Posts
June 1, 2021–May 31, 2022
This year, attorneys Heather MacKinnon, Scott Birrenkott, and President/CEO Rose Oswald Poels submitted 16 comment letters in response to requests for comment on rulemaking affecting the banking industry.
Through this process, the WBA Legal Team was able to advocate on behalf of all WBA members for the betterment of the banking industry. From digital assets to examinations and fees, comment letters are a great opportunity for members of the banking industry to inform agencies about the impact of rulemaking and provide examples.
As part of the rulemaking process within the Administrative Procedure Act (APA), all agencies are required to allow the public an opportunity to comment on proposed rules for a prescribed period (minimally 30 days). All WBA members are encouraged to share their comments with federal and state agencies as requested. Information regarding comment letters, or WBA-created letter templates — when available — are typically shared with the membership in the Wisconsin Banker Daily. Additional rulemaking developments at the federal level are compiled in the monthly WBA Compliance Journal.
Once the public has commented, each agency must determine how to proceed given the feedback received. This year, the WBA Legal Team addressed five federal agencies and further helped inform said agencies on the impact of their proposed rulemaking.
Six Comment Letters Filed with the FDIC
Over the past year, WBA filed six comment letters with Federal Deposit Insurance Corporation (FDIC). Two of WBA’s letters commented on FDIC’s actions regarding examinations. In the first, WBA commented on the FDIC’s proposed hybrid approach to bank examinations and in the second, WBA commented on the post-examination surveys related to FDIC Safety and Soundness and Consumer Compliance examinations. In each letter, WBA emphasized the importance of the FDIC establishing consistent coordination and communication with banks.
Three Comment Letters Filed with the CFPB
WBA wrote three letters this year to the Consumer Financial Protection Bureau (CFPB). Most recently, WBA responded to CFPB’s concerns regarding products which feature “junk fees,” assuring CFPB that the Wisconsin financial services marketplace is competitive, featuring a diverse range of high-quality, convenient, innovative, and competitively priced products and services. Additionally, WBA highlighted that, despite CFPB’s concerns, the market is highly regulated, and that further rulemaking is unnecessary as fees are already subject to disclosure requirements.
Four Comment Letters Filed with the FRB
This year, WBA also filed four comment letters with Board of Governors of the Federal Reserve System (FRB). In one of the letters, WBA addressed FRB’s request for comment regarding the evaluation of account and services requests. WBA acknowledged FRB’s attempt to create consistency, but ultimately expressed concern with allowing access to the payment system by entities with little or no regulatory oversight, lack of protection, and minimal capital and liquidity requirements, among others. WBA proposed that FRB establish standards or requirements for users, maintain ongoing review of those involved, as well as coordinate an FRB-led evaluation committee.
One Comment Letter Filed with the HUD
In late May, WBA expressed support of the Department of Housing and Urban Development’s (HUD) proposal to extend a term for loan modifications. The modification would allow mortgagees to modify Federal Housing Administration (FHA) insured mortgage loans by recasting the total unpaid amount due for a new term limit of 480 months — an increase from a term limit of 360 months; allow FHA-loan borrowers similar flexibility and benefits as is available for Fannie-/Freddie-loan borrowers; and creates yet another tool for Wisconsin’s financial institutions to use in their continued work to help find solutions for struggling borrowers to retain their homes.
One Comment Letter Filed with the OCC
In a letter filed with the Office of the Comptroller of the Currency (OCC), WBA was able to comment on a final rule to adopt a new Community Reinvestment Act (CRA) framework. This regulation facilitated the issuance of joint CRA to an interagency basis which would allow for greater coordination on all CRA ruling between the OCC, FRB, and FDIC for the benefit of banks serving low- and moderate-income communities.
One Interagency Comment Letter Filed
Some rulemakings are issued on an interagency basis. This year, WBA commented on the FRB, FDIC, and OCC’s proposed interagency guidance on third-party relationships related to risk management. In the letter, WBA commented that this effort would promote consistency in their guidance as well as clearly articulate risk-based principles. In addition, WBA identified several ways Wisconsin banks will be impacted by the new guidance during final implementation.
Conclusion
Industry comment is a critical aspect to the rulemaking process. It is an opportunity for the industry’s voice to be heard, and it is important that the agencies hear from banks about how rulemaking affects you. WBA welcomes feedback on comment letters because it is key that we, and the agencies, hear directly from members.
For more information on the rulemaking process, comments, and upcoming rules, contact the WBA Legal Department at wbalegal@wisbank.com. For a full list of the comment letters filed during the 2021–22 fiscal year, visit www.wisbank.com/advocacy/comment-letter-library.
*This article has been updated from previous published editions
Last year, President Joe Biden signed a bill on June 17, 2021, to create Juneteenth National Independence Day. The new law amends 5 U.S.C. 6103(a) to add “Juneteenth National Independence Day, June 19” as a specified legal public holiday. While this created a bit of a stir within the lending industry when the bill was signed so close to the date of the new holiday, banks have now had a year to prepare for its second observation.
Banks will have determined the extent to which they will observe the new federal holiday, including whether offices will remain open. As with any time a bank closes, it should consider what functions will remain available. Among other things banks should ensure they have provided adequate notice, consider cut-off times and prompt crediting of payments, access to safe deposit box operation, funds availability schedules, and any impact this might have on lending operations such as closing and rescission rights.
For example, as a result of the new law, the date of June 19 is not a business day under Regulation Z. Because June 19 is a Sunday this year, the holiday will be observed on the following Monday, June 20. For purposes of rescission under Reg Z, a “precise” business day test applies, meaning, the precise day is excluded from the definition of “business day” while the observed holiday (in this example, June 20) is a business day.
In summary, banks should consider if and how they have decided to observe Juneteenth this year and how it will affect their business functions. In addition, banks should consider the regulations with a definition of “business day” to determine how it might affect compliance considerations. Each regulation should be considered individually, as they define “business day” differently.
With the mandatory compliance date for the new, revised General QM loan definition just on the horizon, banks should ensure their implementation plans are in place. In terms of a quick-look at dates, CFPB issued a final rule on December 29, 2020 (Final Rule) which amends the General QM loan definition in Regulation Z. The Final Rule included a mandatory compliance date of July 1, 2021. However, on April 27, 2021, CFPB extended that mandatory compliance date to October 1, 2022. The General QM Final Rule was effective on March 1, 2021 and, among other things, replaces the existing 43 percent debt-to-income ratio limit with price-based thresholds. As such, it presents the potential for significant changes to a bank’s mortgage lending operation.
To expand upon the new price-based thresholds with a general summary: a loan meets the revised General QM definition only if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by less than the applicable threshold set forth in the Final Rule as of the date the interest rate is set. Additionally, the Final Rule removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. Consequently, it amends the consider and verify requirements in Regulation Z and its associated commentary. First, it outlines the minimum considerations required by creditors, including, for example, the consumer’s current or reasonably expected income or assets. Second, it requires that creditors verify those considerations using reasonably reliable third-party records and reasonable methods and criteria.
Banks have likely already taken time to evaluate the categories of QMs they originate, and how the revised General QM definition may or may not affect its current loan policy and underwriting procedures. Even banks which originate Small Creditor QMs should still consider the extent to which they may or may not original General QMs. For example, does bank originate General QMs? Will it continue to do so, or will it exclusively utilize the Small Creditor QM exception, if applicable?
Given the mandatory compliance date of October 1, 2022 banks should confirm that their implementation steps are in place. Banks should prepare to fully transition current policies and procedures to conform with the new definition and consider what training might be necessary in advance of and after the transition.
As an additional resource, WBA has prepared an ATR/QM Toolkit to assist bankers.
On January 28, SBA released Procedural Notice 5000-827666 regarding SBA loan reviews of PPP Lender partial approval forgiveness decisions. The notice outlines a new process to allow PPP Borrowers to request an SBA loan review of partial approval forgiveness decisions issued by their PPP Lenders. The procedures in the notice apply to loan forgiveness decisions submitted by Lenders to SBA through both the regular forgiveness process as well as the Direct Borrower Forgiveness process. The notice is effective January 27, 2022.
The notice reiterates the process for a partial approval forgiveness decision and the steps that need to be taken by the Lender when it receives a forgiveness application from a Borrower. The notice also outlines a new process for borrower requests of SBA loan review of a partial approval forgiveness decision.
Starting from the effective date of the notice, when a Lender receives a forgiveness remittance from SBA on a partial approval decision, including where the Lender required the borrower to apply for forgiveness in an amount less than the full amount of the loan, the Lender’s post-forgiveness remittance notification must inform the borrower that the borrower has 30 calendar days from receipt of the notification to seek, through the Lender, an SBA loan review of the Lender’s partial approval decision. Within five calendar days of a Lender’s receipt of a borrower’s timely request for an SBA loan review, the Lender must notify SBA through the Platform. The Lender’s notice to SBA of the borrower’s timely request for review must include a copy of the Lender’s notice to the borrower of the reason(s) for the Lender’s partial approval decision. SBA reserves the right to review the Lender’s decision at its sole discretion.
Additionally, within 30 calendar days of the date of the notice, Lenders must notify all of their borrowers on loans that previously received a partial forgiveness remittance from SBA as a result of Lender partial approval decisions, including where the Lender required the borrower to apply for forgiveness in an amount less than the full amount of the PPP loan, that the borrower has 30 calendar days from receipt of the Lender notification to seek, through the Lender, an SBA loan review of the Lender’s partial approval decision. Within five calendar days of the Lender’s receipt of a borrower’s timely request for an SBA loan review, the Lender must notify SBA through the Platform. The Lender’s notice to SBA of the borrower’s timely request for review must include a copy of the Lender’s prior notice to the borrower of the reason(s) for the Lender’s partial approval decision. Again, SBA reserves the right to review the Lender’s partial approval decision at its sole discretion.
In either circumstance, if SBA selects the loan for an SBA loan review as a result of the borrower’s request, the borrower must continue to make payments on the remaining balance of the loan, and the loan is not deferred.
If SBA determines, as a result of the SBA loan review, that the borrower is entitled to forgiveness in an amount greater than the Lender’s partial approval decision and SBA has previously remitted a partial forgiveness payment to the Lender, SBA will remit an additional forgiveness payment to the Lender to make up the difference. SBA will issue an additional Notice of Paycheck Protection Program Forgiveness Payment (Payment Notice) to the Lender.
If the SBA loan review results in a higher forgiveness amount, but less than full forgiveness, SBA will also issue a final SBA loan review decision to the Lender. The Lender must provide a copy of the Payment Notice and, if applicable, the final SBA loan review decision, to the borrower within 5 business days of the remittance and comply with applicable requirements of the Lender Responsibilities Notice. If a borrower has begun making payments on their loan and the SBA loan review results in full forgiveness, the Lender must refund all payments made by the borrower.
If the SBA loan review results in a higher forgiveness amount, but less than full forgiveness, the lender must re-amortize the PPP loan and refund any excess payments made by the borrower.
Note: PPP Borrowers that have received full denial forgiveness decisions from their Lenders should continue to follow the process outlined in the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as amended by the Economic Aid Act (86 FR 8283, February 5, 2021), as amended.
Lenders may call the Lender Hotline at (833) 572-0502 for live assistance regarding PPP access and support, policy questions and procedures, and Capital Access Financial System (CAFS) and SBA’s Electronic Transmission (E-Tran) systems support. Questions concerning the notice may be directed to the Lender Relations Specialist in the local SBA Field Office.
By Rose Oswald Poels
In a four-three opinion filed late last week, the Wisconsin Supreme Court concluded that a “dwelling used by the customer as a residence” under the Wisconsin Consumer Act (WCA) includes a garage attached to the residential building in which the customer lives for purposes of rules that need be followed when creditors proceed with nonjudicial repossession.
On behalf of the membership, WBA participated as an amicus curie in the case of Duncan v Asset Recovery Specialists, Inc. as the case involved the interpretation of statutory language used within the repossession rules of the WCA.
The facts of the case were undisputed by the parties and include that Duncan purchased a vehicle from a dealership; she financed the purchase with a loan. Duncan failed to make payments that came due and eventually was in default. The vehicle served as collateral for the loan, and the bank followed the procedure allowed under Wisconsin law for a “nonjudicial” repossession under Wis. Stat. §425.206(1)(d). The bank met all statutory requirements to proceed with nonjudicial repossession and ultimately retained Asset Recovery Specialists to repossess Duncan’s vehicle. At the time, Duncan rented an apartment unit in a multi-story apartment building. The ground floor of the building consisted entirely of a private parking garage for tenants, and Duncan sometimes kept her vehicle in it.
The central dispute between the parties is whether Asset Recovery Specialists violated Wis. Stat. §425.206(2)(b) when they entered the garage shared by residents in Duncan’s apartment building to repossess her vehicle. The court reviewed language within §425.206(2) which provides in full: In taking possession of collateral or leased goods, no merchant may do any of the following: (a) Commit a breach of the peace. (b) Enter a dwelling used by the customer as a residence except at the voluntary request of a customer. The court focused its review on the statutory language in italics.
Although “dwelling” is undefined in the WCA, the court looked to the word’s ordinary, dictionary definition, and to the use of the word in other sections of the WCA and its Administrative Code. In taking that approach, the court concluded a “dwelling” means, at minimum, a building in which at least one person lives. In proceeding in this manner, the court concluded that “dwelling used by the customer as a residence” in Wis. Stat. §425.206(2)(b) includes a garage attached to the residential building in which the customer lives. In making its conclusion, Asset Recovery Specialists was found to have violated §425.206(2)(b) when they repossessed Duncan’s car from the parking garage of her apartment building without her consent.
While I am disappointed in the court’s opinion, I do not regret WBA’s involvement in the case as an amicus on behalf of the membership as the court’s opinion does offer clarity of the term “dwelling.” This in turn helps members further fine-tune any nonjudicial repossession procedures. Fortunately, Wisconsin’s banks are not heavily engaged in nonjudicial repossession of vehicles, so the impact of the court’s decision in this context I believe is likely minimum. That said, as the effect of the court’s decision broadens the plain language of Wis. Stat. §425.206(2)(b), banks need be aware of the court’s new interpretation to ensure there is no violation of the WCA when repossessing vehicles in a similar setting.
By Jodie Norquist, CIP, CHSP; Ascensus, a WBA Associate Member
If your financial organization administers IRAs, health savings accounts (HSAs), and Coverdell education savings accounts (ESAs), you are likely aware of the many reporting deadlines looming in the first quarter of the coming year. Performing these annual administrative tasks can be stressful. After all, compliance errors or missed deadlines can lead to costly financial penalties.
Here’s a rundown of the impending due dates, along with a brief description of the financial organization’s requirements. Please note that if any of these deadlines fall on a Saturday, Sunday, or legal holiday, the deadline is extended to the following business day.
January 31
Fair Market Value Statement
Financial organizations must provide an annual fair market value (FMV) statement to IRA owners and beneficiaries by January 31. These statements must be provided to Traditional, Roth, and SIMPLE IRA owners. They must also be provided to Traditional IRA owners that have received simplified employee pension (SEP) plan contributions. FMV statements are required for both IR accounts and IR annuities, including those that have been annuitized.
NOTE: FMV statements are not required but are recommended for HSAs.
The FMV statement must
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show the IRA’s FMV as of December 31 of the previous year;
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be presented in any type of written format;
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be provided to IRA owners even if no contributions were made to the IRA for that year; and
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contain a legend designating which information is being furnished to the IRS on Form 5498, IRA Contribution Information.
Required Minimum Distribution (RMD) Statement
If an IRA owner is age 72 or older and is required to take a distribution from an IRA for the year, the financial organization holding the IRA on December 31 of the prior year must provide an RMD statement to the IRA owner by January 31. RMD statements are not required for beneficiaries or for Roth IRA owners. This statement may be combined with the FMV statement.
The RMD statement must
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inform the IRA owner that an RMD is due for the calendar year,
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notify the IRA owner of the date by which the RMD must be taken,
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include an offer to provide a calculation of the RMD amount, upon request, and
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communicate what information is being reported to the IRS for the year.
This requirement may also be satisfied if a Form 5498 is sent to the IRA owner by January 31. If a financial organization opts to use Form 5498 to satisfy the RMD statement, then the date by which the RMD must be distributed should be entered in Box 12a, RMD date, and the RMD amount in Box 12b, RMD amount. However, keep in mind that if an IRA owner must take an RMD for the year, the financial organization is not required to report any RMD information to the IRS on Form 5498, other than the fact that an RMD is due.
SIMPLE IRA Account Statement
Financial organizations must provide SIMPLE IRA owners with an account statement by January 31. Although the IRS hasn’t provided any specific guidance on the form that the account statement must take, the SIMPLE IRA account statement must include
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the SIMPLE IRA’s account balance as of the end of the previous calendar year;
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a summary of the account activity throughout the previous calendar year; along with
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any distributions taken or fees charged against the account, as well as all contributions.
Coverdell ESA Year-End Statement
While year-end statements for Coverdell ESAs are not required, they are recommended. Before 2003, the FMV of an ESA—originally known as an Education IRA—was reported on Form 5498, IRA Contribution Information, which suggests reporting ESA FMVs as a “best practice.” The recommended deadline for providing a year-end statement to the designated beneficiary is January 31. This statement should show
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the ESA’s FMV as of December 31 of the previous year, and
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contribution activity for the calendar year.
IRS Form 1099-R
Financial organizations must report Traditional, Roth, and SIMPLE IRA distributions made during the calendar year on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to IRA owners and beneficiaries by January 31.
Distributions reported on Form 1099-R include
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rollovers,
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recharacterizations, and
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conversions.
IRS Form 1099-SA
HSA and medical savings account (MSA) owners must be sent a Form 1099-SA, Distributions from HSA, Archer MSA, or Medicare Advantage MSA, by January 31, which reports their distributions for the previous year.
IRS Form 1099-Q
ESA distributions that were taken during the previous calendar year are reported on IRS Form 1099-Q, Payments From Qualified Education Programs, which is due to recipients by January 31.
IRS Form 945 and 945-A
Financial organizations must report amounts withheld by payers to the IRS on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 is due to the IRS by January 31 of the year following the year the taxes are withheld.
NOTE: If withholding deposits are made on time and in full, the due date for filing Forms 945 and 945-A is February 10, rather than January 31.
Some payers are required to file Form 945-A, Annual Record of Federal Tax Liability, in addition to Form 945, depending upon the payer’s withholding depositor status. Monthly depositors file only Form 945, which lists the amount of nonpayroll withholding collected for each month. Semiweekly depositors, however, file Form 945-A with Form 945 to report nonpayroll withholding. Form 945-A reports the amount of nonpayroll withholding collected each day. The IRS uses Form 945-A to match the tax liability to deposits to determine whether the withholding tax liabilities have been timely deposited.
Employer SEP Contribution Notice
Employers that make SEP plan contributions for employees must notify employees of all discretionary contributions by the later of
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January 31 of the year following the year for which the contribution is made, or
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30 days after the contribution is made (potentially as late as the SEP plan sponsor’s tax return due date, including extensions).
February 28
IRS Forms 1099-R, 1099-Q, and 1099-SA
Forms to report distributions are due to the IRS by February 28 if filing on paper. The paper form must be filed with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
March 15
IRS Forms 1099-R, 1099-Q, and 1099-SA
Forms 1042 and 1042-Srm 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is filed to report tax withheld by the payor on certain payments (including IRA distributions) to foreign persons, including nonresident aliens. Form 1042 must be filed with recipients’ Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, by March 15 of the year following the year of distribution.
March 31
IRS Forms 1099-R, 1099-Q, and 1099-SA
These forms used to report distributions from IRAs, Coverdell ESAs, HSAs, and MSAs are due to the IRS by March 31 if filing electronically. Financial organizations must file electronically if there are 250 or more returns of any one type.
Wisconsin Bank Attorney: The Board of Bar Examiners of the Supreme Court of Wisconsin has approved the following completed WBA educational programs for use toward the Wisconsin mandatory Continuing Legal Education (CLE) requirement for attorneys. None of the activities listed below include Ethics and Professional Responsibility (EPR) hours or qualify for GAL education.
WBA Compliance Forum, February 2020
3.0 CLE Hours
February 18, 2020 – Stevens Point
February 19, 2020 – Wisconsin Dells
February 20, 2020 – Pewaukee
WBA Compliance Forum, June 2020
3.0 CLE Hours
June 23, 2020 – live webcast
WBA Compliance Forum, October 2020
1.5 CLE Hours
October 28, 2020 – live webcast
WBA Compliance Forum, June 2021
3.0 CLE Hours
June 22, 2021 – Stevens Point
June 23, 2021 – Madison
WBA Trust Conference, May 2021
5.5 CLE Hours
May 18, 2021 – live webcast
WBA Compliance Forum, November 2021
4.0 CLE Hours
November 9, 2021 – Wausau
November 10, 2021 – Madison
WBA In-House Legal Counsel Webinar Series
September 2021: Mergers and Acquisitions, Pre and Post M/A Issues to Consider
2.0 CLE Hours
October 2021: Troubled Business Borrowers, Deal with Real and Personal Property in a Defaulted Loan
2.0 CLE Hours
Earlier this year the CFPB issued its long-awaited proposal for implementing Section 1071 of the Dodd-Frank Act, which requires collection of credit application data for small businesses, including women-owned and minority-owned small businesses. Comments on the proposal are due January 6, 2022. WBA will be creating a draft comment letter for use by members to reply to CFPB regarding concerns and impact of the proposal on banks. WBA encourages each bank to consider submitting its own letter reflecting bank-specific information. In preparation for these comments, WBA has prepared the following considerations regarding the rule.
What specific burdens will your institution face as a result the proposal? Some examples might include:
- Costs, technology, training, staffing, customer-facing educational information needs.
- Review of application process (based upon the rule’s definition of application).
- Is the proposed “firewall” process workable for the bank?
- What sort of implementation period will be necessary?
More specifically you might consider:
- Will bank need to hire new staff (compliance, processor, etc.)?
- Technology costs, such as a new platform, or 1071 data software.
- Costs associated with updating existing systems, testing, applications, training, development of new policies and procedures, legal consultation, review of implementation, etc.
- New annual costs related to collection such as customer service, data management, resolution of errors, exam prep, etc.
In preparation for filing comments, banks should plan to provide specific estimates where possible. For example, if bank predicts new software will be necessary to capture the data, be prepared to provide CFPB with a specific cost if possible.
As mentioned above, WBA will be creating a draft comment letter for use by members to reply to CFPB. The letter will be released shortly to allow banks time to personalize their letter with bank-specific information. For more information about CFPB’s Section 1071 proposal, please see the WBA Toolkit and PowerPoint materials.
While there has not been a recent significant change to escrow requirements, it is WBA’s understanding that many banks pay taxes from escrow by December 20 every year. Around this time, many questions arise as to State and Federal requirements regarding escrow accounts. Furthermore, given the lingering impacts of the COVID-19 pandemic, many borrowers may have been, or currently are, in deferral or forbearance, resulting in insufficient escrow balances. This article presents several questions and answers to refresh banks on relevant requirements, and important considerations, regarding escrow accounts both with respect to the pandemic, and more generally.
Q1: Does Wisconsin have rules regarding disbursements from tax escrows?
A1: Yes. Wis. Stat. section 138.052(5m) governs escrow accounts required to be maintained to pay taxes or insurance in connection with consumer-purpose loans secured by a first lien real estate mortgage or equivalent security interest in the borrower’s principal dwelling. For example, the requirement applies to covered purchase money, refinance, and home equity transactions but does not apply to loans that are business or agricultural purpose, or manufactured home transactions. It also does not apply to voluntary escrow accounts. If a bank maintains a voluntary escrow account, it should ensure it has adequate documentation to evidence that fact.
For covered loans, banks must provide an escrow notice before closing giving the borrower options regarding how the bank will make payments from the amount escrowed:
Escrow agent sends a check by December 20 to the borrower for the amount held in escrow for the payment of property taxes made payable to the borrower or to the borrower and the taxing authority.
- Escrow agent pays the property taxes by December 31 if the escrow agent has received a tax statement for the property by December 20.
- Escrow agent pays the property taxes when due.
This notice is not required under section 138.052(5m) if the escrow agent’s practice is to pay the borrower the amount held in escrow for the payment of property taxes by December 20, or to send a check in the amount of the funds held in escrow for the payment of property taxes, made payable to the borrower and taxing authority.
Regardless of whether a notice under state law may not be required, banks are reminded that a voluntary agreement is still required under the Real Estate Settlement Procedures Act (RESPA) to pay property taxes annually as permitted under Wis. Stat. section 138.052(5m). See the discussion below regarding the interconnection between state and federal law.
Q2: Does RESPA have rules regarding disbursements from tax escrows?
A2: Yes. RESPA section 1024.17(k) prescribes rules that apply to escrow accounts established in connection with RESPA-covered loans to pay taxes, insurance, or other charges. If the terms of the loan require the borrower to make payments to an escrow account, the bank must make disbursements in a timely manner. A timely manner means payment by the disbursement date, so long as the loan account is not more than 30 days overdue.
If a taxing authority offers a bank a choice between annual and installment disbursements, RESPA includes additional requirements. Generally, disbursements must be made on an installment basis depending on whether the taxing authority offers a discount, or charges additional fees, for installment disbursements. In Wisconsin, where taxes may be paid in annual or installment payments, and the taxing authority does not offer a discount for payments on an annual basis nor does it impose any additional charge or fee for installment payments, the bank must make disbursements on an installment basis, unless the bank and borrower agree to another disbursement alternative.
Most property taxes in Wisconsin may be payable in two installments. If the first installment is paid by January 31, the second installment may be paid by July 31. Because no discount is available for making annual payments, and no penalty is imposed for making installment payments, RESPA requires property taxes payable in this manner to be disbursed on an installment basis, unless the borrower voluntarily agrees, in writing, to an annual disbursement.
Q3: How do the requirements under Wis. Stat section 138.052(5m) and RESPA section 1024.17 work together?
A3: RESPA preempts State law only to the extent of any inconsistency. Generally, escrows governed by section 138.052(5m) must also comply with RESPA, and banks must disburse tax escrows in installments, or as otherwise agreed to by the borrower. Thus, banks will want to consider their written agreement as to the borrower’s choice of disbursement methods, and as discussed in Q1 above, a bank may pay by December 20 by check.
As RESPA requires taxes to be disbursed in installments, and State law allows more flexibility in how taxes are paid, in order for bank to disburse money from a required escrow account, annually under the section 138.052(5m) December 20 method, RESPA requires the customer’s voluntary agreement of that option. And, while notice under section 138.052(5m) may not be required, RESPA still requires the customer’s voluntary agreement to pay by December 20; see the discussion in Q2. FIPCO’s WBA Tax Escrow Option Election form meets the requirements under Wis. Stat. 138.052(5m) and also serves as the voluntary agreement to disburse property taxes out of escrow in any method other than installments to comply with RESPA.
Q4: What if a deficiency occurs before disbursement?
A4: As discussed in Q2, RESPA generally requires the bank to disburse funds in a timely manner. If a deficiency exists, the bank must still cover the amount due. Upon advancing the funds, the bank may seek repayment from the borrower after performing an escrow account analysis.
If the deficiency is less than one month’s escrow account payment, then the bank:
- May allow the deficiency to exist and do nothing to change it;
- May require the borrower to repay the deficiency within 30 days; or
- May require the borrower to repay the deficiency in 2 or more equal monthly payments.
If the deficiency is greater than or equal to 1 month’s escrow payment, the bank may allow the deficiency to exist and do nothing to change it or may require the borrower to repay the deficiency in two or more equal monthly payments.
If the borrower is not current, then the bank may recover the deficiency pursuant to the terms of the mortgage loan documents. For example, language within the WBA 428 Real Estate Mortgage states that if the escrowed funds held by bank are not sufficient to pay the escrow account items when due, bank may notify consumer in writing, and consumer shall pay bank the amount necessary to make up the deficiency in a manner described by bank or as otherwise required by applicable law.
Furthermore, for loans that are not covered by RESPA (i.e., the escrow account is not required), the bank will need to determine how the deficiency will be covered, either by the borrower, or the bank, pursuant to the terms of its agreement.
Q5: How does a payment deferral or forbearance affect escrow considerations?
A5: As a result of the pandemic, bank may have deferred or forborne payments for some of its borrowers. Bank should consider its deferral and forbearance agreements to confirm whether this deferral or forbearance included escrow payments. Even if it did not, financial distress caused by the pandemic may have resulted in more escrow shortages and deficiencies than typical. Banks should consider how they are monitoring loans for payments, and accounting for expected, and unexpected shortages. Specific attention may need to be paid to escrow balances for loans in deferral, forbearance, or modification. Banks should identify loans that will be short, and determine how the deficiency will be handled, with the above considerations in mind.
Q6: What is the escrow rate for 2022, as set by 138.052?
A6: At time of this release, the Wisconsin Department of Financial Institutions, Division of Banking, has not yet released the 2022 interest rate required to be paid on escrow accounts for residential mortgage loans subject to Wisconsin Statute Section 138.052(5). WBA will continue to monitor and will report the 2022 rate once released. Once set, the 2022 interest rate shall remain in effect through December 31, 2022.
Q7: Does 138.052 require Wisconsin banks to pay interest on escrow accounts?
A7: Not for loans originated after April 18, 2018. 2017 Wisconsin Act 340 eliminated the requirement that a financial institution pay interest on escrow accounts for residential mortgage loans originated on or after the effective date of the Act. Thus, a Wisconsin financial institution is not required by law to pay interest on any escrow account maintained in association with a loan originated on or after April 18, 2018.
Wisconsin Section 138.052 previously required financial institutions to pay interest on the balance on any required escrow accounts. As discussed above, 138.052 applies to consumer-purpose loans secured by a first lien or first lien equivalent in a 1-4 family dwelling that is used as the borrower’s principal residence. Banks must continue to pay interest on escrow accounts they required prior to the effective date of Act 340. However, for any escrow account associated with a loan originated after the effective date of Act 340, 138.052 no longer requires payment of interest. A bank should also consider the terms of its contract as to whether any payment of interest is part of the agreement.
Q8: Bank is closing loan in December for which bank will require escrow for the payment of taxes. The first mortgage payment will be February. Can bank escrow for 2020 taxes to be paid in 2021?
A8. No. RESPA’s escrow collection rules are prospective in nature. Bank should only collect for 2021 taxes to be paid either in December 2021 in a lump sum (with borrower’s permission as outlined above) or in installments. Bank should not collect for anything between December 1 and 31 because nothing is owing during that time as the bank should only be collecting for 2021 taxes. Bank should not be collecting for 2020 taxes for payment in 2021. Borrower should be on his/her own to pay 2020 taxes.