Compliance Solutions quarterly newsletter — September 2024

Deposit

EFTA amendments proposed to combat payments fraud

The Protecting Consumers from Payment Scams Act was introduced in both the U.S. Senate (S. 4943) and House of Representatives (H.R. 9303) in August 2024. This proposed legislation, which would amend the Electronic Fund Transfers Act (EFTA), is intended to provide better protections for consumers who are harmed when they make payments. According to the bill's sponsors, one of the key reasons for introducing the legislation is to combat growing fraud stemming from the use of peer-to-peer payment services. However, it would also shift more liability and monetary burden to financial institutions.

Financial institutions will be required to modify initial funds availability disclosures and deposit hold notices to reflect the adjusted dollar thresholds and notify account holders of these changes. Additionally, they will need to ensure that corresponding system updates are made to align with the changes.

The proposed amendments would:

• Protect consumers from liability when they are fraudulently induced to initiate a transfer to a bad actor;
• Require shared liability for unauthorized or fraudulent payments between the consumer’s financial institution and the financial institution that receives the funds, with the discretion to include other entities that materially help facilitate payments;
• Clarify that consumers are protected from unauthorized charges when they initiate wire transfers and electronic transfers authorized by telephone call;
• Protect consumers when they make a mistake (e.g., in amount or recipient of transfer) or if they do not receive goods or services purchased; and
• Ensure error resolution processes are followed if a consumer’s account is frozen or closed unless access is denied due to a court order, law enforcement, or the consumer obtained the funds through fraudulent means.

We will continue to monitor and provide updates on these bills as they move through the legislative process.

Final RMD regulations issued with additional new proposed regulations

The Department of the Treasury and the Internal Revenue Service issued regulations on July 19, 2024, updating the required minimum distribution (RMD) rules for qualified plans, section 403(b) annuity contracts and custodial accounts, individual retirement arrangements (IRAs), and eligible deferred compensation plans under Internal Revenue Code Section 457.

The final regulations reflect changes made by the SECURE Act and the SECURE 2.0 Act impacting retirement plan participants, IRA owners, and their beneficiaries. At the same time, Treasury and IRS issued new proposed regulations, addressing additional RMD issues under the SECURE 2.0 Act.

These final regulations are effective January 1, 2025. Some of the key takeaways from the final regulations are as follows.

• The IRS confirmed the hybrid RMD/10-Year Rule interpretation meaning that annual RMDS, once formally begun, must continue regardless of whether the 10-Year payout requirement is applicable.
• IRA providers are off the hook for some administrative requirements. Under the proposed regulations, all plan administrators as well as IRA providers were required to obtain verification of chronic illness and disability for a beneficiary to qualify as an Eligible Designated Beneficiary (EDB). The final regulation retained the requirements for plan administrators but eliminated the requirement for IRA trustees, custodians, and issuers.
• There are increased options and flexibility for trust beneficiaries to include see-through trust situations that do not involve any disabled or chronically ill beneficiaries while also decreasing IRA provider responsibility for those situations that involve trust beneficiaries. Previously, IRA providers were required to gather documentation concerning trust beneficiaries for a trust beneficiary to qualify for “See-Through Trust” status, this requirement has been eliminated.
• There is greater flexibility provided for spousal beneficiaries. As before, a sole spouse may delay until decedent would have attained RMD age to begin distributions, but what’s new is that based on when the spouse beneficiary begins RMD, the spouse may be able to use the Uniform Life Table (vs. Single life expectancy). They also, eliminated the deadline on the option for a spouse to “treat as own” (via transfer) but expands the “hypothetical RMD” restriction to include scenarios involving both transfers and rollovers.
• There are also new interpretations involving Year-of-Death RMDs and RMD restrictions for rollovers. The deadline for avoiding excess accumulation penalty has been extended until the later of the beneficiary’s tax return due date, or the end of the year following year of death. As it relates to RMD restrictions for rollovers the IRS stated that in situations where RMD aggregation is permissible (e.g., IRAs), no distribution from an IRA is rollable until the aggregate RMD amount has been satisfied.

We are continuing to review this 260-page guidance and will provide updates on what changes to the solution may be necessary in response to the final rules.

Question of the quarter

Question: We allow new accounts to be funded by originating ACH debits through our financial institution’s online banking service. The availability of the initial deposit is delayed for a short period of time (e.g., three business days) to ensure the transaction is not fraudulent. Are we required to address this in our Funds Availability Policy Disclosure?

Answer: No. Regulation CC's disclosure requirements apply to deposits made by cash, check, or electronic payment. The term “electronic payment” is defined to mean a wire transfer or an ACH credit [Regulation CC § 229.2(p)]. The Commentary on the definition of “electronic payment” further explains: “ACH debit transfers, even though they may be transmitted electronically, are not defined as electronic payments because the receiver of an ACH debit transfer has the right to return the transfer, which would reverse the credit given to the originator.” Since deposits via ACH debits are not considered electronic payments for purposes of Regulation CC, they are not addressed in the Funds Availability Policy Disclosure.

Lending

The demise of Chevron Deference

In June of 2024 in Loper Bright Enterprises v. Raimondo the United State Supreme Court overturned a decades-old legal doctrine known as “Chevron Deference.” While this doctrine likely means little to those outside the legal sphere, over the coming years the impact of it being overturned will be felt by many industries, including the finance, lending, and banking world.

The Chevron Deference doctrine is a legal concept that arose from the Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. in 1984. The doctrine essentially said that if a government agency had interpreted a law or statute a certain way and Congress hadn’t directly addressed the issue in the legislation and the agency’s interpretation was a reasonable or permissible interpretation of the statute then the courts must defer their own interpretation of the statute in favor of accepting the agency’s interpretation of that statute. Administrative agencies were now free to interpret vague sections of statutes and laws in a way that generally favored their goals and so long as the interpretation was a somewhat permissible construction of the statute and courts were bound to give deference to that interpretation, even in instances where the court itself would come to an entirely different interpretation of the statute.

This doctrine became a pillar of American administrative law over the ensuing decades as Congress would go on to pass more laws vesting administrative agencies with broadly defined tasks and leaving it up to the agencies to interpret the minutia of how to best achieve those tasks. During this time courts struggled to apply the Chevron doctrine in a consistent manner which resulted in a dense and conflicting body of case law. Chevron had become a high hurdle to overcome for parties that wanted to bring challenges to agency interpretations of statutes.

One example of this doctrine affecting consumer finance is the definition of an “applicant” under the Equal Credit Opportunity Act (“ECOA”). Circuit courts have struggled with interpreting this on a few different occasions. For instance, the 7th Circuit Court has recently wrestled with deciding if a “perspective applicant” is an “applicant” under the ECOA definition. Consumer Fin. Prot. Bureau v. Townstone Fin., Inc., 107 F.4th 768 (7th Cir. 2024). Defendants in that case argued that “applicant” could not be extended to include “prospective applicants” while the CFPB argued that Regulation B provided it did include perspective applicant and that their interpretation of “applicant” was entitled to Chevron deference from the courts. In an unrelated case the 6th Circuit court took on the question of whether a guarantor is an “applicant” under the ECOA statute, even going as far as to outright disagree with the CFPB’s Reg B. interpretation that a guarantor was not an applicant, but nonetheless giving the agency interpretation Chevron deference and ruling in its favor. RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380 (6th Cir. 2014).

The issue at the core of the Loper Bright case revolved around a provision of a statute that said that fishing vessels may be required to “carry” federal monitors from the National Marine Fisheries Service (“NMFS”) on board to enforce agency regulations. The NMFS eventually interpreted this provision as a requirement that the fishing vessels not only must carry the monitors but also pay their wages as well. The Supreme Court ruled that Chevron Deference previously given to agency interpretations was incongruent with the Administrative Procedures Act and they were not bound to follow the agency interpretation. The court ruled that making the vessels pay the wages of the federal monitors exceeded the statute that required the “carrying” of federal monitors. Going forward, courts are still free to consider agency interpretations as guidance, but the final interpretation of the law is to rest entirely within the domain of the judiciary, and courts are not required to defer to agencies.

This change in federal administrative law could potentially disrupt many aspects of the finance industry in the coming years. There are countless instances where regulators such as the Federal Trade Commission, Consumer Financial Protection Bureau, Nation Credit Union Administration, and numerous other federal regulators have made agency interpretations of the statutes that govern the financial industry. Now that agency interpretations hold significantly less weight in the outcome of a dispute it is lenders and industry groups affected by such interpretations will be more likely to challenge those interpretations in court.

Future advance clauses and continued lien perfection

In today’s competitive marketplace, it is common for lenders to seek process efficiencies in efforts to reduce costs and conserve resources. While in pursuit of these efficiencies, some lenders may choose to rely on previously perfected security interests when documenting new transactions. However, lenders should exercise caution when engaging in this practice or risk finding themselves unsecured.

Such was the case in the matter of Fortunato Carraman, Jr. et al v. TitleMax of Texas, Inc. which was presented to the U.S. Bankruptcy Court for the Western District of Texas, San Antonio Division earlier this year. In that case, the court was asked to determine if TitleMax’s security interest in the Carraman’s vehicle was properly perfected when it extended a second loan to the Carramans, or if its security interest was extinguished at the time it extended the second loan. Although the case was relatively complex, below is a summary that provides the high points and key takeaways.

The facts

The Carramans obtained a loan from TitleMax in the amount of $5,571.00 that was secured by their vehicle (“First Loan"); notably, the First Loan did not include a future advance clause. TitleMax perfected its security interest for the First Loan in the borrower’s vehicle by noting its lien with the Texas Department of Motor Vehicles (DMV).

Less than one month later, the Carramans obtained another loan from TitleMax (“Second Loan”) in the amount of $9,988.00 that was also secured by the same vehicle, fully satisfied the First Loan, and increased the borrower’s obligation to TitleMax by $4,417.00. Instead of noting its lien with the Texas DMV in conjunction with the Second Loan, TitleMax elected to rely on its previously noted lien.

The claims

TitleMax argued that the Second Loan was an “extension and renewal” of the First Loan, or that the Second Loan was a “refinance”; that the First Loan was properly perfected and was never satisfied; and, because the First Loan was not satisfied, it was not required to “re-perfect” its security interest when granting the Second Loan.

The Carramans argued the Second Loan was neither an extension and renewal, nor a refinance of the First Loan, and that it was a new loan in an amount greater than the First Loan; that the Second Loan effectively extinguished the security interest perfected in conjunction with the First Loan, and, as a result, TitleMax was required to “re-perfect” its security interest in the collateral when extending the Second Loan; and that TitleMax’s failure to perfect its security interest when extending the Second Loan effectively rendered the Second Loan unsecured.

The issue

The ultimate issue before the court was whether the Second Loan extinguished TitleMax’s security interest perfected with the First Loan (i.e., was TitleMax required to re-perfect its security interest when it extended the Second Loan).

While the parties characterized the Second Loan differently, the court approached the matter practically: If the Second Loan fully satisfied the First Loan, the security interest perfected in conjunction with the First Loan was extinguished; if the First Loan security interest survived, that security interest secures the Second Loan.

Central to the conversation of whether the security interest perfected with the First Loan was extinguished by the Second Loan hinges on whether the security agreement for the First Loan contained a “future advance clause,” which serves to secure both the original loan amount as well as subsequent (i.e., future) advances. If included, a future advance clause will automatically perfect a lender’s security interest when making future advances.

The ruling

The court found that the security agreement for the First Loan included neither an express nor implied future advance clause; that, due to the additional funds provided, the Second Loan was a future advance for which the lien was not automatically perfected; the Second Loan fully satisfied the First Loan; the Second Loan extinguished TitleMax’s First Loan security interest; and that TitleMax’s Second Loan security interest was “unperfected and avoidable.”

The takeaways

Generally, lenders seeking process efficiencies by streamlining business rules and practices should exercise caution. Specifically, and in the context of business practice involving the reliance on previously perfected security interests when extending new credit, lenders should ensure that the applicable security agreements include the appropriate future advance language/clause (which your standard TruStage Compliance Solutions security agreement already contains) and, when in doubt, re-perfect its security interests.

Question of the quarter

Question: Do we have to disclose the introductory APR (Annual Percentage Rate) for credit card accounts in the credit card initial disclosures?

Answer: Yes. It is considered an introductory rate if you are offering a discounted rate to new applicants. Regulation Z §1026.6 and §1026.60 require that any introductory APR be disclosed in the Truth in Lending box of the Credit Card Application and Solicitation Disclosure and the Credit Card Account Opening Disclosure. You must disclose the introductory rate, how long it applies, and the APR that will apply after the introductory rate expires. When offering a discounted APR on an existing credit card account, it is considered a promotional APR, and the initial disclosure requirements as set forth in Regulation Z §1026.6 and §1026.60 do not apply.

Reminder

As we approach the last quarter of 2024, we encourage financial institutions to begin planning for any promotions scheduled for early in 2025. Providing us with details of your promotional APR now ensures adequate time to create or update your documents. This will also allow your financial institution sufficient time to review documents and make additional modifications if necessary. Your financial institution should consider its processor’s lead times to ensure that documents will be mapped and ready prior to the kick-off of a promotion. (This information may not be applicable to all financial institutions depending on their document and data processor updating procedures).