report or a credit score at all in making your adverse decision, you use just the ECOA language (e.g., reasons and do not discriminate clauses).
- EXAMPLE: You only considered the collateral, and you deny the loan because of insufficient collateral
- If you do use a consumer report in making your adverse decision and did not use any credit score, you include ECOA language and FCRA’s ‘our decision was based in whole or in part . . .’
- EXAMPLE: The consumer report contained several collections and late pays, and you deny credit because of collections and slow pays
- If you do use the credit score, good or bad, in making your adverse decision, you include the ECOA language, FCRA’s ‘our decision was based in whole or in part . . .’, and FCRA’s ‘we also obtained your credit score . . .’
- EXAMPLE: The credit report has several collections from medical bills some time ago, yet the credit score has improved to 700. The 700 makes you think twice, but your policy is no collections. You deny the loan based on the collections, but you used the credit score in your overall decision process.
- Because you denied the loan, you do not have to give the RBPN (alternate or otherwise). If you give the alternate notice (H3, H4 or H5) anyway, it’s no harm, no foul.
Credit Granted Risk based pricing model forms should be sent as soon as reasonably practical. For closed end loans, they must be sent after the terms are set but prior to consummation. For open end credit, you must send the RBPN after the terms have been set but prior to the first transaction under the plan.
- No adverse action notice is sent.
- If you calculate using the credit score proxy method or tiered pricing method (40% cut-offs), the borrower falls in the applicable bucket, and you did not use a credit score in setting the material terms of the credit, you use Regulation V model form H-1.
- If you calculate using the credit score proxy method or tiered pricing method (40% cut-offs), the borrower falls in the applicable bucket, and you do use a credit score in setting the material terms of the credit, you use Regulation V model form H-6, which includes the credit score disclosure.
- If you don’t do all of the math and send the RBPN (the alternate notice) to everyone that you grant credit, regardless of whether or not the credit score was used in setting material terms, you use Regulation V model form H-3 for loans secured by 1-4 residential; H-4 for loans not secured by 1-4 residential; and H-5 if no credit score is available.
- If you use a consumer report in making the adverse decision to deny employment, you include the FCRA language ‘in whole or in part . . .’
- If you use a credit score in making the adverse decision to deny employment, you include the FCRA language ‘in whole or in part . . .’ and FCRA’s ‘we also obtained your credit score . . .’
Employment Denials & FCRA
If they thought the consumer didn’t know his/her credit score before, the applicant will certainly know it now and probably more than they want!
Bonus Scoop - In sum, get out the ice cream to have with your cake; here’s a bonus scoop cheat sheet.If you deny:
If you grant:
- Don’t give an RBPN;
- Do give an AAN (* ECOA, *FCRA Consumer Report, * FCRA credit score); and
- Do send NHLA if credit is for a consumer, consumer purpose, secured by 1-4 family residential real property (* FCRA credit score)
- Don’t give an AAN;
- Do give a RBPN (*H1 or *H6; *H3 or *H4 or *H5)
- Do send NHLA if credit is for a consumer, consumer purpose, secured by 1-4 family residential real property ( FCRA credit score)
If this helps diffuse the confusion, I like killer cake, king cake, or mile high turtle cheesecake with a small scoop of chocolate ice cream! Now, you can have your cake and eat it, too!Reprinted with permission from David Brasfield, CEO of eBankSystems/TriNovus. eBankSystems is a solutions provider specializing in delivering complete turnkey systems for community banks. eBankSystems helps banks utilize technology to drive down costs, retain existing customers and attract new customers. Trinisys, eBankSystems flagship core processing application, allows banks to manage their operations efficiently and intuitively. eBankSystems partners with many industry leaders to provide ATM/EFT processing, Internet banking, mobile and voice banking, platform automation and more, allowing banks to choose which ancillary products work best for them. TriNovus was founded with the goal of delivering relevant technology to the marketplace. Building on years of experience and expertise, the TriNovus team is constantly analyzing and evaluating the banking industry and developing germane solutions that successfully address the needs of bankers at this time. https://www.trinovus.com/