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Impact of CARES Act on Retirement Accounts

This was the Special Focus section for the May 2020 Compliance Journal, click here to view the entire edition.

Title II, Subpart B of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) consists of provisions that affect retirement account distributions, charitable contributions, and employer payments on student loans. The following is a summary of the provision affecting retirement accounts. 

Several sections of Subpart B effect distributions from retirement accounts including: temporary treatment for coronavirus-related distributions, limited repayment and income tax treatments for qualified individuals, and waivers from required minimum distributions.

Coronavirus-related Distributions  

The new law allows for temporary treatment for distributions referred to as “coronavirus-related distributions” (CRDs). For a distribution to be considered a CRD, the distribution need be:  

  1. Made on or after January 1, 2020 and before December 31, 2020; and 
  2. Made to an individual:   
    • Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;  
    • Whose spouse or dependent (as defined in section 152 of the Internal Revenue Code) is diagnosed with such virus or disease by such a test; or 
    • Who experiences adverse financial consequences as a result of being: 
      • Quarantined;  
      • Furloughed or laid off or having work hours reduced due to such virus or disease; or 
      • Unable to work due to lack of childcare due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury. 

CRDs are permitted for up to $100,000 (in the aggregate) from eligible retirement accounts and are not subject to the standard 10% withholding tax penalty that would otherwise apply to a distribution taken before the participant was 59½. Eligible retirement accounts include qualified defined contribution retirement plans, including 401(k), 403(b), 457(b), and IRAs.  

The new law does allow for retirement plan administrators to rely upon an employee certification that he/she meets the CARES Act conditions to make a CRD. There is no further detail in the CARES Act regarding what specific certification should be made for reliance there upon.  

CRDs will automatically be included as qualified individual taxable income ratably over a 3-taxable year period beginning with the year withdrawn. The participant may voluntarily elect income treatment differently—such as including CRDs as qualified taxable income all in one tax year.  

The CARES Act also allows participants to repay CRDs back to eligible retirement plans and IRAs for which they are beneficiaries and for which a rollover contribution of such distributions can be made. The repayment period is three years from date the distribution was received. Repayments will be treated as satisfying general 60-day rollover requirements and will generally require the participant to file an amended tax return.  

Loans from Qualified Retirement Plans 

Separate from options available for CRDs, the CARES Act increases the amount qualified individuals may borrow from a qualified retirement plan. From the date of enactment until 180 days thereafter, qualified individuals may borrow up to 100% of the individual’s vested account balance or $100,000, whichever is less. This is an increase from current thresholds of 50% and $50,000. A qualified individual is someone that meets the criteria listed in item 2. above. Not all retirement plans allow for participant loans; plan participants should discuss loan options with retirement plan administrators.  

In the case of a qualified individual with an outstanding loan from a qualified retirement plan on or after the date of enactment of the CARES Act (March 27, 2020), if the due date for any repayment of the outstanding loan occurs during the period beginning March 27, 2020 and ending December 31, 2020, such due date is delayed for one year. In determining the traditional 5-year period for when a loan from a qualified retirement plan must be repaid, the traditional time period disregards the delayed period.   

Waiver of Required Minimum Distribution for 2020 

The rules for required minimum distributions (RMDs) for defined contribution plans (such as 403(b) and certain 457(b) accounts) and IRAs have also been impacted by the CARES Act. Under section 2203 of the Act, RMDs are waived for 2020. Due to the changes, an accountholder who was otherwise required to take an RMD in 2020 is no longer required to take the RMD. Additionally, an accountholder who turned 70½ in 2019 but had not yet taken the first RMD by April 1, 2020, is not required to take the first RMD; nor is that accountholder required to take a 2020 RMD.  

The RMD changes also impact inherited IRA-holders. If an accountholder inherited an IRA from a person who died before January 1, 2020, the accountholder is not required to take a 2020 RMD. If the accountholder inherited an IRA as a designated beneficiary, the accountholder is generally required have the IRA funds distributed to him/her within a ten-year time period. Under the CARES Act, if the death occurred after December 2019, the ten-year period does not start until 2021—skipping 2020. A non-designated beneficiary (i.e., estate, charity) normally is required to receive the inherited IRA funds over a 5-year period. Under the CARES Act, 2020 is skipped giving the non-designated beneficiary six years to have the IRA funds fully distributed.  

A change made by the CARES Act is independent of the Setting Every Community up for Retirement Enhancement Act (SECURE Act). The CARES Act made no changes to the new timing rules of the SECURE Act. Thus, under the SECURE Act, it remains that if an IRA-holder reached 70½ prior to January 1, 2020, or if the IRA-holder is not yet 70½, once the IRA-holder reaches 72 after December 31, 2019, he/she must take an RMD.  

Bank Considerations 

Given the new distribution flexibilities for retirement accounts, banks should consider whether further tracking of withdrawals should be implemented for distributions made pursuant to the CARES Act. For example, is the bank be able to track the amount of CRDs taken by a qualified individual from an IRA to help ensure the customer did not exceed the $100,000 threshold. Or whether the bank should track CRDs to then anticipate repayments thereof and perhaps monitor both the timing and amount of repayment.   

Bank should also consider whether any type of automatic RMD activity need be ceased before an otherwise pre-arranged RMD is disbursed to the customer. Banks should be in contact with those IRA customers in distribution regarding the changes made to RMDs. IRA customers may still decide to voluntarily receive an RMD even though the CARES Act waives the distribution requirement for 2020. 

Banks should also become familiar with the frequently asked questions released by the Internal Revenue Service (IRS) regarding the changes made by the CARES Act. In the guidance, IRS references past guidance issued after Hurricane Katrina. It is expected IRS will use the practices implemented in that past disaster in its implementation of the CARES Act changes. IRS needs to issue further guidance for some of the changes made by the CARES Act; banks should keep an eye on the IRS website for that further guidance. The IRS guidance may be viewed at: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers  

Conclusion 

Title II, Subpart B of CARES Act affect retirement account distributions, charitable contributions, and employer payments on student loans. The changes made to retirement accounts include CRDs, limited repayment and income tax treatments for certain withdrawals made by qualified individuals, and waivers from RMDs for 2020. 

Banks should be familiar with guidance issued by the IRS, including a series of frequently asked questions and should consider how the changes may impact IRA operations. Bank should also consider reaching out to IRA customers currently in distribution regarding the opportunity to waive RMDs for 2020.

By, Ally Bates

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Regulation D Transaction Limitations

This was the Special Focus section for the May 2020 Compliance Journal, click here to view the entire edition.

On Tuesday, April 28, 2020, the Board of Governors of the Federal Reserve System (FRB) issued an interim final rule to amend Regulation D to delete the numeric limits on certain kinds of transfers and withdrawals that may be made each month from “savings deposits” (interim final rule or IFR). The interim final rule is effective immediately. 

Background 

The Federal Reserve Act authorizes FRB to impose reserve requirements on certain types of deposits of depository institutions. Regulation D distinguishes between reservable “transaction accounts” and non-reservable “savings deposits” based on the ease with which the depositor may make transfers or withdrawals from the account. Prior to the interim final rule, Regulation D defined the term “savings deposit” to require, under the terms of the deposit contract or by practice of the depository institution, that the depositor be permitted to make no more than six transfers or withdrawals (in any combination) per calendar month or statement cycle of at least four weeks (six transfer limit).

In January 2019, the Federal Open Market Committee (FOMC) announced its intention to implement monetary policy in an ample reserves regime. Considering that shift, on March 15, 2020, FRB reduced reserve requirement ratios to zero percent effective March 26, 2020, eliminating reserve requirements for all depository institutions. Because of the elimination of reserve requirements on all transaction accounts, the regulatory distinction between reservable “transaction accounts” and non-reservable “savings deposits” is no longer necessary. Thus, FRB issued the IFR to delete the six transfer limit from the definition of “savings deposit.”

Impact of the Change and Considerations for Banks 

The IFR allows depository institutions to immediately suspend enforcement of the six transfer limit, but does not require any mandatory changes. Because the six transfer limit was deleted, financial institutions may, but are not required to, permit their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits. 

Many financial institutions have questioned whether the deletion of the six transfer limit is permanent. FRB has stated that, as discussed above, the underlying reason enabling the changes in Regulation D is the FOMC’s choice of monetary policy framework of an ample reserve regime. In such a regime, reserve requirements are not needed. Thus, the distinction made by the transfer limit between reservable and non-reservable accounts is also not necessary. The FOMC’s choice of a monetary policy framework is not a short-term choice. FRB does not have plans to re-impose transfer limits but may make adjustments to the definition of savings accounts in response to comments received on its interim final rule and, in the future, if conditions warrant. 

In short, based upon the IFR, and FRB’s clarifying statements above, the deletion of the six transfer limit is indefinite. The interim final rule amends Regulation D with no time limitations. FRB could later re-implement the six transfer limit, but would be required to issue a new rule. As discussed above, FRB currently has no plans to re-implement the six transfer limit. 

FRB has answered additional frequently asked questions. Some of the more common questions and answers are provided below: 

  1. May depository institutions continue to report accounts as “savings deposits” on their FR 2900 reports even after they suspend enforcement of the six-transfer limit on those accounts? 
    Yes. Depository institutions may continue to report these accounts as “savings deposits” on their FR 2900 reports after they suspend enforcement of the six-transfer limit on those accounts. 
  2. If a depository institution suspends enforcement of the six-transfer limit on a “savings deposit,” may the depository institution report the account as a “transaction account” rather than as a “savings deposit”? 
    Yes. If a depository institution suspends enforcement of the six-transfer limit on a “savings deposit,” the depository institution may report that account as a “transaction account” on its FR 2900 reports. A depository institution may instead, if it chooses, continue to report the account as a “savings deposit.” 
  3. May depository institutions suspend enforcement of the six-transfer limit on a temporary basis, such as for six months? 
    Yes. 
  4. How did the recent amendments to Reg D impact Reg CC? 
    Regulation CC provides that an “account” subject to Regulation CC includes accounts described in 12 CFR 204.2(e) (transaction accounts) but excludes accounts described in 12 CFR 204.2(d)(2) (savings deposits). Because Regulation CC continues to exclude accounts described in 12 CFR 204.2(d)(2) from the Reg CC “account” definition, the recent amendments to Regulation D did not result in savings deposits or accounts described in 12 CFR 204.2(d)(2) now being covered by Regulation CC. 

In its FAQs, FRB states that the IFR does not specify the manner in which depository institutions that choose to amend their account agreements may do so. Meaning, the IFR, and Regulation D in general, does not require or prescribe how a financial institution must modify its account agreements with respect to the six transaction limitation. However, WBA reminds financial institutions to consider Regulation DD, which implements the Truth in Savings Act.  

Regulation DD requires a depository institution to give its consumers 30 calendar days advance notice of any change in a term if the change may reduce the annual percentage yield or adversely affect the consumer. The notice shall include the effective date of the change. If a financial institution decides to remove the six transaction limitation, such a change is positive to the customer and would not require advance notice. Financial institutions might still decide to provide notice of the change from a customer service standpoint, however. 

There are other situations that might necessitate advanced notice of a change in terms under Regulation DD. As discussed above, the deletion of the six-month transaction limitation is indefinite. However, financial institutions have the flexibility to choose how to act on that change. Financial institutions could choose to maintain their current policies, procedures, and account agreements, or modify them, and could do so on a temporary basis. For example, a financial institution might decide to permit its customers to make unlimited transactions for a period of six months. At the end of the six-month period, if the financial institution decides to re-implement the six transaction limitation, 30 days advance notice would be required as the change would be adverse to the customer. 

Conclusion 

FRB’s interim final rule deletes the six transaction limit from Regulation D without further limitation. The amendments are intended to allow depository institution customers more convenient access to their funds and to simplify account administration for depository institutions. The IFR permits, but does not require, depository institutions to suspend enforcement of the six transfer limit. Thus, financial institutions have the flexibility to determine whether, and how, to act upon the deletion of the six transfer limit. 

Additional Resources 

FRB’s Interim Final Rule 
FRB’s Monetary Policy and Reduction of Reserve Requirements 
FRB’s FAQ on Reserves 
FRB’s FAQ on Savings Deposits 
FRB on Reporting Changes

By, Ally Bates

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IRS Issues Instructions on How to Handle Payments Made to Deceased Individuals

On May 6, 2020 the Internal Revenue Service (IRS) updated its Economic Impact Payment Information Center to include new questions and answers related to Economic Impact Payments (EIP) issued to deceased individuals. 

IRS Question 10 asks whether someone who has died qualifies for an EIP. The answer states the following: 

“No. A Payment made to someone who died before receipt of the Payment should be returned to the IRS by following the instructions in the Q&A about repayments. Return the entire Payment unless the Payment was made to joint filers and one spouse had not died before receipt of the Payment, in which case, you only need to return the portion of the Payment made on account of the decedent. This amount will be $1,200 unless adjusted gross income exceeded $150,000.” 

The instructions for returning an EIP provide the following: 

  • If the payment was a paper check: 
  1. Write "Void" in the endorsement section on the back of the check. 
  2. Mail the voided Treasury check immediately to the appropriate IRS location. 
  3. Don't staple, bend, or paper clip the check. 
  4. Include a note stating the reason for returning the check. 
  • If the payment was a paper check and you have cashed it, or if the payment was a direct deposit: 
  1. Submit a personal check, money order, etc., immediately to the appropriate IRS location. 
  2. Write on the check/money order made payable to “U.S. Treasury” and write 2020EIP, and the taxpayer identification number (social security number, or individual taxpayer identification number) of the recipient of the check. 
  3. Include a brief explanation of the reason for returning the EIP. 

The IRS has provided a list of appropriate addresses on its website which can be found in the link at the end of this article. 

Considerations for Banks 

The information provided by IRS answers the question as to how EIPs made to decedent should be handled, making it clear that they are to be returned. This is true for EIPs made both by check and direct deposit. An individual who receives an EIP payable to a decedent, or who is in possession of EIP funds paid to a decedent, must return those funds. 

Unfortunately, because this information was not issued until after many payments had already been made, it means that some banks have likely already accepted payments made to a decedent. While the information provided by the IRS instructs the recipient to return the EIP funds, banks should consider how they use this information. Certainly, if a customer receives a direct deposit on behalf of a decedent, or presents a check payable to a decedent, that customer should be directed to the instructions for returning the payment. For customers who have already received the funds, either by direct deposit or by depositing a check, those funds still need to be returned pursuant to the instructions. 

The IRS instructions also provide how the recipient is to determine the amount that must be returned. Banks are reminded that the appropriate amount that is to be returned is a consideration that should be made by the customer, not the bank. The instructions relate to the recipient and furthermore, banks are not in a position to know the customers adjusted gross income to make the determination on a customer’s behalf. 

Conclusion 

IRS has made it clear that decedents are not eligible for EIP funds, and individuals who have received payments made to decedents are to return those funds. At this time, IRS has not indicated any steps beyond the requirements above. For example, there is no current indication of a reclamation process beyond a requirement for recipients to return the payments themselves. 

Click here for the IRS FAQ.

By, Amber Seitz

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Transitioning Away from LIBOR

The below article is the Special Focus section of the February 2020 Compliance Journal. The full issue may be viewed by clicking here.

Globally, the London Interbank Offered Rate (LIBOR) is one of the most widely used interest rate benchmarks. However, this benchmark may cease to exist at the end of 2021, necessitating a transition away from LIBOR. This article briefly discusses the reasons why LIBOR may be ending and then concentrates on how financial institutions should prepare for its potential end.

The End of LIBOR

LIBOR is calculated as the average of interest rates that a panel of large London banks report that they would charge other banks to borrow unsecured for a specified period of time. Despite LIBOR’s widespread use as a reference rate by financial institutions, its reliability and sustainability has been called into question in recent years for a number of different reasons. 

Concerned that LIBOR was becoming less stable and reliable, the Financial Conduct Authority (FCA), the United Kingdom’s financial regulator, announced that by the end of 2021, it would no longer compel banks to report their interest rates to the LIBOR administrator. The FCA also explained that although it would no longer require banks to submit their rates to the administrator, it would not prohibit banks from continuing to submit their LIBOR data after 2021. LIBOR’s administrator has stated that it will continue to calculate LIBOR as long as at least five banks continue to submit their information. This means that LIBOR may continue to exist after 2021; however, the rate will no longer be representative of the inter-bank interest rate offered and accepted by major financial institutions. There are also fears that this number would be more volatile. This occurrence has been referred to as the “zombie LIBOR.”

The FCA’s announcements have made the future of LIBOR uncertain but clarified the increasing risk associated with continued reliance on LIBOR. With the uncertain future of LIBOR, financial institutions should prepare for the either the retirement or instability of LIBOR.

Transition from LIBOR to SOFR

Based on the potential problems with LIBOR in 2021, market participants and regulators have worked to identify the best alternative reference rate to replace LIBOR and implement plans to transition to that reference rate. The Federal Reserve convened the Alternative Reference Rates Committee (ARRC) to identify a more robust reference rate and to facilitate the transition way from LIBOR. The ARRC is composed of many private-sector entities that have a presence in markets that are impacted by LIBOR. Further, several federal regulators, including the FDIC, the Federal Reserve, the OCC, and the CFPB, serve as non-voting, ex officio members of the ARRC. 

In 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended best alternative to LIBOR. SOFR is based on transactions in the U.S. Treasury repurchase market, measuring the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the market. Because of the size and liquidity of the market underlying SOFR, the ARRC believes that the index is more robust and resilient than LIBOR. To support the transition to SOFR, the ARRC has begun implementing steps to help SOFR gain momentum. As a part of this work, in April 2018, the New York Federal Reserve Board began publishing SOFR in conjunction with the Office of Financial Research.

Following the selection of SOFR as its alternative reference rate, the ARRC also published a Paced Transition Plan that outlines specific steps and timelines to promote the adoption of SOFR. These steps focus on updating existing contracts that cite LIBOR as the reference rate and encouraging the issuance of new products that use SOFR. The ARRC has supported the issuance of SOFR-linked products and securities. Recognizing the importance of updating existing contracts that use LIBOR as a reference rate, the ARRC has developed guiding principles for fallback contract language. Following this, the ARRC released recommended fallback contract language for several products including adjustable-rate mortgages and floating-rate notes.
On November 15, 2019, Fannie Mae and Freddie Mac announced their support of the ARRC’s fallback language and their plan to incorporate the recommended language into its uniform notes and other legal documents for ARMs. They also announced their plan to offer new SOFR-based index and ARM products and have now become regular issuers of SOFR-indexed debt. Similarly, on February 5, 2020, Fannie Mae and Freddie Mac announced that they had incorporated the ARRC’s fallback language into their existing standard ARM notes and riders. Further, they announced that, by the end of 2020, they will no longer acquire loans indexed to LIBOR.

Planning for the End

Given either the upcoming end or instability of LIBOR, financial institutions should prepare for 2022. Institutions should use the next two years to comprehensively assess their risks and develop an action plan to mitigate those risks. It might be best to appoint one person to head the financial institution’s strategy and implementation. First, financial institutions should review their existing agreements that use LIBOR as a reference rate. The existing agreements should be divided into those in which a third party is involved, i.e., trust preferred securities or swap agreements, and those in which the financial institution and the other contracting party are the only parties to the transaction (the In-House Contracts).

Any financial institutions that have issued debt securities (such as subordinated debt or trust preferred securities) at the holding company or bank level should check the documentation governing those issuances. Typically, those contracts provide for the substitution of a comparable rate. Financial institutions should confirm the substitution language and also review the procedures for substituting the rate. If the issuance involves an institutional trustee, such as Wilmington Trust Company for many outstanding trust preferred securities, it may be necessary or advisable to contact the institutional trustee far in advance of the LIBOR end to discuss the process of changing rates.

The In-House Contracts should be further subdivided into those whose term ends prior to the end of 2021 and those whose maturity is after 2021. Next, financial institutions should ensure that existing In-House Contracts are able to substitute a comparable rate. Then, the financial institution should determine whether it will substitute a new rate and a new margin and at what point the change will be made. Consideration should be given to the stability of a new rate and a new margin. The decision on a new rate and a new margin may involve several committees and personnel at the financial institution as different considerations of interest rate risk, stability, competition and other factors will influence the ultimate substitute reference rate the financial institution will utilize. Financial institutions should note that the Prime Rate will continue to be available unaffected by the impending demise of LIBOR.

After a decision has been made on the financial institution’s new reference rate, it may be advisable to educate the financial institution’s LIBOR customers on the new rate, especially if it’s a rate that customers may not be familiar with. Although a customer may not have the right to contest the new reference rate, educating the customer may alleviate the customer’s anxiety about the new reference rate.

Finally, the financial institution should determine how the new reference rate will be implemented. The financial institution should consider whether it will draft amendments to existing loan documents to implement the new reference rate or whether it will simply notify the other party to the contract of the new reference rate. Financial institutions should contact their legal counsel for advice on this issue.
 
The WBA forms distributed through FIPCO currently contain a provision that if the index rate a lender uses with respect to a particular loan becomes unavailable then the lender may substitute a comparable index rate. To alleviate concerns with the zombie LIBOR, FIPCO has created the LIBOR Addendum. This Addendum allows the lender to replace LIBOR if a “Replacement Event” occurs. The Addendum is drafted to define a Replacement Event to include a situation in which LIBOR would continue to exist in a zombie state. The LIBOR Addendum can be used for new loans that use LIBOR as the index rate. The form could also be used for existing loans, but the borrower is required to sign the LIBOR Addendum.

When making new loans using LIBOR that will mature after 2021, financial institutions should ensure that any new contracts allow for an easy transition to a new reference rate. Consideration should be given to using the LIBOR Addendum to In-House Contracts. Additionally, financial institutions should consider incorporating the fallback language adopted by Fannie Mae and Freddie Mac to any residential real estate mortgages using LIBOR intended to be sold on the secondary market.

Taking the steps outlined above will help financial institutions mitigate their risks in the post-LIBOR market.

WBA wishes to thank Atty. Catherine Wiese, Boardman & Clark, llp for providing this article. 

By, Ally Bates

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USDA’s New Hemp Program and What it Means for Wisconsin

The below article is the Special Focus section of the November 2019 Compliance Journal. The full issue may be viewed by clicking here.

The United States Department of Agriculture (USDA) published an interim final rule on October 31, 2019 specifying regulations to produce hemp. The rule is effective October 31, 2019 through November 1, 2021.

Introduction

The rule establishes a Federal program for producers in States that do not have their own USDA-approved plan. The program includes provisions for maintaining information on the land where hemp is produced, testing of THC levels, disposing of plants not meeting certain requirements, and licensing requirements. USDA has also outlined provisions under which States may submit their own plans for approval.

It is WBA’s understanding that the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) will submit a Hemp Program Plan to USDA. However, DATCP will continue under the 2014 Farm Bill provisions, and existing Wisconsin regulation at time of this article’s publication, in 2020. As of November 1, 2019, DATCP has begun its hemp licensing for the 2020 hemp season. At this time, DATCP is is preparing to write rules to align Wisconsin law with the 2018 Farm Bill, and expects to begin the new program under the 2018 Farm Bill, and USDA’s rule, in 2021. 

This article discusses the procedural aspects for submission of a State plan to USDA under its interim final rule. It also discusses the Federal program requirements placed upon hemp producers. While these procedures and the program requirements do not directly apply to banks, they will affect how hemp businesses operate in Wisconsin, and thus, bank customers seeking to engage in hemp-related activity. This article presents selected aspects of the interim final rule for banks to better understand what to expect in the coming years and the requirements that may apply to their customers.

Procedural Aspects

From a procedural standpoint, WBA reminds readers that as of publication of this article, much remains to be decided. November 26, 2019 Governor Tony Evers signed 2019 Senate Bill 188 establishing a new hemp program. It requires DATCP to write and submit a plan to USDA for approval. After USDA receives the plan, it will either approve or disapprove the plan no later than 60 calendar days after receipt.

If DATCP proposes a plan and it is rejected by USDA, the interim final rule provides for amended plan procedures. Under those procedures, hemp production continues under the existing plan. For example, production in Wisconsin would continue under current rules while DATCP and USDA work out amendments to the proposed plan. However, if an amended plan is not submitted within one year from the effective date of the rejected new law or regulation, the existing plan is revoked. 

Note that as of publication of this article, the current DATCP program under ATCP 22 and 2017 Wisconsin Act 100 is still in effect. As discussed above, DATCP is currently issuing licenses for the 2020 season. If DATCP writes new rules under the new law, WBA will report on what banks need to know about the process.

USDA Plan Requirements

Because hemp production at the time of this article’s publication continues under existing Wisconsin law, and the future rule governing production is unknown, a full discussion of USDA’s rule and the Wisconsin bill would be premature. As such, this article will not discuss the Wisconsin bill which has yet to be signed by the governor. It will discuss USDA’s rule below, but from a conceptual standpoint rather than a full discussion. Note that the requirements as presented below have been edited to help banks understand their broader implications. As such, most technical requirements have been removed. For a full reading of the rule, please refer to the link at the end of this article.

A State plan must meet information collection requirements, to be reported to The Secretary of Agriculture of the United States regarding:

  1. Contact information for licensed producers;
    • A legal description of the land on which the producer will produce hemp including its geospatial location; and 
    • The status and number of the producer’s license or authorization. 
       
  2. A State plan must include a procedure for accurate and effective sampling of all hemp produced, requiring the following: 
    • Samples must be collected within 15 days prior to the anticipated harvest.
    • The method used for sampling must be within a level of 95% accuracy, that no more than 1% of the plants in the lot would exceed the acceptable hemp THC level.
    • During a scheduled sample collection, the producer or an authorized representative of the producer shall be present at the growing site. 
    • Representatives of the sampling agency shall be provided with complete and unrestricted access during business hours to all hemp and other cannabis plants, whether growing or harvested, and all land, buildings, and other structures used for the cultivation, handling, and storage of all hemp and other cannabis plants, and all locations listed in the producer license.
    • A producer shall not harvest the cannabis crop prior to samples being taken.
       
  3. The State plan must include procedures for testing that can accurately identify delta-9 tetrahydrocannabinol content concentration levels to specified levels and meet a specific methodology.
    • Any test resulting in higher than acceptable THC levels is considered conclusive evidence that the lot represented by the sample is not in compliance. Lots tested and not certified may not be further handled, processed or enter the stream of commerce and the producer shall ensure the lot is disposed of.
    • Samples of hemp plant material from one lot shall not be commingled with hemp plant material from other lots. 
    • Analytical testing for purposes of detecting the concentration levels of THC shall meet standards that are not presented in this summary.
       
  4. The State shall promptly notify USDA by certified mail or electronically of any occurrence of cannabis plants or plant material that do not meet the definition of hemp in this part and attach the records demonstrating the appropriate disposal of all of those plants and materials in the lot from which the representative samples were taken. 
     
  5. A State plan must include a procedure to comply with certain enforcement procedures.
     
  6. A State plan must include a procedure for conducting annual inspections of, at a minimum, a random sample of producers to verify that hemp is not produced in violation of this part. 
     
  7. A State plan must include a procedure for submitting a monthly report to USDA. All such information must be submitted to the USDA in a format that is compatible with USDA’s information sharing system. 
     
  8. The State must certify that it has the resources and personnel to carry out the practices and procedures necessary to comply.
     
  9. The State plan must include a procedure to share information with USDA.
    • The State plan shall require producers to report their hemp crop acreage to the Farm Service Agency. 
    • The State government shall assign each producer with a license or authorization identifier in a format prescribed by USDA. 
    • The State government shall require producers to report the total acreage of hemp planted, harvested, and, if applicable, disposed. The State government shall collect this information and report it to USDA. 

Final Takeaways

As expected, the rule requires testing, reporting, and monitoring to accurately identify whether hemp samples contain a delta-9 tetrahydrocannabinol (THC) content concentration level that does not exceed the acceptable level. To that extent, hemp is defined as the plant species Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3 percent on a dry weight basis.

Another aspect to note is the rule’s use of the word “producer.” A producer is someone who is licensed or authorized to produce hemp, meaning to grow hemp plants for market, or for cultivation for market, in the United States. The rule does not distinguish between grower, producer, retailer, or any other type of hemp-related business. As such, it will remain important to see what DATCP proposes for categories of regulation in its rule.

Conclusion

While hemp businesses in Wisconsin still operate under DATCP’s current rule at time of this article’s publication, it is important to understand the track Wisconsin is currently on, and what possibilities the future holds, in order to prepare accordingly. WBA will continue to monitor and report on future hemp regulation as it continues to develop.

Click here to view USDA’s interim final rule.

By, Ally Bates

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Legal Q&A: Revised Transfer by Affidavit Form Changed, But Not the Law

Q: Is There a Revised Transfer by Affidavit Form?

A: Yes. 

The transfer by affidavit form for estates of $50,000 or less is no longer maintained by the Wisconsin Court System’s Records Management Committee. The form is now maintained, for free, by the State Bar of Wisconsin Real Property, Probate, and Trust Law Section (Bar).

While the format of the form has changed, its purpose, function, and governing law under Wis. Stat. 867.03 has not changed. As such, financial institutions may want to review the new form to become familiar with it, but the law has not changed.

One format change that WBA was made aware of was how the affiant completes the Wisconsin Department of Health Services (DHS) section. On the prior form, the affiant indicated that if they “did not know” whether the decedent received aid, that they had submit notice to DHS. It is unclear on the new form whether such notice is required. However, WBA has heard from the Bar that it was not their intent to change the form in this way or any other.  

The new form and its instructions can be found through the links below. 

Form: https://www.wisbar.org/forPublic/INeedInformation/Documents/Transfer%20by%20Affidavit.PDF 

Instructions: https://www.wisbar.org/forPublic/INeedInformation/Documents/Transfer%20by%20Affidavit%20Instructions.pdf 

Birrenkott is WBA assistant director – legal. For legal questions, please email wbalegal@wisbank.com.

Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution’s attorney for special legal advice or assistance.

By, Ally Bates

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Can Wisconsin Banks Lawfully Bank Marijuana-Related Businesses?

The below article is the Special Focus section of the October 2019 Compliance Journal. The full issue may be viewed by clicking here.

On January 1, 2020, recreational marijuana becomes lawful in Illinois, making it the eleventh state in the country to legalize marijuana for recreational use. When Illinois Public Act 101-0027 was enacted this past June, Illinois also became the second state bordering Wisconsin to legalize marijuana for recreational use, second to Michigan where licenses will begin being issued next month. Marijuana legalization in neighboring states raises the following question: Can a Wisconsin bank lawfully bank marijuana-related businesses (MRB)1 that operate in states where recreational marijuana is legal? 

State v. Federal Legality

To answer that question, it requires an understanding of the current legal landscape. At a state level, individuals and businesses acting consistent with state law requirements (e.g. licensure, age restrictions) will be deemed lawful actors within the state. However, current federal law muddies the waters regarding whether those individuals and business are acting entirely lawfully. This is because marijuana is still unlawful on the federal level – the Controlled Substances Act (CSA) characterizes marijuana as a Schedule I Controlled Substance and makes it illegal under federal law to manufacture, distribute, dispense, or possess marijuana. Technically speaking, then, individuals acting consistent with state marijuana laws are violating federal law. But, you ask, why don’t we often hear of lawful state actors being penalized by federal law enforcement officials?

Enter the Cole Memo. On August 29, 2013, then-Attorney General James Cole issued a Memorandum (the “Cole Memo”) in response to several states legalizing marijuana. The memo, in so many words, defers enforcement of marijuana-related activity to the states that have enacted laws legalizing marijuana in some form. The Cole Memo sets forth a number of federal enforcement priorities pertaining to marijuana including, for example, preventing the distribution of marijuana to minors, preventing violence and use of firearms in the cultivation and distribution of marijuana, and preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels. Outside of the enforcement priorities delineated in the Cole Memo, the federal government will rely, as it has traditionally relied, on “states and local law enforcement agencies to address marijuana activity through enforcement of their own narcotics laws.”

After the issuance of the Cole Memo, individuals and businesses could act pursuant to state marijuana laws without fear of prosecutorial action from the feds, assuming their actions did not implicate an enforcement priority indicated in the Cole Memo. That “relief” was short-lived, however, as on January 4, 2018, then-Attorney General Jeff Sessions rescinded the Cole Memo. The Cole Memo remains rescinded today. In practice, however, the spirit of the Cole Memo appears to live on, as the rescission issued by Attorney General Sessions continued to provide “prosecutorial discretion.” 

Thus, in summary, though recreational marijuana may be lawful at the state level, it remains unlawful and subject to enforcement action at the federal level. In practice, however, it is clear that federal law enforcement officials do not necessarily prioritize taking enforcement action against individuals and businesses acting consistent with state marijuana laws.

BSA Responsibilities

Of course, the legality question is a relevant one for banks because of Bank Secrecy Act (BSA) obligations. As banks, it’s imperative that you meet your (BSA) obligations, consistent with your Customer Due Diligence (CDD) program. In short, the bank must ensure that the transactions conducted through the bank are not derived from illegal activity. As described above, however, transactions flowing through an MRB are, very clearly, derived from illegal activity.
 
Recognizing the precarious position of financial institutions and the practical realties of having an unbanked yet burgeoning MRB population, the Financial Crimes and Enforcement Network (FinCEN) issued guidance entitled “BSA Expectations Regarding Marijuana-Related Businesses” on February 14, 2014 (“FinCEN Guidance”). The FinCEN Guidance, which is still alive and well today, leaves direction to banks to determine whether to provide financial services to MRBs, but indicates that customer due diligence is a “critical aspect” of this determination. To this end, the FinCEN Guidance delineates financial institutions’ due diligence responsibilities when banking MRBs. Specifically, it outlines requirements including, for example, verifying state licensure and registration and reviewing associated documentation, requesting information about the MRB and related parties from state licensing and enforcement authorities, developing an understanding of the normal and expected activity of the business, and conducting ongoing monitoring. 

In addition, the FinCEN Guidance outlines the obligation of financial institutions to file Suspicious Activity Reports (SARs) on activity involving MRBs, which, according to the Guidance “is unaffected by any state law that legalizes marijuana-related activity.” If a bank is providing financial services to an MRB, the bank must file one of the following types of SARs, consistent with FinCEN’s suspicious activity reporting requirements and related thresholds:

  • “Marijuana Limited” 
  • “Marijuana Priority”
  • “Marijuana Termination”

Determining which type of SAR to file is described within the FinCEN Guidance. In summary, the determination is based on whether or not Cole Memo priorities are implicated (despite its rescission) and if the account activity leads the bank to terminate the relationship with the customer. 

Finally, the FinCEN Guidance notes that a bank’s Currency Transaction Reporting (CTR) responsibilities are unaffected by the fact that a customer is deemed an MRB.

Banks planning to provide financial services to MRBs should familiarize themselves with the obligations outlined in the FinCEN Guidance.

Regulator Considerations

In addition to the criminal liability risks and practical considerations that a bank must consider in weighing the decision to bank MRBs, the regulator risk must also be weighed. Based on our current understanding the various regulators’ position on banking MRBs, the direction is to “follow FinCEN Guidance.” Thus, assuming the bank is following the FinCEN Guidance and has followed applicable policies and procedures, one would assume enforcement action would be avoided. 

To the extent your bank is considering providing financial services to MRBs, I suggest getting in touch with your regulator for guidance. 

So, What Do I Do?

The head-in-the-sand approach to banking MRBs is not a good one, as the issue will eventually present itself if it hasn’t already. Thus, I suggest banks take the following actions:

  • Consider whether your answer to “will you bank an MRB?” is a “yes (under certain circumstances)” or “no”. Develop policies and procedures accordingly and as necessary. 
  • Regardless of your policy, it’s important to know if your customer is an MRB; thus, you should ask. If the customer is an MRB and your policy says you won’t bank them, don’t bank them. If your policy is that “yes” (you will consider banking the MRB), you need additional information before you should bank or continue banking the self-identified MRB.
  • That additional information is information and documentation that allows the bank to determine whether or not the customer is in compliance with state law. Such collection will typically take the form of a Questionnaire and Certification and will require supporting documentation from the customer. Information will vary from state to state and any such information collection documentation should be developed in consultation with counsel who is familiar with the marijuana laws of the state.
    • If, based on the bank’s reasonable due diligence, the customer appears to be in compliance with state law at account-opening or when the bank confirms compliance of an existing customer, I suggest the following:
      • Designate the customer as “High Risk”. Consistent with such designation, continue to monitor your MRB customer for compliance with state law on an ongoing basis; and
      • Follow FinCEN Guidance. This includes monitoring the account for the presence of red flags identified in the FinCEN Guidance and filing SARs as appropriate. 
  • In contrast, if, based on the bank’s reasonable due diligence, the customer appears to NOT be in compliance with state law, the activity is unlawful and inconsistent with FinCEN Guidance. Accordingly, I do not suggest banking the customer.

The Future

The good news is that we only anticipate greater clarity as time marches on. Such clarity could come with enactment of the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”), which has already cleared the Senate and is now in the hands of the House. In summary, the Act would provide protections for financial institutions that provide financial services to legitimate cannabis-related businesses and services providers. The Act would allow banks to serve cannabis-related businesses without fear of adverse action from the regulators or criminal liability. The Act would not eliminate the need for banks to make policy decisions and draft implementing policies and procedures pertaining to MRBs, but it would certainly reduce ambiguity and provide protections that bankers need to feel comfortable serving this clientele.  Stay tuned on the SAFE Banking Act and/or other possible legislative fixes to the precarious relationship between the banker and the MRB.

1A marijuana-related business (MRB) is not a defined term, though it has been used in various guidance issued by federal agencies. Questions remain regarding whether a business needs to “touch the plant” to be considered an MRB (e.g. grower, processor, or retailer) or if MRB would include parties accepting monies from MRBs (e.g. landlords, vendors, or suppliers). This definitional question is one for the bank to grapple with, possibly in consultation with regulators, until additional clarification is provided.

WBA wishes to thank Atty. Lauren C. Capitini, Boardman & Clark, llp for providing this article.

By, Ally Bates

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Welcome Back, Old Friend – Section 8 of RESPA is a Hot Topic Again

The below article is the Special Focus section of the September 2019 Compliance Journal. The full issue may be viewed by clicking here.

Section 8 of the Real Estate Settlement Procedures Act (RESPA)1 – the prohibition against kickbacks and unearned fees – is back and compliance officers are taking note. In the last year, we have seen a significant increase in RESPA section 8 questions, many of which involve a determination as to whether certain marketing activities are permissible. This is due, in part, to evolving technology which provides a platform to facilitate marketing relationships between settlement service providers, along with recent regulatory and case law developments. Some of these arrangements are simple, while others extraordinarily complex. Either way, I sense bit of panic from compliance officers any time there’s a new opportunity to market the institution’s mortgage area that may implicate RESPA (and for good reasons – penalties and reputation to name a couple!). Not all these arrangements are problematic, especially in light of the recent PHH decision and developments out of the Consumer Financial Protection Bureau (CFPB), but some arrangements should still make your ears perk up. 

So, how do we analyze whether a marketing opportunity presents a RESPA Section 8 issue? Let’s discuss.

When we consider marketing activities under RESPA, there are two primary provisions of RESPA Section 8 that are relevant to our analysis: (1) Section 8(a) which delineates prohibited activity,2 and (2) Section 8(c) which prescribes permissible activities.

Sections 8(a)– Prohibited Activity

The first is Section 8(a) of RESPA which prohibits illegal kickbacks – the giving or receiving of a “thing of value” for referrals made between settlement service providers. Specifically, Section 8(a) prohibits any person from giving or accepting any fee, kickback, or thing of value pursuant to an agreement or understanding for the referral of a settlement service involving a federally related mortgage loan (a.k.a. consumer mortgage loans).3 There are three elements to an illegal kickback under Section 8(a): 

  1. A “thing of value” – for example, money, defrayed costs, special contract terms, a promise to provide future referrals, and things (such as sporting event tickets or office supplies); 
  2. An “agreement or understanding”, whether oral, written, or established by practice; and 
  3. A “referral”, which is defined in two ways: (a) oral or written action that has the effect of affirmatively influencing selection of a settlement service provider, or (b) when a person is required to use a particular settlement service provider.  

All of these components must be present to be considered a prohibited activity under RESPA. Thus, when a potential RESPA-implicating opportunity presents itself, each of these components must be analyzed in detail. 

Section 8(c) of RESPA – Permissible Activity

Notwithstanding the prohibitions in Sections 8(a), the second relevant provision, contained in Section 8(c) of RESPA, sets forth permissible activity. Relevant here, RESPA specifically permits the following:

  • “normal promotional or educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred…”;4 and 
  • “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”5   

These permissible activity exceptions are generally relied upon in order to create relationships between settlement services providers (e.g. the institution and a realtor). 

Importantly, there are some general principles that have developed over time, via administrative interpretations, case law, and enforcement actions that must be true in order for the marketing activity to be permissible pursuant to one of these exceptions:

  • Services must actually be performed or goods must actually be provided. For example, advertising must actually be provided. Any payment for advertising that does not actually occur will be considered an unlawful kickback.
  • The payment for such services or goods must be bona fide. That is, payment must be reasonable market value. Any excess payment above reasonable market value will be seen as an illegal kickback.6

Now, assuming the marketing activity meets the parameters of one of the Section 8(c) exceptions, the activity receives a “safe harbor” from a RESPA Section 8 violation. Note, however, that the “safe harbor” rule was not the prevailing opinion of the CFPB under the reign of Director Richard Cordray, which was a significant departure from previous, longstanding interpretations of RESPA under the Department of Housing and Urban Development (HUD). However, in perhaps one of the most contentions of RESPA cases in recent history, PHH Corporation v. Consumer Financial Protection Bureau,7 the Court of Appeals for the D.C. Circuit confirmed that Section 8(c) of RESPA provides a safe harbor so long as the activity meets the parameters of the Section 8(c) exceptions. 

Analysis When Considering Marketing Opportunities

With that RESPA background in mind, if your institution is considering a marketing opportunity involving federally related mortgage loans, I suggest engaging in the following analysis:

  • Might this be deemed a prohibited activity under RESPA Section 8(a) or 8(b)?
    • That is, could this be considered an illegal kickback under Section 8(a) in that all three elements are present, as described above and restated here:
      • A “thing of value”; 
      • An “agreement or understanding”; and
      • A “referral”
    • Or, is this impermissible fee splitting under 8(b)?
      • Though not often arising in the marketing context and, consequently, not thoroughly discussed herein, the institution should consider applicability

If NO, that’s the end of your analysis – no Section 8 concern
If MAYBE or YES, continue to (2) and (3).

  • Is the activity “saved” by the Section 8(c) educational and marketing exception; or
  • Is the activity “saved” by the Section 8(c) “bona fide payment for services actually performed” exception?

Let’s take a couple of common marketing opportunities and run through the analysis:

Hosting a Complementary Educational Seminar for Settlement Service Providers

If an institution chooses to host a complementary educational seminar for real estate professionals, such an event may be considered to violate Section 8(a) of RESPA because it’s certainly the provision of a “thing of value” provided in hopes of generating business (or, in other words, referrals from those settlement service providers). In fact, previous HUD Guidance states that such educational events implicitly positions settlement service providers to refer business to the institution. We can question whether there is an “agreement or understanding”, but let’s just assume that the conduct is indicative of such. The question then becomes whether this can be redeemed by the “normal promotional and marketing” exception under 8(c).

Whether an educational seminar meets the safe harbor exception is very much dependent upon the facts and circumstances at hand. Consider the following:

  • Is the event in any way conditioned on past, present, or future referrals of business? For example, does the institution provide an incentive for attendees to refer business back to the institution? Or, does the institution only invite settlement service providers that have previously referred business to the institution? If so, the safe harbor is unlikely to be met.
    • Note that who is invited can make a difference here. The more “open” the attendance list (e.g. not just settlement services providers located near your branches or those who have previously referred business your way), the more likely the seminar is to pass muster.
  • Does the seminar defray costs of the attendees? For example, if the seminar provides a course required to receive or maintain licensure, that would be defraying a cost ordinarily incurred and would be, consequently, unlawful.

The most challenging aspect here is to remain referral-neutral. Pay careful to this component in your analysis.

Advertising with a Realtor

Recently, a number of institutions have been given the opportunity to advertise their services on a realtor’s website or jointly advertise with a realtor on a separate platform (e.g. Zillow). I think we could all agree that this is prohibited activity under Section 8(a). Thus, we turn to whether it can be saved under either of the relevant Section 8(c) exceptions delineated above.

Of course, facts matter here. The following should be considered:

  • Is the advertising conditioned on past, present, or future referrals of business? For example, if the institution and the realtor enter into a contractual arrangement for direct advertising, does the agreement discuss future business or incentives for referrals? Pay close attention to contract language, if a contract exists, and remain referral-neutral in order to meet the exception. 
  • Is the institution paying for the advertising? If the advertising is free, this will not meet the exception as the institution’s costs will be defrayed. 
  • Is the institution paying reasonable market value for the advertising? Assuming the institution is paying for the advertising, is the institution paying reasonable market value? Remember, any payment above reasonable market value will be seen as an illegal kickback. 

One of the challenges with meeting these relevant Section 8(c) exceptions is to get the fee structure exactly right. If the institution is obtaining free advertising or is receiving “below market rate” advertising, you run the risk of receiving “defrayed costs” or not making a bona fide payment for the advertising. In contrast, if you pay above market rate, the portion of the payment above market rate kicks you back into prohibited activity under Section 8(a). To this end, we always suggest drafting a business justification to demonstrate that the fee paid is fair market value and maintaining it in your files. To determine market value, we suggest considering the following:

  1. Look internally for evidence of similar transactions (e.g. is the price similar to the institution’s other advertising costs for the type of media, duration, etc.);
  2. Look externally to determine if the price is consistent with the price third parties would incur for similar services (e.g. other financial institutions in the area); and
  3. Management should exercise its best judgment based on the internal and external evidence. 

Furthermore, you should be especially careful when navigating joint marketing arrangements when a third party is involved. For example, Zillow offers lenders and real estate agents the opportunity to jointly advertise via the Zillow online platform. In this program, Agent invites up to five lenders to jointly market with Agent. Lender then pays Zillow for the opportunity to advertise with Agent. The advertising fees paid by lender, in turn, reduce the amount the Agent pays Zillow for Agent’s advertising. The more the lender spends, the more often the lender is featured (versus other lenders with whom the Agent advertises). Though this program was being investigated by CFPB for violations of RESPA Section 8 and UDAAP, the investigation quietly concluded and Zillow announced in a June 2018 SEC filing that the company had received a letter from the Bureau indicating that it would not be pursuing enforcement action. 

The Zillow case is comforting to institutions insomuch as the CFPB validated that these types of marketing arrangements can lawfully exist. However, they do not come without scrutiny. In these types of arrangements, institutions should pay considerable attention to how the fee structure flows through the parties, in addition to the considerations above. In my experience, these arrangements can be incredibly complex and always invite risk. It’s prudent to get legal counsel involved before agreeing to participate in this kind of arrangement.

To conclude, RESPA Section 8 questions can be complex, rife with competing interpretations from HUD, CFPB and the courts, and require wading through unchartered waters with ever-changing leadership at the CFPB. Given that penalties are steep, as permitted by statute – recent RESPA CFPB enforcement actions have imposed penalties ranging from $35,000 to $265,000 and the amount at issue in the PHH case was $109 million – these questions deserve attention, thorough analysis, and often times, involvement of counsel. 

WBA wishes to thank Atty. Lauren C. Capitini, Boardman & Clark, llp for providing this article. 

  1. 12 U.S.C. § 2607.  Implementing Regulation X is codified at 12 C.F.R. § 1024.14.
  2. Note that section 8(b) prohibits the giving or accepting of a “portion, split, or percentage of any charge made or received” for rendering settlement services other than for services actually performed.  In other words, institutions cannot share a portion of or split fees with other settlement service providers when rendering settlement services unless the payment given/received is for “services actually performed”.  Though a very important component of RESPA to understand, this provision is not often relevant in the marketing context.
  3. 12 U.S.C. § 2607(a) and 12 C.F.R. § 1024.14(b).
  4. 12 C.F.R. § 1024.14(g)(1)(vi).
  5. 12 C.F.R. § 1024.14(g)(1)(iv).
  6. See PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 at 41 (D.C. Cir. 2016).
  7. 839 F.3d 1 (D.C. Cir. 2016).  The court’s interpretation of RESPA was upheld by a petition for rehearing en banc by the D.C. Circuit Court of Appeals.  PHH, No. 15-1177 (Jan. 31, 2018).

By, Ally Bates

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Regulation CC Dollar Amount Adjustment Rule Finalized

The below article is the Special Focus section of the July 2019 Compliance Journal. The full issue may be viewed by clicking here.

On July 3, 2019, the Board of Governors of the Federal Reserve System (FRB) and the Bureau of Consumer Financial Protection (CFPB) published a jointly issued final rule (rule) amending Regulation CC that implements a requirement to periodically adjust dollar amounts under the Expedited Funds Availability Act (EFA Act). This requirement stems from a Dodd-Frank Act amendment to the EFA Act a number of years ago. 

The rule also extends Regulation CC’s coverage to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam, and makes certain other technical amendments. This article will only focus on the dollar amount adjustment provisions of the rule.

Specified Dollar Amounts Subject to Adjustment

Subpart B of Regulation CC implements the requirements set forth in the EFA Act regarding the availability schedules within which institutions must make funds available for withdrawal, exceptions to those schedules, disclosure of funds availability policies, and payment of interest. 

The EFA Act and subpart B of Regulation CC contain the following specified dollar amounts concerning funds availability which are subject to adjustment: (1) The minimum amount of deposited funds that institutions must make available for withdrawal by opening of business on the next day for certain check deposits (“minimum amount’’) under 229.10(c)(1)(vii); (2) the amount an institution must make available when using the EFA Act’s permissive adjustment to the funds availability rules for withdrawals by cash or other means (‘‘cash withdrawal amount’’) under 229.12(d); (3) the amount of funds deposited by certain checks in a new account that are subject to next-day availability (‘‘new account amount’’) under 229.13(a); (4) the threshold for using an exception to the funds availability schedules if the aggregate amount of checks on any one banking day exceed the threshold amount (‘‘large deposit threshold’’) under 229.13(b); (5) the threshold for determining whether an account has been repeatedly overdrawn (‘‘repeatedly overdrawn threshold’’) under 229.13(d); and (6) the civil liability amounts for failing to comply with the EFA Act’s requirements under 229.21(a).

Frequency of Adjustments; Initial and Subsequent Adjustment Dates

The rule specifies that amounts for the six enumerated categories listed above must be adjusted every five years in accordance with a calculation set forth in the rule, with the first adjustment taking effect on July 1, 2020. Thus, each subsequent adjustment following July 1, 2020 will take effect every fifth July 1, (e.g. July 1, 2025; July 1, 2030, etc.).

Calculation Methodology of the Adjustment Amount

The adjustment amount will be calculated across an “inflation measurement period” (defined in the regulation) by the aggregate percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), rounded to one decimal, and then multiplied by the applicable existing dollar amount, the result of which being rounded to the nearest multiple of $25. However, no dollar amount adjustment will be made if the aggregate percentage change is zero or is negative, or when the aggregate percentage change multiplied by the applicable existing dollar amount and rounded to the nearest multiple of $25 results in no change.

When there is an aggregate negative percentage change over an inflation measurement period, or when an aggregate positive percentage change over an inflation measurement period multiplied by the applicable existing dollar amount and rounded to the nearest multiple of $25 results in no change, the aggregate percentage change over the inflation measurement period will be included in the calculation to determine the percentage change at the end of the subsequent inflation measurement period. That is, the cumulative change in the CPI–W over the two (or more) inflation measurement periods will be used in the calculation until the cumulative change results in publication of an adjusted dollar amount in the regulation. 

Adjustments will likely be published in the Federal Register at least one year in advance of their effective date. The Agencies stated they anticipate publishing in the first half of 2024 the adjustment amounts that will take effect on July 1, 2025.

Initial Adjustment Amounts

The following is a list of current dollar amounts that apply prior to July 1, 2020, and the set of first adjustment amounts that will take effect on July 1, 2020.

  1. For purposes of the minimum amount under § 229.10(c)(1)(vii), the dollar amount in effect prior to July 1, 2020 is $200; effective July 1, 2020, the amount will be $225;
  2. For purposes of the cash withdrawal amount under § 229.12(d), the dollar amount in effect prior to July 1, 2020, the amount is $400; effective July 1, 2020, the amount will be $450;
  3. For purposes of the new account amount, large deposit threshold, and the repeatedly overdrawn threshold under §S 229.13(a), (b), and (d) respectively, the dollar amount in effect prior to July 1, 2020, the amount is $5,000; effective July 1, 2020, the amount will be $5,525; and
  4. For purposes of the civil liability amounts under § 229.21(a), the dollar amounts in effect prior to July 1, 2020, are $100, $1,000, and $500,000 respectively; effective July 1, 2020, the amounts will be $100, $1,100, and $552,500 respectively.

Updating Disclosures & Notices

Institutions will need to update funds availability policies, disclosures, and notices (including change-in-terms notices for existing accounts) that will be provided on and after the applicable effective date to reflect the appropriate adjusted amount(s). It should be noted that rule has not changed the timing or content requirements for such policies, disclosures, and notices.

Revised and New Commentary Examples in the Regulation

The rule has revised and added certain examples in the commentary to reflect the July 1, 2020 adjustment amounts, and to address the new adjustment amount calculation methodology. However, the rule neither addresses nor modifies model hold notice verbiage or format, as a separate rulemaking is underway for that purpose.

Conclusion

Fortunately, the rule provides a substantial period of time before the first set of adjusted amounts is effective on July 1, 2020. Institutions should read the rule and begin reviewing their funds availability policies, disclosures, and notices to identify needed changes, and devise an implementation strategy for accounts opened prior to July 1, 2020, and those opened on or after that date. In addition, the plan should address procedures for future adjustments. The final rule may be viewed at: https://www.govinfo.gov/content/pkg/FR-2019-07-03/pdf/2019-13668.pdf 

By, Ally Bates

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House icon and keys

Who Must Sign The Mortgage?

The below article is the Special Focus section of the May 2019 Compliance Journal. The full issue may be viewed by clicking here.

When originating a mortgage loan, banks often find themselves asking “who needs to sign the mortgage”. It’s a great question and the trite, lawyerly answer, is “it depends”! Given the fact that Wisconsin is a community property state and has a marital property act which includes homestead protections, the answer is not necessarily easy.

There are, of course, certain straightforward scenarios that follow the “General Rule”. The General Rule is this: only those parties in title to the property securing the loan are required to sign the mortgage. Of course, there is an exception to the General Rule – when you have a married person(s) in title to the property securing the loan, the spouse of the titled individual may be required to sign the mortgage.

The following hypotheticals demonstrate application of the General Rule.

  1. Mom and Daughter, both unmarried individuals, are borrowers on a loan. The loan will be secured by Mom’s home, for which Mom is the sole titleholder. Though Mom and Daughter are both borrowers, only Mom must sign the mortgage as the sole titleholder.
  2. Same facts as (1) above, except both Mom and Grandma are in title to the property. Grandma is unmarried. In this case, though Mom and Daughter are borrowers, Mom and Grandma must sign the mortgage because they are both titleholders.
  3. Son and Son’s Wife are borrowers on the loan and Dad is a Guarantor. The loan will be secured by a home in which Son and Son’s wife permanently reside, but Dad and Uncle are the titleholders. Dad and Uncle are both unmarried. In this case, Dad and Uncle must sign the mortgage. Son and Son’s Wife are not required to sign the mortgage despite the fact that they are married and the property is their permanent residence – in this case, neither spouse is in title to the property and thus no exceptions to the General Rule apply, as described in further detail below.

Of course, every good rule has exceptions. In this case, the exception to the General Rule is as follows: If a married person is in title to the property securing the loan, the spouse of that individual will also be required to sign the mortgage if the conveyance alienates either or both spouses’ homestead interest, even if the spouse is not in title. See Wis. Stats §706.02(1)(f). This requirement to obtain the spouse’s signature (the “exception”), however, does not apply to purchase money mortgages. See Wis. Stats §706.02(1)(f). In other words, if the mortgage is a purchase money mortgage, you’re back to the General Rule and the spouse of the married titleholder will not be required to sign the mortgage if the spouse is not going to be listed as an owner of the property, even if the property is homestead property or either or both spouses.  

Thus, assuming the bank is not originating a purchase money mortgage, the bank must require signatures of all titleholders PLUS the spouse of a married titleholder if the property is the homestead property of either or both spouses. 

Banks should note that a “homestead” is defined under Wis. Stats. § 706.01(7) as “the dwelling, and so much of the land surrounding it as is reasonably necessary for use of the dwelling as a home, but not less than one-fourth acre, if available, and not exceeding 40 acres.” Customers should indicate to the Bank whether the property is homestead property and such information should be contained on the mortgage itself.

If the bank does not obtain the signature of the married titleholder and the spouse of the titleholder, the mortgage is void and unenforceable. This interpretation of Wis. Stats. § 706.02(1) and (1)(f) was recently confirmed in a 2017 court case – U.S. Bank National Association v. Charles E. Stehno III, 2017 WI App. 57 (August 30, 2017). In Stehno, the Bank attempted to foreclose on mortgages signed by Charles Stehno in December 2002 and April 2003. The property was Stehno’s homestead at the time he signed the mortgages. However, the mortgages were not signed by his then-spouse, Candice Wells. Therefore, according to the court, the mortgages were invalid from the start against both spouses because only Stehno signed them. 

The following hypotheticals demonstrate application of the Exception to the General Rule:

  1. Husband and Wife are refinancing their homestead property. They are both listed as borrowers on the loan. Husband is the sole titleholder on the property. Both Husband and Wife must sign the mortgage because it’s conveying an interest in the homestead property of both spouses on a non-purchase money loan.
  2. Daughter and Daughter’s Husband are borrowers on second mortgage loan. The property securing the loan is titled in Dad’s name only and it’s Dad’s homestead property. Dad is married to Stepmom who does not live in the property. Both Dad and Stepmom must sign the mortgage because this is a non-purchase money loan which conveys the homestead interest of one spouse.
  3. Daughter and Son are refinancing their parents’ homestead property and are borrowers on the loan. Dad is married to Mom and the property securing the loan is both Dad’s and Mom’s homestead. Dad and Grandma are in title to the property. Grandma is unmarried. Dad, Mom, and Grandma must sign the Mortgage. Dad and Grandma must sign because they are titleholders. Mom must sign because this is a non-purchase money loan which conveys the homestead interest of Mom and Dad.
  4. Husband and Wife are looking to originate a purchase money mortgage loan for which they will both be borrowers. The loan will be secured by property held by husband only. Husband only will live in the property as his homestead. In this case, only husband must sign the mortgage because this is a purchase money loan and, therefore, the Exception to the General Rule does not apply.

In summary, taken altogether, the signatures needed on a mortgage are as follows: (1) All titleholders and (2) if the loan is not secured by a purchase money mortgage, the spouse of any married titleholder to the extent the property is the homestead of one or both spouses.

Finally, it’s best to obtain a title insurance policy that lists the owners of the property being mortgaged. Title insurance companies will also list the names of all individuals required to sign the mortgage so banks may have additional comfort that the correct individuals are signing the mortgage.

WBA wishes to thank Atty. Lauren C. Capitini, Boardman & Clark, llp for providing this article.

Learn more about the Wisconsin Marital Property Act at the June session of the WBA Compliance Forum.

By, Ally Bates

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Wisconsin Bankers Association logo

questions@wisbank.com

608-441-1200

4721 S Biltmore Ln.
Madison, WI 53718

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