Legal Q&A - Counsel's Corner

Board of Directors

Q: What happens when a director on a company’s board of directors has an ownership interest in another business that is entering into a contract with the company? Isn’t that a conflict of interest?

A: An interested director transaction is something businesses needs to be aware of prior to entering into the transaction. The basic problem is when a director gets an unfair benefit for him/herself own business transaction with the company. It’s not unheard of for directors to have business interests in other businesses. The issue though is that all directors owe a company a fiduciary duty. These types of deals can be a breach of that duty. The risk for these transactions is that the deal can be set aside or the director can be personally liable. There is an exception when 1) it was a fair deal, or 2) the director disclosed his/her own interest in the deal AND the deal was approved by a majority of disinterested directors. The interested director should not vote on approving the transaction.

Cannabis Banking

Q: The bank has a business customer that is a CBD store. They are going to begin selling edibles now that these products are legal in Minnesota. Do they need a license to sell these? Is there a checklist of considerations for the bank to review when it has this type of customer?

A: The Minnesota Board of Pharmacy has authority over these products, but there are no licenses for selling them, at least not yet. Banks typically follow their standard documentation procedures as any other business entity, such as a certificate of good standing, articles of incorporation or organization, and any relevant permits or licenses from a local authority to operate a store. But there is no license to obtain to sell edibles under the Minnesota statute. The MBA crafted a checklist that banks can use for these types of customers if they wish: https://www.minnbankers.com/MBA/Legal_and_Compliance/Compliance_Tools/MBA/Compliance/Compliance_Tools.aspx?

Checks

Q: We’re going to be contacting law enforcement regarding some check forgery. There is a guy who is constantly stealing our customers checks and writing them to third parties, then having the third-party cash the checks. Are we able to tell law enforcement our customer’s name and the payee of the checks? Or do they have to have a subpoena for it? The only thing is that I don’t know how they would know who to subpoena since the perpetrator isn’t named on the transactions at all.

A:  State statute, Minn. Stat. 13A.04, specifically allows a bank to proactively report a crime and provide evidence without a subpoena. The statute states that nothing in the privacy chapter precludes a financial institution from notifying a government authority that the institution has information which may be relevant to a possible violation of any statute or rule or the financial exploitation of a vulnerable adult and providing access to financial records relevant to the possible violation or financial exploitation. On the federal side, Regulation P has an exception for protecting against or preventing actual or potential fraud, unauthorized transactions, claims, or other liability.

Q: We have had an uptick in check fraud. Customers’ checks are being stolen from their mailboxes and altered or they create new checks with their information. Is there a difference in business versus consumer accounts as to when they must notify the bank of fraudulent checks?

A:  The Uniform Commercial Code liability rules as enacted in Minnesota statutes generally don’t differentiate between business and consumer accounts. A bank may have different time periods to report in consumer and commercial account agreements. Plus, altered checks and counterfeit checks have different liability rules. With an altered item, the depository bank generally is liable as the party best positioned to notice the alteration at deposit. Counterfeit items, on the other hand, are treated like forged drawer’s signatures and the drawee bank is generally liable because it is in the best position to know what its customer’s signature looks like.
For altered items, the drawer of an altered check has a duty to review their statement and promptly report any alterations. There is a one-year period in statute after which a bank is not liable for payment of the altered check, but this period may be shortened by contract. The drawee bank has up to three years to demand repayment from the depository bank. A drawee bank will have no liability to its customer for paying an altered check if it has previously paid a check altered by the same wrongdoer and the drawer has had the bank statement with the first altered item for at least 30 days and has not notified the bank.

Counterfeit items must be returned by the midnight deadline for a drawee bank to avoid liability. As with altered items, the drawer of an altered check has a duty to review their statement and promptly report any alterations. The law allows a customer to report a counterfeit check and request a refund for up to one year, but account agreements generally shorten that period to 30 or 60 days.

The MBA offers a fraud and forgery cheat sheet on its website under the Legal tab/Compliance Tools. Another resource is the ABA’s new online Check Fraud Claim Directory, created to help banks resolve check fraud claims. Learn more on the ABA’s website under Topics/Risk Management/Fraud/Check Fraud.

Q: Our customer came in and purchased a cashier’s check that they then sent to the payee. After they sent the check the customer is now asking whether the bank can stop payment on the cashier’s check. Can we do that?

A: Banks cannot typically stop payment on a cashier’s check the way it does for other checks. In a cashier’s check, the parties to the payment are the payee, the person receiving the cashier’s check, and the bank as the payer/drawer. The customer that purchased the cashier’s check is the remitter of the funds. Unlike a typical check though, the customer who bought it is not the drawer. It is the bank itself that is the payer on the cashier’s check. The funds the bank pays on the cashier’s check come from the bank’s own funds, not the remitter’s deposit account at the bank. Because the remitter is not a party on the check that person has no stop payment rights to it. If the bank were to stop payment it can be liable for expenses and consequential damages to the payee. There are a few exceptions where a bank may not be liable: 1) the bank suspends payments; 2) the bank asserts a claim or defense of the bank that has reasonable grounds to believe is available against the person entitled to payment on the check; 3) the bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the check; or 4) payment is prohibited by law.

Q: Our customer notified us that a check drawn on the account was altered. Who is liable for the altered check?

A: When this question comes up for banks it is one in which they often confuse a fraudulently drawn check with one that has been altered. An altered check is one that the account holder (the drawer) wrote, but somewhere between the writing of the check and the depositing of the check it was altered in some way. Often the check is altered to change the payee line and the amount of the check. On the other hand, fraudulently drawn checks are completely unauthorized because the account holder did not write the check. In those cases, a check may be stolen and someone forged the account holder’s signature on the check. There the entire check is not properly payable, which means that the drawee bank is liable if it pays that item. To contrast this with altered checks, these are properly payable according to their original terms. The depositary bank and any collecting bank provide the drawee bank with presentment warranties, one of which is that the item has not been altered. Thus, the liability for an altered check will most often fall on the depositary bank and any collecting bank. Should the drawee bank, as the paying bank, pay the altered check it can then pass on the liability for that altered check back in the chain of collection.

Q: We have a customer who regularly deposits checks into his account from a Canadian bank. Are we able to hold these funds until the check clears, or do we need to credit the account under the typical funds availability schedule?

A: The general rule for funds availability on checks deposited by the bank’s customer is that the first $225 of the check must be made available on the first business day following the banking day on which the check is deposited. Under Regulation CC’s funds availability schedule, it depends on what constitutes a “check” and what constitutes a “bank.” To be clear, a bank in Canada is still a bank, and a check drawn on that bank is still a check. The issue is whether it is a “check” or “bank” for purposes of Regulation CC. “Check” is defined to include “a negotiable demand draft drawn or payable through or at an office of a bank. . . .” The term “bank” is defined then to include “an insured bank as defined in section 3 of the Federal Deposit Insurance Act . . . or a bank that is eligible to apply to become an insured bank under section 5 of that Act . . . .” It’s also important to note that the term “bank” includes all of a bank’s offices in the U.S., but not offices outside the United States. The Canadian bank in this example is not an insured bank under the FDIA. Simply put, the Canadian bank is not a “bank” for purposes of Regulation CC’s definitions, which means this check is not a “check” under the funds availability schedule. Therefore, the bank could hold the funds until the check clears.

Q: Who’s liable for fraudulent remotely created checks? Our customer alerted us that we paid a remotely created check against the account that is fraudulent.

A: Normally, under a typical paper check written by the bank’s account holder, the bank would be liable if it paid forged checks. The reason for this is that the UCC assigns the drawee bank as the party best situated to detect a fraud. Checking that the drawer’s signature is valid, and therefore not unauthorized, is the responsibility of the bank. However, when it’s a remotely created check it’s different. The liability will generally shift from the paying bank to the bank that created the check. The reason for this is that the check is made by someone other than the paying bank. Therefore, it is not possible for the paying bank to verify a drawer’s signature. Fraudulent remotely created checks breach the UCC’s transfer and presentment warranties that the depositary bank and any transferee bank give to the paying bank.

Q: Recently our bank had a few fictitious checks created on a customer’s account. Is our customer responsible for the checks?

A: A fictitious or counterfeit check is treated the same way as a forged drawer’s signature. Generally, the bank in which the check is drawn off (drawee bank) has until the midnight deadline to return the check to the depositary bank. With automated processing, this is generally not feasible. If the drawee bank fails to return it to the depository bank by the midnight deadline, the drawee bank’s only recourse is against the forger. However, the UCC makes it clear that the drawee bank may not charge the drawer’s account for the check. Minn. Stat. § 336.4-401(c) states that a bank may charge the customer’s account when an item is properly payable. Because the customer never authorized the check, it was not “properly payable.” Put another way, the bank takes the loss, not the customer.

Conservatorship

Q. What happens to the conservatorship when the conservatee dies?

A.The conservatorship terminates upon the death of the conservatee. Upon the conservatee’s death, the conservator shall conclude the administration of the estate by distribution of probate property to the personal representative of the conservatee’s estate. The conservator shall distribute non-probate property to the successor in interest. When the bank receives the notice of death, the bank should no longer allow the conservator to access the account, except for distribution as stated above.

Consumer Lending

Q: If the bank decides to use a risk-based pricing model for consumer loans, is there anything we need to provide the consumer?

A: Regulation V in 12 CFR 1022.72(a)(2) requires that banks provide a risk-based pricing notice to consumers when a bank decides to extend credit or not “based in whole or in part on the consumer report . . ..” (emphasis added) Regulation V and the Fair Credit Reporting Act (FCRA) permit the use of these models. This subject is discussed in both the Consumer Lending Manual and Real Estate Lending Manual and both have the model forms from Regulation V that are contained in Appendix H to Part 1022. There are four forms for risk-based pricing notices and three forms for credit score disclosure exceptions. Appendix H describes the circumstances under which each form is to be used.

Q: Must we send an adverse action notice when a consumer’s application is incomplete?

A:   No, although this is a common practice. Under Regulation B, banks may send only a notice of incompleteness within 30 days after receiving an incomplete consumer application. See 12 CFR 1002.9(c)(1)(ii). The notice of incompleteness must be written, specify the needed information, designate a reasonable time for the applicant to respond, and inform the applicant that no further consideration will be given to the application if the needed information is not provided. If the needed information is received after the time designated in the notice of incompleteness, then banks may require the applicant to restart the application process. Banks may also provide an adverse action notice within 30 days after receiving an incomplete consumer application, but should only do so if they are denying the application. Banks will need to follow the usual adverse action notice requirements. The adverse action notice must include:

1. A statement of action taken;
2. The bank’s name and address;
3. The ECOA notice;
4. The name and address of bank’s prudential Federal regulator; and either;
5. A statement of specific reasons for action taken; or
6. A disclosure of applicant's right to a statement of specific reasons within 30 days, if requested within 60 days of bank's adverse action notice. 

Banks may always verbally request additional information, but this action will not avoid the need for banks to provide an adverse action notice or notice of incompleteness.

Q: We repossessed a borrower’s car because they stopped paying their auto loan. We sold the car and applied the proceeds to the loan balance. It wasn’t enough to cover the remaining loan balance, so can we now seek the remainder of the loan balance from the borrower?

A: No, Minnesota has an anti-deficiency statute. This means that when a bank elects to repossess and sell the car it cannot then seek a judgment for the remaining balance from the borrower. Banks have two options in this situation. The first option is to sue for a judgment on the unpaid balance of the loan. In that case the borrower keeps the car, but the bank takes the borrower to court for the loan balance. The second option is to repossess the car, sell it, and apply the proceeds of that sale to the loan balance. If a bank decides to repossess the car it cannot seek a deficiency judgment from the borrower, which means the bank is out whatever the difference is between the proceeds and the loan balance that wasn’t covered by the sale. A bank cannot choose both.

Q: How does the bank determine finance charges on consumer loans when there is both a Minnesota statute and Federal regulation that apply to the transaction?

A: There are two rules relevant to this question, Minn. Stat. § 47.59 and Regulation Z in 12 C.F.R. § 1026.4. The term “finance charge” is defined in § 47.59 to mean how the term is defined in Regulation Z, with a few exclusions. There are several exceptions to the term in § 47.59, but one in particular comes up often for banks, and that is the “additional charge under subdivision 6.” Put simply, if the charge to the consumer falls within the additional charge category in § 47.59, Subd. 6 then it is not a finance charge for the transaction. If a charge does not meet the language in § 47.59, Subd. 6 then the bank can still charge it, but it would be a finance charge. This means it would be included in the APR calculation and may even need to be refunded in the event of prepayment should the APR be out of tolerance. Some examples of additional charges are items like appraisal fees, credit report fees, delinquency charges, etc. Two that come up frequently are doc prep fees and loan administrative fees. Banks regularly combine the two to mean the same thing, although they should be different.

 

Whether a doc prep fee is a finance charge depends on if it is real estate related or not and to whom it is paid. A doc prep fee could be an “additional charge” excluded from finance charges that are allowed by § 47.59. Regulation Z excludes doc prep fees from the definition of finance charge when it is for a real estate transaction, but that means for non-real estate loans it is considered a finance charge under Regulation Z. Under § 47.59 it depends on whom it is paid to and what it is for. The doc prep fee is mentioned in § 47.59, Subd. 6(a)(3)(ii). It is excluded from a finance charge so long as it is 1) not paid to the bank and 2) for a real estate transaction. If it is paid to the bank then it is a finance charge, because § 47.59, Subd. 1(j)(2) says charges in Subd. 6 are excluded. The reason is that if the doc prep fee is paid to the bank and/or it is for a non-real estate loan then it does not meet the language in Subd. 6; if it does not meet the language in Subd. 6 then it is not an “additional charge,” and it is instead a finance charge. The bank could still charge it, but it needs to be included in the finance charge, which consequently means it may need to be refunded if the loan is paid early and the APR is out of tolerance.

A loan administrative fee is different than a doc prep fee. Banks should not confuse the two as the same charge. A loan administrative fee is specifically allowed as an additional charge excluded from the finance charge determination when it is 1) a one-time fee, 2) at most $25, 3) for closed-end credit, and 4) for loans of $7,344 or less. The maximum loan amount is periodically updated. The bank could decide to charge more than $25, but it would be a finance charge in that case, which means it may need to be refunded. It is important that banks not confuse the two charges to be the same thing.

Copyright

Q: Are we in violation of copyright law if we include snippets from movies in videos, without receiving prior authorization? The snippets themselves last only a second or two, but there may be several snippets included in one video.

A: Using even a short snippet of a copyrighted work is generally not allowed. Using even one frame of a movie could be a violation. There is a “fair use” exemption for criticism, comment, news reporting, teaching, scholarship and research. According to the US Copyright Office, courts look at how the party claiming fair use is using the copyrighted work and are more likely to find that nonprofit educational and noncommercial uses are fair. Using a more creative or imaginative work (such as a novel, movie, or song) is less likely to support a claim of a fair use than using a factual work (such as a technical article or news item). Courts also look at both the quantity and quality of the copyrighted material that was used. If the use employs only a small amount of copyrighted material, fair use is more likely. In some contexts, using even a small amount of a copyrighted work was determined not to be fair because the selection was an important part—or the “heart”—of the work. There is no exception for the commercial use of snippets of movies.

Deposit Accounts

Q: Does a bank have the right to set off on a deposit account that is overdrawn when the only funds deposited to an account are Social Security (SSI) benefits?

A: Generally, Social Security Income is protected from various assignments. Some courts have found that banks can set off against the funds, but the debt that is owed (i.e., the overdrafts) and the Social Security benefits must be related to the same account. See Lopez v. Washington Mutual Bank, (9th Cir. 2002) 302 F.3d 900; Miller, et al. v Bank of America, No. A110137, WA WL33539831(Cal.Ct.App.1st Dist. Nov. 20, 2006). So, if there are overdrafts on a checking account and the Social Security income is deposited into that same checking account it could be possible to set off against it. But if the funds are deposited into another account, then the answer is likely no. It’s important to note that a major consideration in the Lopez case was that the account holders’ account agreements stated that those funds would be used for overdrafts, so it essentially was based on that voluntary, contractual agreement. The case does also point out that the debt and the Social Security funds need to be for the same account. Lopez is a 9th Circuit decision, and Minnesota is in the 8th Circuit, but it’s possible that a Minnesota court would use the same reasoning.

Q: Should an account be jointly owned by two business entities, like two corporations or two LLCs, when the business entities are closely held by the same individual?

A: We get this question quite often here. Usually, we just give a simple answer—no. An account for a business organization, like a corporation or an LLC, is by its very nature an individual account. The only “person” listed on the account title is the business entity. If this were possible it would create a number of issues. One such issue could be the liability each business would have to its own shareholders or members. The very moment a bank would make an account jointly held, each respective business could be liable to its respective shareholders and members for allowing access to the entities’ assets like this. On the bank’s side, the bank might even be held liable for knowingly allowing the business entities to do this. This often arises when the lines between owner and business are blurred because it is closely held by one person. From the bank’s point-of-view, the “customer” is the corporation or LLC, not the shareholder or member opening it. These business owners often want to do this out of convenience. The entire reason for establishing a corporation or LLC is to limit the owner’s liability. Ignoring the separate nature of the business entity is one reason why a court may decide to disregard the corporate nature and “pierce the corporate veil” to hold a shareholder or member liable for a debt or obligation of the business entity. In short, banks should always refuse to do this. It is important that business owners respect the corporate formalities and responsibilities that come with owning a business, or multiple businesses.

Q: We have a business that wants to open a checking account with our bank. The business is a limited liability company, and it is organized and operates in Texas. Does that business need to file anything with Minnesota to operate in the state, and should we obtain that information for documentation purposes when opening the account? What if it is a corporation?

A: An LLC that is organized and operates in a state other than Minnesota is a “foreign limited liability company.” As such, according to the Minnesota Revised Uniform Limited Liability Company Act, it must obtain a certificate of authority in order to do business in Minnesota. A foreign LLC can obtain the certificate of authority by filing an application with the Secretary of State and paying a fee.

However, under Minn. Stat. § 322C.0803, Subd. 1(3), simply “maintaining bank accounts” is an activity that does not constitute “transacting business” in Minnesota. This means that a foreign LLC may not always need to obtain a certificate of authority to open and maintain a checking account in Minnesota. If the foreign LLC were to carry on any activity not listed in subdivision 1, then it would first need to obtain the certificate of authority. The Minnesota Foreign Corporation Act in Minn. Stat. § 303.03(c) has a similar provision regarding this issue for corporations. Therefore, it is important that banks ask the proper questions to these entities to determine whether the bank has the necessary documentation before opening an account.

Q: The owner of a single-member LLC recently passed away and he was the only authorized signer on the account. Now his personal representative wants to access the LLC account. Does the PR have authority to do this?

A: Appointment as personal representative of an estate does not automatically give access to an LLC account. The LLC is a separate legal entity that lives on even after the death of the owner(s). The bank should expect a resolution from the LLC appointing a new signer. Often this will be the same person serving as the decedent's PR, but not always.

Early Withdrawal Penalties

Q: If we have two owners on a CD and one of the owners passes away and the other wants to cash in the CD, can we assess a penalty? What about court appointed CDs for minor settlement funds? Do we impose an early withdrawal penalty on those?

A: It is not a requirement that banks refrain from imposing any early withdrawal penalty on a CD when an owner dies. However, banks are permitted to pay CDs without imposing the contracted early withdrawal penalty when any owner of the CD dies. See fn1 to 12 CFR 204.2(c)(1)(i). It is a common practice for banks to waive CD early withdrawal penalties in these cases. State law, (Minnesota General Rules of Practice 145.05) requires that minor settlement funds have a maturity date that is limited to the minor’s 18th birthday, so they shouldn’t automatically renew after that date. A bank would not want to charge an early withdrawal penalty in that situation. If the minor passes away before their 18th birthday, a court order would be required to access the funds.

Elder Abuse

Q: With older adults increasingly falling victim to fraud and scams that can cost them thousands of dollars in one fell swoop, can the bank reach out to others, such as a family member when we suspect financial exploitation?

A: We get a lot of questions on elder financial exploitation. For some background, banks can be protected from immunity when they freeze a transaction that they reasonably believe may result in financial exploitation of an eligible adult, according to Minn. Stat. 45A.06, Subd. 2 and Minn. Stat. 45A.07. An “eligible adult” is a person aged 65 or older or a “vulnerable adult” (as defined in Minn. Stat. 626.5572, Subd. 21).

The law provides that a financial services provider may, but is not required to, delay a disbursement or place a hold on a transaction involving the account of an eligible adult or an account for which the eligible adult is a beneficiary when the bank reasonably believes it may result in financial exploitation. The bank will be protected from civil, criminal, and administrative liability whether it places a hold on a transaction or does not do so. The MBA Deposits Accounts Procedures Manual details the process, the extent of the hold, and other requirements of the statute.

In addition to allowing a bank to place a hold, Minn. Stat. 45A.04 and Minn. Stat. 45A.05 also allows a bank to notify a third party reasonably associated with the eligible adult of the possible financial exploitation. Of course, disclosure may not be made to a third party that is suspected of financial exploitation or other abuse of the eligible adult. The bank is protected from liability for notifying and for choosing not to notify the third party. If a bank suspects an attorney-in-fact of committing or attempting to commit financial exploitation, the bank will not be liable under the power of attorney statutes for a good faith refusal to carry out the transaction for the attorney-in-fact.

Q: Our bank suspects that an elderly customer is being taken advantage of, and today we received from the customer a same day ACH transfer request that the bank believes will result in that customer’s financial exploitation. If the bank delays the disbursement or places a hold, does it apply to all the funds and transactions in that customer’s account, or just the transaction in question?

A: Effective August 1st, 2020, Minn. Stat. § 45A.06 allows banks to delay disbursements or place holds on transactions for accounts owned by seniors and vulnerable adults. Minn. Stat. § 45A.07 frees banks from liability when acting under § 45A.06. However, this section does not say a bank can entirely freeze a customer’s checking account. Rather, for example, if the customer wanted to submit the same-day ACH transfer and also take out $200 from his/her checking account (let’s say for a birthday present to a grandchild), the bank can only hold the ACH transfer, unless it also reasonably believes the $200 withdrawal could also be financial exploitation. Therefore, this new rule is fact-specific, only applies on a per transaction basis, and does not apply to an entire account.

Employment Law

Q: Are the bank’s employees, like tellers and personal bankers, eligible for the frontline worker pay bonus in Minnesota?

A: Unfortunately, no, bank employees are not eligible for this. The definition of “frontline sector” does not include banks under S.F. 2677 Art. 2 Sec. 2. The financial services sector, like the insurance sector, was not part of the definition here. Some banks have questioned whether the bank may fall under “retail.” A reasonable question, after all people walk into bank branches for various services and products, not unlike a retail store. The problem is that financial services is a specifically named sector, so it’s not under retail. The decision to not include banks is even more unfortunate in light of the obvious need for people to have had access to money and credit during the pandemic, and the fact that many banks had to deal with much of the same risks and difficulties as other types of businesses that are eligible for the frontline worker pay.

Garnishments, Writs, and Levies

Q: We received a levy from the Minnesota Department of Revenue on a customer, but the only account we have that the customer owns is a joint account held with the person’s daughter. She is a minor, and the only money in the account is from her direct deposits. It’s just an account the parents opened for their child many years ago. Do we process the levy on those funds and send them to the state?

A: The earnings of a minor are exempt under Minn. Stat. § 570.37, Subd. 15. A bank is responsible for doing a lookback to identify things like federal benefits, but the debtor is responsible for claiming exempt property is not subject to a levy. In any case, banks don’t just immediately take the money and send it right away to the state. They freeze whatever is being levied and then the account holder debtor has 10 days to claim it. They probably will since it’s obvious that the funds are not the parent’s.

Q: Are we required to respond to interrogatories that accompany a garnishment order even if there are enough funds in the account to cover the order?

A: Yes. The garnishment statutes state that all written interrogatories served with the summons must be answered; they do not consider the amount of funds available. If you have concerns that your answers will be divulging private information related to other customers or that the requests are crossing in to document discovery, be sure to discuss with bank counsel immediately.

HDMA

Q: Do we need to collect HMDA data for 2023 if we made 25 or more closed-end mortgage loans the past couple of years, but fewer than 100?

A:  Yes, banks that were exempted from HMDA data collection and reporting due to the Consumer Financial Protection Bureau’s (CPFB’s) 2020 final rule implementing the 100 closed-end mortgage origination threshold will need to collect data for 2023. The U.S. District Court for the District of Columbia in National Community Reinvestment Coalition v. Consumer Financial Protection Bureau vacated the CFPB’s 2020 final rule that increased the 25 closed-end mortgage threshold from 25 to 100. See LC-19-22 for more on the court’s decision. Since that time the CFPB has published a blog post stating that the CFPB will not cite violations or pursue enforcement actions against banks for failing to collect and report HMDA data for 2020-2022. However, the CFPB has published a technical amendment that resets the impacted portions of Regulation C to the language in effect prior to the CFPB’s 2020 final rule. As a result, if your bank made 25 or more closed-end mortgage loans in 2021 and 2022, then your bank must collect HMDA data in 2023 for reporting by March 1, 2024. This will likely require additional training for lending staff and may require new policies and procedures. You can access the CPFB’s blog at: https://www.consumerfinance.gov/about-us/blog/changes-to-hmda-closed-end-loan-reporting-threshold/. You can access the CFPB’s technical amendment at: https://files.consumerfinance.gov/f/documents/cfpb_judicial-vacatur-_technical-amendment_2022-12.pdf. You can also access MBA’s LC-20-22 discussing this issue at: https://www.minnbankers.com/MBA/Compliance/LC_Bulletins/2022/LC2022.aspx.

Mortgage Lending

Q: Our bank received a strange letter and Affidavit of Facts: Verification & Validation of Debt regarding a mortgage via certified mail. The letter and affidavit are nonsensical mentioning civil sovereignty and referencing the UCC, FDCPA, FCRA, GAAP and other federal violations. Signed “With Peace and Honor In Good Faith and Clean hands, John:Doe [Beneficiary] Without Prejudice U.C.C. 1-308”. The bank does have a mortgage with this individual. Should we ignore this or respond in some manner?

A: This appears to be a “sovereign citizen” situation. Although the letter and affidavit appear to be a bunch of nonsense, the sender is a mortgage loan customer, so it is also likely a written request for information under Regulation X. See 12 CFR 1024.36. This regulation mandates that a bank provide a written acknowledgement within five business days of receipt of a written request. The actual investigation and written response are required within 30 business days, but information about the owner or assignee of the mortgage is required within 10 business days. See 12 CFR 1024.36(d)(2). There are some exemptions for duplicative requests, irrelevant information, and others. See 12 CFR 1024.36(f). A bank should respond with the acknowledgement of receipt and perhaps the fact that the mortgage loan has not been sold and give any specific contact information for making further inquiries. It would be prudent to have an attorney in the loop on the activity since it may be headed for collection/foreclosure.

Q: Our bank wants to ask mortgage applicants to include their paystubs and recent tax returns when they submit an application. Can we do that?

A: Banks cannot require this until a bank has received the application and sent out the early disclosures, but a bank could ask for it, under Regulation Z in 12 C.F.R. § 1026.19(e)(2)(iii) and Regulation X in 12 C.F.R. § 1024.7(a)(5). Requiring this as part of the application before the disclosures have been sent would be a hindrance to applying for credit. This limitation applies to loans secured by real estate. It doesn’t apply to commercial loans.

Q: The bank has a mortgage customer who obtained cheaper homeowners insurance, and they called to ask whether the bank is able to change the monthly escrow account payment. But the problem is that the bank already did the escrow account analysis for this upcoming computation year, so can we do another escrow account analysis at the request of the borrower?

A: Regulation X talks about the requirements for escrow accounts. Basically, there’s an initial escrow account analysis done when the account is established, and then after that a bank will conduct an escrow account analysis to determine if a surplus, shortage, or deficiency exists at the end of each computation year. But sometimes borrowers want banks to do another analysis so that they are not paying as much per month into it for their homeowners insurance. A bank isn’t locked into only doing one analysis. Under 12 C.F.R. § 1024.17(f)(1)(ii), the bank is allowed to conduct another escrow account analysis at some other point in that computation year.

Q: We’ve got a customer who wants to purchase a lake home, but they asked if they could purchase it under an LLC. Can they do that?

A: Yes, an LLC can purchase property in Minnesota. This is not unheard of to be done by wealthy individuals. The reasons for doing this vary, and there may be more than one reason. The LLC member may desire to rent out the lake home, or the member may desire to maintain it as a second home that only they occupy. Another possible reason that this person wants to purchase a lake home under an LLC is to attempt to shield that particular asset from any creditor claims that person may have individually or from other business ventures. There may also be some tax reasons involved as well, although that’s a question best left to the CPAs. But to the question itself, yes, LLCs can purchase these assets the same as they can for other buildings and assets. Regardless of what they do with it (like if the owner plans to occupy it as a primary residence), the important thing for the bank is that it can make that loan. It would not be subject to TRID. Regulation Z in 12 C.F.R. § 1026.3(a)(2), and 12 C.F.R. § 1026.3(a) comments 9 and 10 cover this situation and states that it is an exempt transaction as business, commercial, agricultural, or organizational credit.

Payable on Death (P.O.D.) Accounts

Q: We have a customer that wants to set up a single-member LLC account with a trust as POD beneficiary. Can we do this?

A: No, payable-on-death accounts don’t work for organizations because they don’t die. Even if the single member of an LLC dies, the LLC continues to exist. It would work for a sole proprietorship account since they are really individual accounts as there is no separate legal entity.

Q: A customer passed away recently. He had a consumer loan and a POD account. Is the bank able to set off the POD account for the amount he owed on the loans?

A: Note language usually states that death is an element of default and authorizes the bank to accelerate the loan. If that is the case, a bank generally can call a loan due and set off an account owned by the customer. While the money in a POD account automatically belongs to the POD beneficiaries upon the owner’s death, Minnesota law makes an exception for bank setoff. Minn. Stat. 524.6-212 specifically allows financial institutions to set off against multi-party accounts such as POD accounts and joint accounts at the death of a customer. The statute states that “if a party to a multiple-party account is indebted to a financial institution, the financial institution has a right to set off against the account in which the party has or had immediately before death a present right of withdrawal. The amount of the account subject to setoff is that proportion to which the debtor is, or was immediately before death, beneficially entitled, and in the absence of proof of net contributions, to an equal share with all parties having present rights of withdrawal.” As you can see, set off is authorized, but it is limited to the amount of the account that the deceased was entitled to before his death.

Q: We have an account that is set up as a joint account where both the owners have passed away and there is no POD beneficiary listed. There is now a trustee providing the bank with records of an irrevocable trust wanting to claim access to the funds per the trust. This account was not titled in a trust’s name and the owners never listed a trust as POD. Would the funds in the account then belong to the owner’s estate? 

A: An account must be titled in the name of the trust to be part of the trust, either as the owner or as the POD beneficiary. A trustee cannot access funds that are not in the trust. Since the funds are not part of the trust, it would need to be treated as an individual account and the funds would be part of the deceased’s estate. If the estate is under $75,000, a small estate affidavit could be used to avoid probate, otherwise the court-appointed personal representative of the last living owner of the joint account is the only one who can access the funds.

Q: We have a customer who just passed away. She had POD beneficiaries listed on her deposit accounts. Her son is the appointed personal representative. Can her son, as personal representative, change the POD beneficiaries listed on the accounts?

A: It sounds like the POD beneficiary is doing a “qualified disclaimer” so that a potential interest in property they would have, otherwise passes them by as if they were never added as a POD beneficiary and are therefore not taxed on it. For a disclaimer to qualify, it must meet four requirements under Internal Revenue Code Section 2518:

1. The disclaimer must be in writing. There is no specific form or template.
2. The transferor of the property must receive the disclaimer within nine months from the property transfer date. If the disclaimant is under 21, the disclaimer must be made within nine months after reaching that age.
3. The disclaimant has not accepted and explicitly refuses the interest or any of its benefits.
4. By refusing the interest, the property passes without any direction from the disclaimant to the decedent’s spouse or to another individual designated by law.

Q: We just had a customer pass away and he had his five children as POD beneficiaries on his accounts. Unfortunately, one child passed away on the same day. What do we do with the deceased child’s share? 

A: Generally, the beneficiary must survive the accountholder by 120 hours (five calendar days) to qualify as an heir and for the POD to be effective. See Minn. Stat. 524.2-104. If the beneficiary dies within 120 hours of the accountholder, then the beneficiary is deemed to have pre-deceased the accountholder and will not qualify as a POD. A certified or authenticated death certificate “is prima facie proof of the fact, place, date and time of death and the identity of the decedent.” See Minn. Stat. 524.2-107(1). These rules could be altered, subject to certain limitations, by a will. See generally Minn. Stat. Ch. 524. The heir(s), or any other interested parties, would need to provide any will that purports to change the typical manner of descent for the property. See Minn. Stat. 524.6-204(d).

Q: We have a customer who just passed away. She had POD beneficiaries listed on her deposit accounts. Her son is the appointed personal representative. Can her son, as personal representative, change the POD beneficiaries listed on the accounts?

A: POD accounts are payable to the beneficiaries upon the account holder’s death. They are not part of the estate, and the personal representative generally doesn’t control them. However, Minnesota law allows a will to alter a POD designation, so a personal representative could have the power to change the beneficiaries if the POD account was specifically mentioned in the will to be handled in a different way. See Minn. Stat § 524.6-204(d). Also, third parties, such as banks, are protected by statute when they deal with a personal representative in good faith. See Minn. Stat. § 524.3-714(a).

Q: Our customer had a payable on death (POD) account, but the individual listed as the POD beneficiary died before the account holder, so to whom do we pay the account?

A: According to Minn. Stat. § 524.6-210, a POD account may be paid out to the original account holder when requested by the living account holder. If the account holders die, and the POD payee is still alive, the account will be paid to the POD payee. If the account holder dies, and the POD payee listed on the account dies after all original account holders, the POD account may be paid out to the POD payee’s personal representative or heirs. Proof that the POD payee survived the account holders (i.e., died after all the original account holders) is required. When the situation arises that a POD payee died before the original account holders, and the original account holders did not designate a new POD payee, the account can be paid out to the original account holder’s personal representative or heirs. Proof that the original account holder survived (i.e., died after) all other individuals listed as either original account holders or POD payees is also required.

Q: Can a customer include contingent beneficiaries on a deposit account?

A: There’s no law or regulation that says the bank may not accept a contingent beneficiary. However, the responsibility falls largely on the bank. The bank would be in charge of managing the primary and contingent beneficiaries and knowing which beneficiary was entitled to the account upon the death of the account owner. The bank may find that this is a bad idea because of the added responsibility and potential liability. Customers often try to do their estate planning via POD designations at the bank. However, a POD is a limited tool and anything more complicated, such as contingencies, may be better left to other estate planning tools.

Q: Can a single-member LLC have a POD beneficiary on an account?

A: No, this would not be permissible. Even though there is just a single-member in this type of organization, it is still a legal entity and therefore can never die. Death of the member causes the “dissociation” of the member but not the death of the LLC.

Q: Can a sole proprietorship account include a trust as a payable on death beneficiary?

A: Yes. Because sole proprietorships are owned by a natural person who can die, they can have POD beneficiaries listed. A POD beneficiary can even be an entity other than a natural person (such as trust or a corporation) even though they could not list a POD beneficiary on their own accounts.

Power of Attorney

Q: If a principal appoints two attorneys-in-fact on the same power of attorney form, must they act jointly or can they act independently?

A.  A principal may appoint multiple attorneys-in-fact in a single power of attorney form. The principal must check a box on the statutory short form power of attorney to indicate whether the attorneys-in-fact may act independently or must work jointly. If they are authorized to act independently, then either may deal with the bank as attorney-in-fact. If they are required to act jointly, then the bank may not act without authorization from all attorneys-in-fact named on the form.

Q: A customer has two powers of attorney on file with the bank, with different dates and different attorney-in-facts listed. The bank is not aware of any revocation. Which one is valid?

A.  A principal may have more than one effective power of attorney form, giving authority to more than one attorney-in-fact. Therefore, there may be multiple attorneys-in-fact acting on the principal’s behalf at any given time. A bank could deal with any of the appointed attorneys-in-fact individually, unless the bank had knowledge that one of the powers of attorney was revoked and is no longer valid.

Privacy

Q: We have a personal representative who has requested account statements for the decedent’s accounts. Are we able to provide the statements? What if it was a POD account where the funds were paid out to POD payees and then the account closed?

A: A personal representative stands in the shoes of the decedent in order to finalize the decedent’s estate. From anyone’s point of view, such as a bank, the personal representative is literally the decedent. This means that the personal representative is entitled to the same information that the deceased individual would have been entitled to. Thus, the personal representative is able to obtain account statements. There are a number of reasons why they would need this information, whether it be for taxes or to track down other assets, and to account to the probate court. In the scenario where an account is a POD account that has been paid out to the POD payee, the personal representative is still entitled to obtain account statements and to be made aware of the identity of the POD payee. A POD payee may be held accountable to the personal representative to return the funds paid in the event that the estate has insufficient assets to pay other costs.

Probate

Q: The bank has a customer whose father was a resident of Texas and passed away. The son lives in Minnesota and, for convenience, wants to set up an estate account in Minnesota, even though the deceased father had no assets in Minnesota. The son was appointed executor by a Texas court. Can the son bring the bank the letters testamentary from Texas or does the son need to file here in Minnesota?

A: Texas appoints executors through their probate court the same as Minnesota. In order to establish an estate account in Minnesota, the executor will file in Minnesota to show their foreign appointment. See Minn. Stat. §524.4-204. After 60 days from a foreign personal representative’s filing, the executor or personal representative will have all powers of a local personal representative and be able to open and maintain an estate account. See Minn. Stat. §524.4-205.

Q: Is a personal representative able to have access to old statements?

A: Yes. The personal representative is charged with taking inventory, appraisement, and possession of the decedent’s estate. Granting access to the decedent’s statements provides the personal representative with a clear picture of the property in the estate.

Q: How does a divorce affect the rights of a POD beneficiary? For example, if the POD beneficiary was the ex-spouse at the time of the account holder’s death, is the POD beneficiary still valid?

A: Minnesota Statute § 524.2-804 applies to this scenario. It states that a divorce revokes any beneficiary designation unless the POD document says differently. However, the statute also states that the bank is likely protected if it has not received written notice of the divorce.

Regulation E 

Q: One of our customers claims they sent money to someone through Venmo but didn’t receive the item they were paying for. Now the customer is disputing the charge. Is this an unauthorized transfer that the customer is not liable for, or do we need to resolve an error?

A: This scenario has become very common with the increased usage of person-to-person payment apps like Venmo and Zelle. From a bank’s perspective, the important fact here is that the customer initiated the transfer, not that they did not receive whatever good or service for which they were paying. Regulation E applies to unauthorized transfers and errors, which is what the customer is attempting to allege has occurred. The answer depends on whether what happened is an “unauthorized electronic fund transfer” or an “error,” both of which are defined terms in Regulation E and require the bank take specific actions to respond to them.

 

Under 12 C.F.R. § 1005.2(m), an “unauthorized electronic fund transfer” is an electronic transfer from a consumer’s account, made by someone who is not the customer, initiated without actual authority to make the transfer, and from which the customer does not obtain any benefit. While there are some exceptions to this, they are not relevant to this fact pattern. It is common for customers to allege that what has occurred in this situation is an unauthorized transfer. If that was correct then the customer’s liability may be limited according to the provisions of 12 C.F.R. § 1005.6—$50, $500, or unlimited, depending on when the customer discovered and reported the unauthorized transfer. The customer here stated that it was the customer who initiated the transfer, not another person. While they received no benefit for the transfer, which is certainly unfortunate, it is missing the component that it be made by someone else and without actual authority. It does not then meet the definition of an unauthorized transfer because the customer initiated it. Therefore, the customer’s claim does not fall within the section covering the consumer’s limited liability for unauthorized transfers.

For error resolution, 12 C.F.R. § 1005.11(a)(1) defines an “error” to include unauthorized transfers, incorrect transfers, computational errors, and so forth. As noted above, this situation does not constitute an unauthorized electronic funds transfer. The customer did not allege the wrong amount was transferred, or that it was not a preauthorized transfer, or that there was any other reason the transfer through Venmo could be found to be an “error.” Thus, the transfer is also not an error under Regulation E.
Bankers often then ask what the customer’s recourse is going to be. In these cases, the customer should review the terms and conditions for Venmo or Zelle to see if there are provisions in the user agreement that cover this situation. The other option is that the customer may have a claim against the person to whom the customer sent the money, such as for breach of contract for example.

Scams

Q: We have a customer who is 20 and we feel she is caught up in a scam and she may even be in danger.  Is there someone we can contact?  Do we have that right? She came in to do a wire last week to her “fiancé” in Africa. We refused to do it because we believe it is a scam. Then she came back in and wanted to do a wire to a friend who was going to purchase a ticket to Africa for her; we did do this wire. Now today she came in and withdrew most of her money and said she is going to Africa on the 16th of March. Staff is very worried about things like sex trafficking, etc. We are worried that a SAR won’t be looked at soon enough. Is there someone else we can contact to check on this person?

A: Banks can proactively reach out to law enforcement when there are concerns.  An exception to state privacy rules exists in Minnesota Statute, 13A.04, which states “nothing in this chapter precludes any financial institution, or any officer, employee, or agent of a financial institution, from notifying a government authority that the institution, or officer, employee, or agent has information which may be relevant to a possible violation of any statute or rule or the financial exploitation of a vulnerable adult and providing access to financial records relevant to the possible violation or financial exploitation.” There is also an exemption in Regulation P “to protect against or prevent actual or potential fraud, unauthorized transactions, claims, or other liability.” Banks in these situations will often reach out to local law enforcement and/or Martin Fleishhacker at the Department of Commerce.

Taxes

Q: We have accounts for a customer who is deceased with beneficiary designations, and the beneficiaries don’t want the money. For example, she listed an IRA beneficiary, but this person says she does not want the money from the IRA. She instead thinks that we should pay the money to someone else. Can she do that? What about for a P.O.D. account?

A: Technically yes, but the issue here is whether that would be a qualified disclaimer or not of the inherited IRA or P.O.D. account. It’s really a tax question. If a beneficiary did that then this person may have to pay tax. If there is a beneficiary listed and that person does not want the money, then he/she needs to do a “qualified disclaimer” to not be liable for any tax. In simple terms, they are disclaiming any interest in the property by saying, “I do not want this.” This is logical because, although a decedent may want property to pass to specific individuals, there is no rule that says someone must accept property offered to them. A qualified disclaimer under I.R.C. § 2518(b) is an irrevocable and unqualified refusal by someone to accept property 1) made in writing; 2) which the transferor of the property receives within nine months of when the transfer creating the interest is made or the person turns 21; 3) the person didn’t accept the interest or any of its benefits; and 4) because of that refusal the property passes without direction by the individual to the decedent’s spouse or to someone who is not the person making the disclaimer. The problem in the question above is that the person is trying to direct who else should receive the funds in the IRA or P.O.D. account. Doing so is providing “direction” so it would not meet the definition of a qualified disclaimer.

Q: Does the bank need to use Form W-4MNP for IRA distributions?

A: Beginning with distributions from January 1, 2022, banks need to have IRA account holders complete form W-4MNP for withholdings from distributions on IRAs. At the federal level, the IRS requires this with Form W-4P. In 2022 there was much confusion about using this form because the directions for it did not say it was to be used for IRAs. The form is titled for pensions and annuities, and the IRS’s form says to use it for IRAs as well. The Minnesota form did not say this; however, the Minnesota Department of Revenue changed this with the 2023 form that explicitly states it is also to be used for IRA distributions as well.

Trusts

Q: We have a customer who would like to open a Testamentary Trust. The only piece of documentation provided was the EIN and a paper stating the name of the trustee. Per our policy, to open a trust, we need the first page of the trust document, the page that shows the trustee and successor trustee and the last page signed by grantors and TIN.  We are not sure how to open this trust because the attorney is stating there is no trust documentation since this was included in the will. Wouldn’t we then need a copy of the will showing how this trust is to be set up?

A: Testamentary trusts are created by language in a last will and testament, so there is no separate trust document. Many banks choose not to get copies of trust documents in general because they don’t want knowledge of the trust document’s contents to be imputed to the bank. The same would be true of a will creating a testamentary trust. Instead, those banks require a certificate of trust form. The certificate of trust form should have all the information that a bank needs to know and there are protections built into the law for those who rely on it.  A settlor or trustee completes the form and swears to the truth of its contents. Minnesota Statutes 501C.1013 states that “a third party may rely upon a certificate of trust signed by any settlor or trustee.” The Minnesota Department of Commerce has a sample certificate of trust form on its website that customers can use.

Q: Can the trustee of a trust delegate their authority to the trustee’s attorney-in-fact if there is a validly executed power of attorney that lists “all powers?”

A: No, the trustee may not delegate this authority unless the trust document specifically allows the trustee to do so. Even if the power of attorney document states that the attorney-in-fact has the power to conduct “fiduciary transactions,” the trust must still allow the trustee to delegate. See Minnesota Statute § 523.24 subd. 9, which states “nothing in this subdivision authorizes delegation of any power of a fiduciary unless the power is one the fiduciary is authorized to delegate under the terms of the instrument governing the exercise of the power or under local law.”

Unclaimed Property

Q: Is an automatically renewing certificate of deposit subject to the unclaimed property rules as other abandoned accounts?

A: Yes, a CD that automatically renews is still subject to the same rules that apply to other abandoned accounts at the bank, like a checking account. This means that a bank will follow the same procedures for escheatment to the State as it would for other deposit accounts. However, the three-year waiting period for when an automatically renewing CD begins to pass is the date of first maturity. Even though the CD renews itself this does not restart the three-year period. It is unique to CDs, though, that if the time for when the bank would send the deposit to the State falls within the CD’s time deposit period, Minnesota does not want banks to break a CD early in order to send it to the State’s Unclaimed Property Division. What will happen instead is that the bank will wait until the next scheduled renewal period before escheatment. For example, if the CD’s term is five years, the three-year period begins when it renewed, but because three years falls within the five-year timeframe the bank will wait until it matures again in year five before sending it to the State. This process assumes the owner does not take an interest in the CD and that the bank follows its due diligence requirements.

Uniform Transfers to Minors Act (UTMA)

Q: We have an individual who is the custodian of several Uniform Transfers to Minors Act (UTMA) accounts at our bank. This person stated that he no longer keeps in touch with the minors, all of whom are his nieces and nephews. He wants to withdraw all the funds and take back the money that he gave to them in these accounts. Can he do that?

A: No. When this individual opened these accounts and transferred his money to them, the funds became property of the minors, which means that the funds in the UTMA accounts belong to each of the minors. A custodian of a UTMA account is only allowed to do that which may be necessary to take care of the funds for the minors’ benefit. Removing the funds for the custodian’s purposes does not benefit the minors. Custodians do have significant powers over the account, which might include withdrawing the funds to transfer to another UTMA account at another bank. However, the custodian and/or individual that gave the money to the minors cannot come back to the bank at some later point in time to take back the funds.

Respossession

Q: We have a customer who is in default on a car loan. Before we repossess the car, do we need to provide a notice of default and what is the timeline for providing that notice?

A: Minnesota is not a right to cure state when it comes to consumers being in default on car loans. By contrast, there is a notice and right to cure for being past due on a mobile home. But when it comes to a car loan, there is no requirement in Minnesota that the lender provide a default notice and right to cure to consumers. Minnesota allows lenders self-help, meaning they are able to repossess someone’s vehicle so long as they do not breach the peace in the process. However, there could be other reasons why a bank may consider providing a notice. For one, it may work out that the borrower will pay the past due amounts, which can be much easier for the bank than just repossessing the car. It could be a contractual provision in the loan agreement where the bank has promised to provide such a notice. Or perhaps in a prior course of dealing with previous delinquencies with the borrower the bank has provided a notice, and it may be prudent to still provide that information.