By Leslie Callaway, CRCM, CAFP
Q/ While Regulation O overdraft provisions address the amount insiders’ accounts may be overdrawn and how long they have to bring the account positive, those provisions do not apply to related interests of the insider (a company or political or campaign committee controlled by a bank insider). However, if a related interest is indebted to the bank $500,000 or more, the payment of an overdraft is an extension of credit that may require the board’s advance approval. (§215.4(b)(2).)
At what point in the overdraft decision-making process does an overdraft become an extension of credit? Is it when an item that exceeds the available balance is presented, any time after that and before the bank decides to pay or return, or after the bank makes a decision not to return the item?
For example, on Tuesday, a check is presented against the account that, if paid, would put the account into a negative balance. Wednesday morning, based on an overdraft report, the bank contacts the customer to ask if the customer can cover the amount of the check by 10 a.m. before the bank misses the deadline to return the check. The customer makes a deposit by the deadline that ensures there are sufficient funds to pay the check.
Is the bank’s payment of the check an extension of credit because there were insufficient funds in the account when the check was presented and before the customer made a deposit, or is it not an extension of credit because funds were deposited before the item had to be returned?
A/ It is not an extension of credit because an overdraft does not occur until the bank uses its own funds to pay the item. Section 215.3(2) states in relevant part that there is an extension of credit if there is an “advance by means of an overdraft.” This means that the bank advances its own funds to pay an item when the account has insufficient funds to cover it. In this situation, the bank did not give an advance to the customer to pay the check. It simply gave the account holder time to cover any difference between the available balance and the amount of the check. (Answer provided June 2024.)
Q/One of my bank’s customers had an escrow shortage of a little over $300 and sent a check for $1,500. The customer stated that she wanted to deposit the entire amount to escrow to reduce the monthly escrow payment going forward. Is the bank allowed to accept this voluntary excess deposit to escrow under the Real Estate Settlement Procedures Act (Regulation X)?
A/ No federal regulation prevents the bank from accepting the $1,500 advance payment. Moreover, Regulation X contemplates that borrowers and lenders may voluntarily agree that the borrower will pay an escrow amount higher than required.
Section §1024.17(f)(2)(iii) provides:
After an initial or annual escrow analysis has been performed, the servicer and the borrower may enter into a voluntary agreement for the forthcoming escrow accounting year for the borrower to deposit funds into the escrow account for that year greater than the limits established under paragraph (c) of this section. Such an agreement shall cover only one escrow accounting year, but a new voluntary agreement may be entered into after the next escrow analysis is performed. The voluntary agreement may not alter how surpluses are to be treated when the next escrow analysis is performed at the end of the escrow accounting year covered by the voluntary agreement. (Answer provided June 2024.)
Q/ My bank is financing a consumer’s principal dwelling with a first lien and a simultaneous second lien. I know the seller’s fees, if known, must be disclosed on the borrower’s Closing Disclosure (CD) as required under Regulation Z (Truth in Lending Act). Must the bank list the seller’s fees on both the first lien and the simultaneous second CDs?
A/ It depends. If the first-lien CD records the entirety of the seller’s transaction, the bank is not required to list the same fees on the second-lien CD. If the seller’s fees are not listed in the entirety on the first-lien CD, the additional seller fees must be added to the second-lien CD to reflect the terms of the seller’s transaction. See comment 2 to §1026.19(f)(4)(i) (Answer provided February 2024.)
Answers are provided by Leslie Callaway, CRCM, CAFP, senior director, compliance outreach and development at ABA.
