And what qualifies as ‘principal shareholders,’ ‘directors’ and ‘executive officers’ under Regulation O?
By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCMQ: I am reviewing my bank’s loans for Home Mortgage Disclosure Act compliance. The bank made a mortgage loan the purpose of which is paying off another loan secured by a vacation timeshare. The loan secured by the vacation timeshare and paid off was made to the husband, but the new loan is being made to the wife and will be secured by their primary residence. Under HMDA, is the loan purpose reported as a refinancing or as “other purpose”? A: “Other purpose.” Under §1003.2(p) of Regulation C, “refinancing means a . . . loan . . . in which a new, dwelling-secured debt obligation satisfies and replaces an existing, dwelling-secured debt obligation by the same borrower.” (Emphasis added.) In this case, the borrowers of the two loans are different people: The original loan was made to the husband and the new one is made to the wife. (Answer provided September 2022.) Q: My bank has a question regarding a Regulation CC (Expedited Funds Availability) exception hold. A customer who meets the criteria for a repeated overdrafts hold deposited a $30,000 check. The branch manager, who was aware of the customer’s history of repeated overdrafts, decided not to place a hold. A few days later, the fraud team later become aware of the deposit and wanted to place an exception hold on the check because of the overdraft history. May the bank do that? A: No, unless the fraud team is basing the hold on information unknown to the branch manager. Under §229.13(g)(ii), hold notices generally must be provided at the time of deposit if it is made in person. There is an exception “if the facts upon which a determination to invoke one of the exceptions . . . to delay a deposit only become known to the depositary bank after the time of the deposit.” (Emphasis added.)
If the branch manager knew of the customer’s history of repeated overdrafts and chose not to place the hold, it is difficult to argue that the facts were not “known to the depositary bank”—unless the fraud team had additional information unknown to the branch manager on which it based the hold. (Answer provided October 2022.)Q: If consumers consent to receiving disclosures via email, and the bank has complied with the Electronic Signatures in Global and National Commerce Act (E-Sign Act), may the bank provide by email a copy of the borrowers’ appraisal required by §1002.14(a) of Regulation B (Equal Credit Opportunity Act)? A: Yes, as long as the consumer has consented to receiving documents electronically in accordance with the E-Sign Act, the appraisal may be provided via email. (See §1002.14(a)(5) of Regulation B.) (Answer provided September 2022.) Q: My bank made a loan secured by a unit within a residential condominium building. Our policy is that flood insurance policy declaration pages must list our name as mortgagee. The insurance agent claims that declaration pages for Residential Condominium Building Association Policies (RCBAP) issued under the National Flood Insurance Program need not list mortgagees. Is the insurance agent correct? A: It appears so. Per the Federal Emergency Management Agency (FEMA) “Flood Insurance Manual,” “When the applicant is the condominium association, the lender for the individual unit owner should not appear on the declarations page.” Note, however, that the bank should continue to notify the insurance company of the lien on the unit and may request acknowledgement. (Answer provided November 2022.) Q: My bank recently acquired another bank that was owned primarily by one person, and therefore loans to that person and the person’s business were subject to Regulation O (12 CFR 215). My bank now considers the person a “stakeholder,” as the person retained a small amount of ownership though is not otherwise involved in bank activities. Would loans to the person and the person’s businesses still be subject to Regulation O? A: It depends on what the bank means by “stakeholder.” The provisions of Regulation O apply to “principal shareholders,” “directors” and “executive officers” as defined in §215.2(m), (d) and (e), respectively. For example, should the person now directly or indirectly own, control, or have the power to vote 10 percent or less of any class of voting securities of the surviving bank then the person would not meet the definition of “principal shareholder.” Presuming that the person is also not either a director or executive officer, as defined, the person and the person’s businesses would no longer be subject to the regulatory requirements. Note, however, that it would be prudent to maintain records related to the period of time they were. (Answer provided July 2022.) Q: My bank has a certificate of deposit where the penalty was incorrectly disclosed on the bank’s Regulation DD (Truth in Savings Act) disclosure. The bank disclosed a 180-day simple interest penalty, but the penalty should have been 365 days simple interest. The bank would like to correct this error by providing a 30-day notice of the change pursuant to Regulation DD and send an updated disclosure.
This has raised several issues and questions. Some view the CD as a contract that may not be changed prior to maturity. There are also potential unfairness issues. The affected customers relied on the disclosure in making a decision and cannot “avoid injury” because they will incur the 180-day early penalty if they close the account to avoid the change and incur a doubled penalty if they retain the account.A: This is probably a contractual issue that should be discussed with the bank’s legal counsel. If the contract does not permit such a change, the bank cannot make it, and it seems unlikely that the contract includes a provision that permits the bank to unilaterally double the early withdrawal penalty. In addition, as noted, there is a potential unfairness issue. The consumer took action to open the account relying on the bank provided disclosures and cannot avoid the penalty.
Notwithstanding the contract and unfairness questions, however, Regulation DD does not prohibit banks from changing the terms of a CD before it matures. Section 1030.5(a) specifically allows banks to make adverse changes to the account terms that must be disclosed in initial disclosures if they give consumers 30 days advance written notice. (Answer provided September 2022.)
Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.