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When a Loan Customer Dies

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Tuesday, October 27, 2015 Presenter: Susan Costonis

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Webinar for:

Susan Costonis, C.R.C.M. Compliance Training & Consulting for Financial Institutions Email: [email protected]

When a Loan Customer Dies: What are the top 15 issues?

October 27, 2015

WHENALOANCUSTOMERDIES‐15ISSUES Page2

4H

INSTRUCTOR

Susan Costonis is a compliance consultant and trainer. She also has an affiliation with gettechnical inc. as an associate trainer. Her 37 year career in banking and training began with 20 years at First National Bank an affiliate Wells Fargo Bank, in Fort Collins, CO. Susan has been a bank compliance consultant or compliance officer in Louisiana since 1998. During her career, Susan has successfully managed compliance programs and exams for institutions supervised by the OCC, FDIC, and Federal Reserve. She is a Certified Regulatory Compliance Manager and completed the ABA Graduate Compliance School. Susan also graduated from the University of Akron with a B.S in Art Education and the Graduate Banking School of the University of Colorado.

[email protected] (e-mail)

The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the material; however, the accuracy of this information is not guaranteed. The laws and regulatory guidance may be changed often so the user must verify whether or not the information remains current. The WHEN A LOAN CUSTOMER DIES-15 ISSUES manual is sold with the understanding that the publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company's employees.

The text is designed to address a variety of lending compliance issues. However, you will wish to consult with your compliance staff and/or attorney when you are not sure of an answer.

Published by:

Susan Costonis, C.R.C.M Compliance Training and Consulting for Financial Institutions

All rights reserved. This material may not be reproduced in whole or in part in any form or by any means without written permission from the publisher.

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TABLE OF CONTENTS

CHAPTER 1 OVERVIEW AND DEFINITIONS .................................................................................................... 4 INTRODUCTION: OVERVIEW OF THE MANUAL AND SEMINAR OBJECTIVES ....................................... 5 KEY QUESTIONS IN HANDLING THE DEATH OF A LOAN CUSTOMER ...................................................... 6 IS DEATH A TRIGGERING EVENT FOR DEFAULT? .................................................................................. 7 HOW SHOULD LENDERS HANDLE THE BORROWER’S DEPOSIT ACCOUNTS? ......................................... 8 DEFINITION OF TYPES OF BORROWERS ................................................................................................. 10 PROBATE PROCESS - WHAT HAPPENS TO THE COLLATERAL? .............................................................. 14 EFFECT OF THE BORROWER’S DEATH IN THE CLAIM PROCESS ........................................................... 15 WHAT ABOUT INSURANCE AND RIGHT OF SET-OFF? ............................................................................. 18 CONTACTING COUNSEL AND SALE OF COLLATERAL ............................................................................ 19 CONSIDERATIONS FOR A BUSINESS LOAN SITUATION ........................................................................... 20

CHAPTER 2 UNDERWRITING, DOCUMENTATION, CONSUMER LENDING ISSUES ........................... 21 REGULATION B AND SPOUSAL SIGNATURES .......................................................................................... 22 REVIEW AND SPOUSAL SIGNATURE CHECKLIST ................................................................................... 27 HOME EQUITY LINE OF CREDIT ............................................................................................................. 31 REVERSE MORTGAGE ISSUES ................................................................................................................. 32 FIL-28-2012 GUIDANCE ON MORTGAGE SERVICING FOR MILITARY HOMEOWNERS ........................... 34 SCRA BASICS .......................................................................................................................................... 35 SCRA PROVISIONS FOR MORTGAGES AND TRUST DEEDS ...................................................................... 36 SCRA WEBSITE ....................................................................................................................................... 37

CHAPTER 3 COMMUNICATION AND NOTICES ............................................................................................. 38 COMMON QUESTIONS AND ANSWERS FROM THE CONSUMER’S PERSPECTIVE .................................... 39 QUESTIONS ABOUT FUNERAL EXPENSES ............................................................................................... 41 WHAT INFORMATION SHOULD BE SHARED? ......................................................................................... 42 NOTICES TO CO-SIGNERS, GUARANTORS, AND JOINT ACCOUNT HOLDERS .......................................... 43 RESPA CHANGES EFFECTIVE JANUARY 10, 2014 ................................................................................. 44 COLLECTION AND FORECLOSURE ISSUES AND RIGHT TO CURE NOTICES ............................................ 45 AUTHORIZED USER ON DECEDENT’S DEBIT CARD ACCOUNT ............................................................... 46

CHAPTER 4 INSURANCE ISSUES ....................................................................................................................... 47 GENERAL COMMENTS ABOUT INSURANCE ............................................................................................ 48 FINANCIAL INSTITUTION LETTERS FIL 127-2004 ................................................................................. 49 SUMMARY OF 15 ISSUES ........................................................................................................................ 54 SUGGESTIONS FOR DEALING WITH DECEASED LOAN CUSTOMERS ...................................................... 55

APPENDIX ................................................................................................................................................................ 56 REGULATION B - NOTICE FOR JOINT INTENT OF APPLICATION ........................................................... 57 POWER OF ATTORNEY STATUTES .......................................................................................................... 58 DOCUMENTATION AND TYPES OF ESTATES ........................................................................................... 60 CHECK YOUR STATE LAW REGARDING MEMBERS IN MILITARY SERVICE ............................................ 62 SCRA INFO FROM HUD ............................................................................................................................ 63 SCRA ENFORCEMENT ACTIONS ............................................................................................................. 66 DOJ SCRA ENFORCEMENT ACTIONS ...................................................................................................... 67 SCRA DELINQUENCY NOTICE ................................................................................................................. 69 HELOC RESTRICTIONS ........................................................................................................................... 71


CHAPTER 1 OVERVIEW AND DEFINITIONS


INTRODUCTION: OVERVIEW OF THE MANUAL AND SEMINAR OBJECTIVES

As lenders, we work hard to make good underwriting decisions regarding a borrower’s repayment ability. In addition to analyzing a consumer’s income or the cash flow of a business, it’s a common practice to also take a security interest in collateral. The collateral types vary greatly and each type has specific requirements to perfect a security interest and mitigate credit risk. One risk factor that’s difficult to predict is death. When a customer passes, the family is grieving and struggling to cope. If the death involves a sole proprietor, or partner, or a key corporate officer, it may mean that a number of high balance loans are outstanding and repayment is uncertain. Lenders would like to be sensitive to the loan customer’s family or help the remaining business owner, but the compliance clock doesn’t stop ticking. What happens now, and what are the critical issues? .

Join us for a discussion of 15 issues that should be considered before handling a deceased customer’s loan accounts and learn additional tips to protect the interests of your financial institution when making a loan.

HIGHLIGHTS Is the “death” of a customer a triggering event for default? What type of language should

be in a commercial note in the event of the death of a borrower or guarantor? Are “Right to Cure Notices” required How should lenders handle questions about with the borrower's estate? What information can be shared? Who is entitled to the information? What documents or information does a financial institution need before releasing the

information? Is there standard language that your loan agreements should have regarding the death of a

borrower? What if the deceased borrower was also a service member on active duty? What

protections must be extended to the surviving family members? How should notices to co-borrowers, guarantors, and co-signers be given? What is the effect of the death of a borrower on the foreclosure process? Are Home Equity Lines of Credit impacted upon the death of a borrower? How can a financial institution protect its collateral after the borrower has died? How does the financial institution handle issues of guarantors, setoff and insurance when

the borrower has died? What do the banking regulations and exam guidelines say about the event of a borrower’s

death? How does the death of a key person affect the extensions of credit to Corporations,

Partnerships, Limited Liability Companies, Trusts and other legal entities? When should “Key Man” insurance be required? What are the pros and cons of credit life

insurance?WHO SHOULD ATTEND? This informative session is designed for customer service representatives, branch managers, lenders, loan operations, credit administration, compliance personnel, legal staff, and anyone who handles loan accounts


KEY QUESTIONS IN HANDLING THE DEATH OF A LOAN CUSTOMER

There are several issues to consider when handling the disposition of a loan in the event of the death of a borrower (both for a consumer or commercial-purpose loan).

Here are some possible questions to ask:

1. How was the bank notified or how did the bank became aware of the death of the borrower?

2. Are there deposit accounts related to the loan that can be used as a right of set-off? 3. If the borrower has been ill or incapacitated, has the bank allowed a personal

representative with a power of attorney to conduct business on the borrower’s behalf? 4. Is the loan made to an individual or sole proprietor under a line of credit? If yes, has the

bank stopped making advances on the line? Is there an authorized signer who has the power to make draws?

5. What type of borrower is involved? (See the section that describes “Definitions of Borrower Types”). If the borrower was an active servicemember, there may be special provisions under the SCRA.

6. Did the borrower die prior to loan closing? Have the funds been advanced yet? (See the section that describes “Definitions of Borrower Types”)

7. Is there collateral securing the loan? 8. Is there a joint owner of the collateral? Is the joint owner also a borrower on the note? 9. Is the loan “flagged” in some way to let other employees know that further contact or

conversations regarding the loan should only be handled by the loan officer, or a manager, or an attorney that represents the bank?

10. Are there insurance proceeds that may be used to pay the loan? 11. What does the note or security agreement way about death as a condition of default? 12. What is the payment history on the loan? Is it current at the time of death? Who has

been making the payments on the loan?


IS DEATH A TRIGGERING EVENT FOR DEFAULT?

Lenders work hard to “mitigate” risk when underwriting a loan request. Unfortunately, when a loan customer dies there can be significant risks to the institution for legal actions that the estate or remaining business owners may take against the bank if applicable laws haven’t been followed when handling deposit account issues as well as the lending arrangements and collateral. Typically, the death of a borrower or even a guarantor will trigger a default condition under most promissory notes and/or security agreements. This language is from a commercial promissory note from a LaserPro bank that outlines the conditions of default:

Payment default Default under Security Agreements Other Defaults in favor of the lender Default in favor the third parties Insolvency Death or Interdiction “Should any borrower or any guarantor of this Note die or be

interdicted” Assignment for Benefit of Creditors Receivership Dissolution Proceedings False Statements Material Adverse Change Insecurity

This language is from a consumer promissory note from a LaserPro bank that outlines the conditions of default and acceleration: “The Lender has the right, at its sole option, to insist upon immediate payment (to accelerate the maturity) of this Note upon any one or more of the following events of default: (A) Should I fail to make any payment under this NOTE when due; (B) should a default occur or exist under the security agreement directly or indirectly securing this note; (C) should I default under any other loan or obligation in favor of the Lender (D) If I should die, or become insolvent, or apply for bankruptcy or other relief from creditors. Insecurity – Lender in good faith believes itself insecure with regard to repayment of this Note, should I or any guarantor of this Note make any representation or warranty to Lender in connection with obtaining credit that proves to be incorrect or misleading in any respect.


HOW SHOULD LENDERS HANDLE THE BORROWER’S DEPOSIT ACCOUNTS?

Your bank may, or may not, have a specific written procedures about handling both deposit account and loan accounts in the event of the death of a borrower. Surviving family members or business partners have legitimate concerns about access to deposit accounts and collateral in the event of death. Generally speaking, these questions should be handled by a supervisor, senior loan officer, or sometimes by the bank’s legal counsel rather than the frontline staff or customer service personnel. There are many complicated legal issues to consider when dealing with deposit funds that range from UCC provisions for paying checks prior to the time the financial institution is notified of death and the type of accountholder who is involved. The rules can be very confusing. Here’s a chart of various concerns about deposit accounts.

TYPE OF DEPOSITOR or TRANSACTION

GOVERNING LAWS or COMMENTS

Sole depositor, not payable on death

UCC 4-405; the financial institution is not liable for paying checks after a drawer has died until it receives the notice of death. Even with a death notice, the bank can, but is not required, to pay checks for up to 10 days after the customer has died unless a person claiming the account (like a payable on death beneficiary) orders payments to be stopped.

ACH Payments If the decedent authorized the ACH payments, then the payments may be made. However, a financial institution can limit exposure by following the 10 day rule above so that payments aren’t make to parties that would otherwise have to file claims against the estate to collect the funds. The executor or administrator of the estate will have the right to petition for the return of funds from the payee if the payments shouldn’t have been made.

Where an estate or succession has been established

If there is not payable on death beneficiary, the funds shouldgenerally be held until estate or succession has been established. The estate is responsible for handling the financial affairs and will be appointed by the court by an executor or administrator. The estate account must have its own EIN. (There is a 9184 IRS Revenue Ruling that addresses this issue). These funds are typically “owned” by the Estate (Ida B Estate) and titled like this: Ida B Estate, Sam Smith Executor Ida B Estate, Sam Smith Administrator


Documentation to open an estate account

1. Court order appointing executor or independent administrator

2. Letters Testamentary of Letters of Administration 3. Signature card signed by the Executor/Administrator

CIP Remember that the BSA rules for CIP still apply and must be satisfied. In the case of an estate account the ESTATE is the customer, not the individual acting as the executor or administrator. This is a unique legal entity from the decedent and should be treated as a new customer. Typically, a bank will require these items:

1. Name 2. Address 3. TIN (EIN) 4. Documentary Verification 5. Letters Testamentary or Letters of Administration

If there is no estate The bank will maintain the account in the name of the decedent if an estate isn’t established. (See the “Documentation and Types of Estates section in the Appendix). If, however, the funds are never transferred the account will be considered “unclaimed property” and must be given to the state through the escheat process.

FDIC insurance There is a unique FDIC insurance category available for POD accounts but the coverage can be drastically reduced when one of the joint owners of a POD account passes. Train employees to understand the rules. When in doubt, refer them directly to the EDIE calculator and the FDIC service center for deposit insurance accounts. The death of an account owner will in most cases reducethe amount of insurance coverage If an account owner dies, for the purpose of calculating deposit insurance coverage, FDIC provides a six-month grace period during which the account will be insured as if the account owner had not died


DEFINITION OF TYPES OF BORROWERS

One of the first questions that should be asked is: “What type of borrower was involved and how will this impact the repayment of the loan? Obviously, if the decedent was the sole borrower of the obligation then his or her death has a greater impact than if the customer was a co-maker or guarantor in a consumer transaction, or an officer of a corporation. This chart lists several types of borrowers and some of the concerns that may apply in all situations, such as protecting collateral, and other considerations that are unique to that type of legal entity, governing laws, and the specific contract language contained in various documents. In many states, an average simple estate probate process will be completed by an attorney. It can be done within 30-60 days if there are limited assets. See the Appendix for selected sections regarding the Power Of Attorney Statues and Types of Estates. The process will typically begin with these events – check YOUR STATE’s PROBATE LAWS for specific procedures, notice requirements, and restrictions:

1. File a petition to probate the will 2. Complete a detailed descriptive list of assets and liabilities 3. File a petition for possessions.

TYPE OF BORROWER CONCERNS AND ACTIONS Individual Borrower; this includes consumer, sole proprietor, single-member LLC

1. Locate the collateral –The bank has a right to protect its’ security interest. This can be difficult with personal property that is not in the bank’s possession. If the collateral is jointly owned, it’s critical to contact the joint owner to determine the collateral location and arrange to make a physical inspection. Often property that is held by “transfer on death” or “payable on death” tend to have a higher risk for mysteriously disappearing if the bank is not diligent to protect its’ interests.

2. Secure the collateral – Personal property collateral, especially the type that may be subject to deterioration or substantial decline in value, should be protected and secured. Once the estate or succession is opened the executor/administrator is responsible to protect and maintain the collateral on behalf of the lender. There may be costs associated with the process, but they may have been addressed under the terms of the loan documents. If a third party has the property (through a beneficial interest or through contract, the lender should arrange to take possession or have a reasonable belief that the collateral can be maintained by the third party in a manner consistent with the lender’s interests.


3. Due diligence with the equity is held by the decedent’s estate or heirs. While the lender may be sympathetic to the spouse, heirs, or estate, it’s important to understand that the financial institution was an equity interest in the secured assets.

4. Stop advancing on lines of credit. If there is only one borrower who is an individual or sole proprietor under a line of credit, the lender should stop making advances to any party who is not a court-appointed estate representative. At that point, the lender must have a reasonable basis to expect that the estate will be able to repay the advances. The sole proprietor may have one or more authorized signers who can draw on the line of credit. Practically, the authorized signer is an attorney in fact under a limited power of attorney. Upon a borrower’s death, the limited power of attorney ceases. A bank’s exposure can be increased if it continues to make advances to a party that is not obligated by law to repay the loan.

Sole-Member LLC; this is different than a sole proprietor

A sole proprietor is doing business as an individual so that when the person dies, the business does as well. This is not true with a sole-member LLC; the LLC lives on after the sole-member dies. The shares in the LLC can be transferred to another person through the estate or by designating the shares as “transfer on death”. The advantage to this business model is that the LLC can continue business with minor, if any, interruption in the daily operations. The lender can continue to have a business relationship with the LLC despite the passing of the sole-member. However, this option can present some interesting challenges if the reason for the success of the business was because of the sole member’s abilities. (Think Warren Buffett or Steve Jobs in the early days) Is there another individual or group of employees who can effectively assume the shares of the LLC and continue to run a profitable business in the shadow of the deceased sole-member?

Consumer co-makers or co-applicants

The death of a co-maker for a consumer obligation is a default under the terms of the agreement. (This was covered in death as a “triggering event” on page 7). Often the collateral was owned by the co-makers and the legal ownership can take several forms depending on state laws and the type of collateral. There are typically these three forms in NON-COMMUNITY PROPERTY STATES:

1. Joint Tenancy with rights of survivorship (JTWROS)

2. Tenancy in common


3. Tenancy by the entirety In the case of JTWROS and tenancy by the entirety, the collateral is now owned by the surviving co-maker. It’s usually a best practice to approach the co-maker who has survived to discuss how future payments will be made rather than jumping to conclusions and placing the account in collections or pursuing other legal remedies for default. In many cases the co-maker may not be able to make the loan payments; this can often be true with a non-working spouse and other situations. At this point there are typically two options:

1. Renegotiate a new loan with a revised structure 2. Take possession of the collateral. However this option

will require the lender to exercise their right to seek a deficiency judgment from the estate or co-maker.

In COMMUNITY PROPERTY STATES, like Louisiana, each spouse has a 50% interest in the entirety. This means each spouse can donate a 50% interest subject to their possession interest.

Partnerships As outlined in the co-maker issues to acquire the collateral, if the decedent was a partner in a general partnership or the general partner in a Limited Partnership, it’s critical to carefully review the terms of the partnership agreement to determine what remedies may be available. Did the agreement clearly outline what happens in the event of death of one of the partners? The original Uniform Partnership Act allowed for the death of a partner to be a basis for dissolving the partnership. However, this step would prevent enforcing repayment of future advances made to the entity. If the revised Uniform Partnership Act language was used, the death of a partner doesn’t cause the partnership to dissolve but allows the remaining partners to buy out the deceased partner’s now dissolved interest. A smart lender will carefully consider whether or not to advance funds without knowing which of the partners will ultimately be responsible for payment and whether or not they have the ability to make the payments. There typically is not a significant legal impact on the entity when the death involves a limited partner or member of an LLC. However, there may be great impacts if the deceased was a key person to the partnership. This is discussed in “corporations” in the next section

Corporations and Multi-member LLC

A lender isn’t typically overly concerned about the death of a corporate officer or member of a multi-member limited liability company as long as the steps to protect the collateral that were previously outlined have been followed. Of course a new corporate resolution should be executed by the borrower’s


board of directors that specifies who has replaced the decedent as an authorized officer for the purposes of both future advances or lending arrangements. On a practical level, the lender should have a reasonable belief that the death of this officer will not have an unacceptable impact to the ability of the corporation to do business. This is true in the case of a closely-held corporation where the decedent was a “key person.” The reliance on a key person who has passed could mean that the corporation is no longer viable. If the bank anticipated this problem in the underwriting process and obtained reasonable insurance coverage or have ample collateral so the problem will have been mitigated (See Insurance Coverage Issues in Chapter 3 for more information). If either of these conditions isn’t met then the lender may be able to use the default provisions typically seen in commercial notes that cite “Material Adverse Change” or “Insecurity” in the promissory note.

Guarantor becomes deceased It’s possible for a lender to “deem itself insecure” when a guarantor dies. The note generally has a provision for this default provision or it may be in the guaranty agreement.

Loan closing has not yet been consummated or loan advances have not yet been made

If the borrower passes before loan closing or funds have not yet been advanced on a recently closed loan, there are several issues to consider. The lender may elect to simple not go to closing or suspend the advances until a determination can be made about the credit worthiness of any joint borrower. Sometimes this happens with a family business held by a sole proprietor and the relatives need the funds to keep the business running. A best practice would be to decline to advance the funds until the estate is settled and an effective analysis can be done for the remaining business entity. While this may not be “sympathetic” approach, it keeps the lender from a more complicated legal position and reduces the risk of loss. These situations typically require the advice of counsel.


PROBATE PROCESS - WHAT HAPPENS TO THE COLLATERAL?

If the deceased loan customer was an individual debtor there will typically be legal process to establish an estate to settle the financial affairs. When the customer has a will (“testate”), the court will appoint an executor or executrix or order the appointment of this individual. When there is no will (the debtor is “intestate”) the court will often appoint an administrator or administratrix with Letters Testamentary; some state laws identify this person as a “personal representative. A lender, or counsel, should review the trust, will, or other directives involved in probate or a succession to understand how the decedent intended for the collateral to be used and any prior or challenging claims. If the collateral has greater value to the lender than to the other interested party (beneficiaries of the estate, heirs, etc.), a fair proposal can be made for that person or entity to assume the debt. This is frequently the case with business operations and real estate in some cases. It may, or may not, work with motor vehicles or other titled vehicles or farm equipment. If a borrower has pledged his vehicle against the note, but also left it to a family member in their will, the bank will have a purchase money security interest. If the family member may be willing, if they are able to qualify according to the lenders standards, to assume the loan in order to keep vehicle. These trade-offs can become more complicated when co-makers and guarantors are involved in the transaction. It’s not always possible to make the same accommodation without impairing the bank’s position with the obligations of the co-makers or guarantors in these cases.


EFFECT OF THE BORROWER’S DEATH IN THE CLAIM PROCESS

If the deceased loan customer’s deposit accounts and collateral aren’t great enough to satisfy the outstanding loan balance the financial institution has no recourse other than to file a claim against the decedent through the probate process. EVERY STATE HAS UNIQUE STATUTES FOR THE PROBATE PROCESS! CHECK YOUR STATE LAWS FOR THE SPECIFIC PROVISIONS. TYPICALLY, THE FINANCIAL INSTITUTION WILL INVOLVE LEGAL COUNSEL TO FILE ANY CLAIMS! There will be a specific format for the claim in accordance with state law or specific rules of a particular court. Some state bar associations will provide the forms on their website. This is a link to the Missouri Courts: http://www.courts.mo.gov/page.jsp?id=662 This is a link to the Michigan Courts: http://courts.mi.gov/administration/scao/forms/pages/search-for-a-form.aspx See the next pages for a sample statement and proof of claim from Michigan




WHAT ABOUT INSURANCE AND RIGHT OF SET-OFF?

If a credit life policy was purchased in association with the debt, there may be additional relief when a borrower passes and a claim can be filed. The lender will need a certified copy of the death certificate from the executor/or administrator of the estate or succession. If a life insurance policy itself was held as collateral for the loan then the executor or administrator should be contacted to confirm that claim has been filed. The pace of processing insurance claims is typically slower than the surviving family members, lenders, and other interested parties would prefer. The lender should anticipate that the process of working with the decedent’s estate, representatives, and insurance company will be a slow process before the claim is settled. On the other hand, the event of death is a default under most loan agreements and allows the lender to exercise the right of set-off against deposit accounts if:

1. The deposit accounts are held by the decedent (either in the decedent’s name individually or as a joint tenant)

2. WARNING – Do not setoff corporate debts with individual deposits or use corporate deposits to pay individual debts.

3. There are additional restrictions under Regulation Z (Truth in Lending) to set-off credit card debt; unfortunately there is not a great deal of clarity about how this applies to the decedent’s estate.

4. Be careful with the exception of government benefit payments like Social Security or Veteran’s benefits which are protected from the right of setoff.


CONTACTING COUNSEL AND SALE OF COLLATERAL

Issues to be evaluated:

• Review documents with legal counsel for complicated and large dollar loans • Who has the greatest interest in the collateral? • Can the debt be renegotiated with an interested party? • If so, what are the trade-offs?

Legal counsel should always be required before disposing of collateral when a customer has passed. This is particularly true when the subject collateral is the borrower’s primary residence and the family is still in the home. There are several community property states when this protection may present some additional and unique challenges. Some states, like Texas, have very strict “homestead protection” laws. They may be found in Article XVI, Section 50 of the Texas Constitution and in Texas Property Code Chapters 41 and 42

This is a partial excerpt from two Texas court cases:

A creditor is on notice that homestead protections will apply if the debtor occupies a homestead. "When a homestead claimant is in actual occupancy of his homestead, it will be deemed that a lender or encumbrancer acted with knowledge of the occupant´s right to invoke the rule of homestead." Sanchez v. Telles, 960 S.W.2d 769, 772 (Tex. App. – El Paso 1997, pet. Denied). Moreover, the homestead is presumed to endure. "Once property has been dedicated as homestead, it can only lose such designation by abandonment, alienation, or death. After the party has established the homestead character of the property, the burden shifts to the creditor. . . to disprove the continued existence of the homestead. In other words, a homestead is presumed to exist until its termination is proved." (Wilcox v. Marriott, 103 S.W.3d 469, 472 (Tex App. – San Antonio 2003, pet. denied). Once obtained, homestead rights are not easily lost. A homestead claimant may even temporarily rent the property so long as another homestead is not acquired (Prop. Code Sec. 41.003).

It’s not uncommon for a lender, especially a community bank, to have an abandoned mobile home as collateral for a decedent, but it’s located on another person’s or relative’s property who doesn’t want to cooperate with the lender to remove the property. AGAIN – Call your bank’s legal counsel.


CONSIDERATIONS FOR A BUSINESS LOAN SITUATION

The decedent’s heirs or estate may have a strong wish to continue the business of a decedent. In that case, the lender may be asked to loan additional funds or forego exercising a default privilege. This type of request creates some new areas of concern that include the following: What should be considered when lending to an estate? Family members or interested parties in the decedent’s estate may want to keep the business alive and the bank is asked to either continue to extend credit or make new funds available. There can be many legitimate needs for the funds for the payment of taxes when the assets of the estate aren’t easily liquidated. In addition to normal underwriting concerns, a lender may want to have the following legal documentation:

1. Copies of any court orders that appoint an executor, administrator, or in Louisiana an independent administrator

2. Obtain a court order that specifically approves out outlines the loan terms including the list of assets that have been pledged as security for the loan being extended to the estate.

What should be considered when lending to a trust? These types of loans to the trust after a decedent’s passing are normally a longer-term solution. The estate typically operates to transfer to business assets to the heirs, while the trust tends to support the longer-term operations of a business entity. For this reason, the lender will need assurances regarding the strength of the trust as a borrower just as it would analyze any borrower. The lender should be aware that the trust (when the grantor is not the trustee as in most decedent scenarios) is an independent legal entity with full power to borrow money and pledge the assets held in trust unless the trust document limits this power. In addition to normal underwriting concerns, a lender may want to have the following legal documentation:

1. Have legal counsel review the trust instrument to confirm that the trustee does, in fact, have to power to pledge assets to secure the repayment of debt and borrow money or, depending on state laws

2. Obtain a certification of trust which the trustee provides an affidavit regarding the unrestricted power to borrower and pledge; or

3. Get an attorney’s opinion that the trustee has the necessary unrestricted power to borrow money and pledge trust assets.


CHAPTER 2 UNDERWRITING, DOCUMENTATION, CONSUMER

LENDING ISSUES


REGULATION B AND SPOUSAL SIGNATURES

This information is from FIL 09-2002 and can be found on the FDIC website. I. Overview

Federal Reserve Regulation B, which implements the Equal Credit Opportunity Act (ECOA), specifically limits when a creditor may seek an applicant's spouse as a cosigner or guarantor. These rules vary depending on the circumstances, such as whether:

the applicant's creditworthiness is supported or secured by property that is jointly owned, the application is for joint credit, or a community property state is involved.

II. Spousal Signatures: General Rules, Exceptions and Related Requirements

A. General Rules

A creditor cannot ask for or require the signature of an applicant's spouse or any other additional party on a credit instrument if the applicant:

requests an individual credit account, and

individually meets the creditor's standards for creditworthiness for the amount and terms of the credit requested.1

In summary, if the applicant applies for individual credit and meets the creditor's standards for creditworthiness, Regulation B prohibits a creditor from requiring either the additional signature of a cosigner on the credit instrument or a guarantor.2

If the applicant does not meet the creditor's credit standards, the creditor can require a co-signor or guarantor, but it cannot require that the cosigner or guarantor be the applicant's spouse.3

B. Exceptions

However, there are exceptions to the spousal signature rules:

1. Secured credit

If an applicant requests secured credit, a creditor may require the signature of the applicant's spouse or other person "on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default."4

2. Unsecured credit


If an applicant requests unsecured credit and relies on jointly owned property to establish creditworthiness, "the creditor may require the signature of the other person only on the instrument(s) necessary, or reasonably believed by the creditor to be necessary, under the law of the state in which the property is located, to enable the creditor to reach the property being reliedupon in the event of the death or default of the applicant."5

3. Unsecured credit—community property states

"If a married applicant requests unsecured credit and resides in a community property state, or if the property upon which the applicant is relying is located in such a state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if:

a. applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested under the creditor's standards of creditworthiness; and

b. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property."6

Note: What is Community Property?

Community property laws determine, among other things, which spouse has management and control over the marital property, and in turn, who has the legal power to commit the property to support a credit or secure a loan. Creditors making loans (a) to married borrowers who live in a community property state or (b) that are supported or secured by collateral located in a community property state should become familiar with the management and control provisions of the community property law in such states to assure that signatures on security and/or credit instruments are limited to those necessary to perfect their interest in the underlying collateral in the event of the borrower's death or default.

As of the date of this letter, Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin use some form of community property system. Since state laws are subject to amendment and repeal, creditors should confirm this list with counsel.

C. Related Requirements

1. Need for signature on note—definition of "reasonable belief"

In most states that do not follow community property principles, the co-owner does not have to sign the note to grant the creditor access to the property, but only the security documents, such as a mortgage or lien. If a creditor believes that the co-owner's signature is needed on an instrument that imposes personal liability to assure access to jointly owned property securing the debt, such belief should be supported by a thorough review of pertinent statutory or decisional law or an opinion of the state attorney general obtained prior to requiring the signature.7


2. Rules applicable to spousal signatures apply equally to guarantees

A guarantee on an extension of credit is part of a credit transaction and is subject to Regulation B's rules governing spousal signatures and other anti-discrimination provisions. Although a creditor may require that all partners, directors, officers or shareholders of a closely held corporation personally guarantee a loan, it cannot automatically require their spouses to also sign the guarantee, even if the guarantee is supported or secured by jointly owned property. Obtaining the signature of a guarantor's spouse is subject to the same restrictions as obtaining the signature of an applicant's spouse.8

In cases where an individual has applied for a business loan, a creditor may require the guarantee of another partner, director, officer or shareholder, but this requirement must be based on the guarantor's relationship with the business. For example, a creditor may require all partners, directors, officers or shareholders of a closely held corporation to guarantee a loan, or an additional partner, director, officer or shareholder to provide a guarantee, but it cannot single out a partner, director, officer or shareholder because he or she is the spouse of the applicant.9

3. Integrated note/security agreement

Where a creditor uses an integrated instrument that combines the note and the security agreement, a spouse can be asked to sign the instrument if it is clear, for example, by the use of a legend placed next to the spouse's signature that the spouse's signature is made only to grant the security interest and that signing the instrument does not impose personal liability on the spouse.10

4. Value of an applicant's interest in joint property

When determining the value of an applicant's interest in jointly owned property, a lender must look to the actual form of ownership of the property before or at consummation of the transaction. The possibility of subsequent changes in the form of ownership (for example, by transfer or divorce) may not be considered. 11

III. Ensuring Compliance with Regulation B's Spousal Signature Provisions

As more and more creditors expand the geographical reach of their lending activities through interstate mergers and acquisitions or by taking applications over the Internet, they need to ensure that all loan officers -- consumer and commercial -- are familiar with the restrictions on spousal signatures found in Regulation B. Additionally, creditors need to know the various requirements of state law with respect to joint and marital property, not only in the states in which they operate, but where their borrowers reside or where jointly owned assets supporting or securing a loan are located.

Creditors should consider a three-prong approach to ensuring compliance with the spousal signature rules:


A. Review and revise loan policies and procedures regarding spousal signatures

1. Eliminate loan policies or procedures that are inconsistent with Regulation B's spousal signature provisions.

Specifically, creditors should eliminate loan policies that require:

the guarantee of a loan to a closely held corporation by the spouses of the partners, officers, directors or shareholders of the corporation;

the signature of the spouse on the note when the applicant submits a joint financial statement; or

the signature of the spouse on the note when jointly owned assets are offered as collateral.

2. Expand loan policies and procedures to provide loan staff with specific guidance on state law regarding necessary signatures, particularly in community property states.

Creditors should only obtain those signatures necessary to perfect their security interest. When handling an individual application from a married borrower supported or secured by jointly owned property, the creditor must look at the laws of the state where the borrower resides as well as those of the state where the jointly owned property supporting or securing the loan is located. These state laws will determine what documents must be signed by the co-owner of the property in order to perfect the creditor's security interest in the collateral.

3. Create or amend checklists to address when spousal signatures may be obtained in connection with an individual application for credit.

Creditors should consider creating or revising loan checklists to ask if an application is for individual credit and if so, whether the loan is supported or secured by jointly owned property and if a co-signor or guarantor is required in order to perfect the creditor's security interest in the jointly owned collateral.

Whenever a co-signor or guarantor is requested in connection with an individual application for credit, the lender should document the basis for requiring the co-signor or guarantor and the guarantor's relationship with the applicant or, in the case of a commercial loan, the company.

B. Provide Periodic Training to Both Consumer and Commercial Loan Staff

The Regulation B requirements regarding spousal signatures apply to all loans, consumer and commercial. Education on the spousal signature rules should be part of any training program for new loan staff. Creditors also should provide periodic refresher training, particularly in the event of any expansion of market reach (for example, the taking of credit applications over the Internet, or a change in product base, such as the introduction of a streamlined small business loan program).


C. Monitoring and Audits

Creditors should incorporate in their compliance program a check for spousal signature violations. Monitoring and audits should include reviews of all documents in a representative sample of loan files, particularly the application, financial statements, documents relating to collateral, as well as the credit instrument and any security documents. Special attention should be taken with respect to loans to closely held corporations and business loans supported by jointly owned residential or personal property or other personal assets, like stock or savings.

1 12 C.F.R. § 202.7(d)(1). 2 Id. 3 Official Staff Interpretations, 12 C.F.R. Pt. 202, Supp. I, Paragraphs 202.7(d)(2) and (6). 4 12 C.F.R. § 202.7(d)(4). 5 12 C.F.R. § 202.7(d)(2). 6 12 C.F.R. § 202.7(d)(3)(emphasis added). 7 Official Staff Interpretations, 12 C.F.R. Pt. 202, Supp. I, Parargraph 202.7(d)(4), note 2. 8 Official Staff Interpretations, 12 C.F.R. Pt. 202, Supp. I, Paragraph 202.7(d)(6), note 2. 9 Official Staff Interpretations, 12 C.F.R. Pt. 202, Supp. I, Paragraph 202.7(d)(6), note 1. 10 Official Staff Interpretations, 12 C.F.R.Pt. 202, Supp. I, Paragraph 202.7(d)(4), note 3. 11 Official Staff Interpretations, 12 C.F.R. Pt. 202, Supp. I, Paragraph 202.7(d)(2),note 1.


REVIEW AND SPOUSAL SIGNATURE CHECKLIST

The Equal Credit Opportunity Act prohibits discrimination in any aspect of credit on the basis of nine specific factors, ranging from age to marital status. It's easy to rattle off the nine prohibited bases, but getting your employees to understand how the prohibitions actually impact transactions can be much more difficult. A prime example is spousal signature requirements. The FDIC's FIL-9-2002 provides a much-needed reminder about what you can and cannot do. The natural inclination of most loan officers is to make a loan as bullet-proof as possible, grabbing all the collateral they can get and obligating as many parties to repay as they can get away with. It's great that they want to protect the bank, but there are boundaries that should be respected. It’s extremely important the all loan signatures be properly executed; this can become a significant issue if the bank faces a legal action taken by the estate, after one of the borrowers is deceased. Boundary #1. If the application is for individual credit and the applicant is individually creditworthy, you cannot require the spouse's signature on the promissory note, nor can you require anyone else's signature on the note. So, look at your application. Who is the applicant? Is it a joint request, or is it a request for individual credit? Process the application. If it is for individual credit and the applicant qualifies for individual credit, the applicant's signature will be the sole signature on the promissory note unless one of the exceptions described below applies. If there are co-applicants, both/all co-applicants should be asked to sign the note. Beware of situations where one spouse fills out the application and includes information about the other spouse on the application form. Don't assume you have a joint application without confirming that fact with the other spouse. We've all heard too many tales of errant spouses who incur joint debt without the knowledge of their mate, even going so far as to take the note out of the bank to get the second signature and returning with the signature forged on the document. Before you even pull a credit report on a supposed co-applicant, verify their intent to apply for credit with you. Just because the applicant gives you a joint financial statement does not mean the spouse should be considered a co-applicant. Boundary #2. If you process the application for credit and determine the applicant does not meet your credit standards, you may request a cosigner or guarantor. However, you may not require that the applicant's spouse be the cosigner or guarantor. You must let the applicant select the cosigner or guarantor. Of course, you have the say-so over whether the person they select is sufficiently creditworthy to allow you to make the loan. Exceptions Yes, there are some exceptions to the boundaries described above. But don't go get all excited about them. In most instances, they will, at best, simply permit you to require the spouse's


signature on the documents which give you a security interest in jointly owned collateral, such as a real estate mortgage on property owned by both husband and wife. There are three narrow circumstances under which a creditor may require the signature of the applicant's spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law. Those three circumstances are set below, but first, an important caveat: Just because you don't know what instruments are necessary under state law doesn't mean you have a reasonable belief that you can require a spouse to sign a particular document. Your belief should be supported by either a thorough review of pertinent statutory authority, or case law, or a state attorney general opinion. Talk to your bank's attorney and obtain a written opinion about what documents you can require a signature on. In most states (other than those that follow community property principles, the co-owner does not have to sign the promissory note to grant the creditor access to the property. Instead, the co-owner only needs to sign the security documents, such as a mortgage or lien. Exception for Certain Unsecured Credit

Where the applicant requests unsecured credit but relies on jointly owned property to establish creditworthiness, the creditor may require the signature of the applicant's spouse or other person "on any instrument necessary or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of the death or default of the applicant. Once again, you should have an opinion of counsel in your file to document what signatures you may require on what documents.

The Staff Commentary to Reg B says that if an applicant who requests unsecured credit does not own sufficient separate property, and relies on joint property to establish creditworthiness, the creditor must value the applicant's interest in the jointly owned property. A creditor may not request that a nonapplicant joint owner sign any instrument as a condition of the credit extension unless the applicant's interest does not support the amount and terms of the credit sought. In determining the value of an applicant's interest in jointly owned property, a creditor may consider factors such as:

the form of ownership and the property's susceptibility to attachment, execution, severance, or partition;

the value of the applicant's interest after such action; and the cost associated with the action.

The creditor must base the determination on the form of ownership prior to or at consummation, and not on the possibility of a subsequent change. You cannot take into consideration the fact the parties may divorce or that the applicant's separate party may be conveyed into tenancy by the entirety between the two parties after consummation of the loan transaction. Look only at what


The ownership is prior to consummation or at consummation. If the applicant's interest in jointly owned property does not support the amount and terms of credit sought, there are several options available to you:

You could request a cosigner or guarantor. (Remember, however, that you cannot require the spouse to be the cosigner or guarantor.);

You could offer to grant the applicant's request on a secured basis; or You could ask for the signature of the joint owner on an instrument that ensures access to

the property in the event of the applicant's death or default, but does not impose personal liability unless necessary under state law (e.g., a limited guarantee).

You cannot routinely require, however, that a joint owner sign an instrument (such as a quitclaim deed) that would result in the forfeiture of the joint owner's interest in the property.

Exception relating to community property

Where the applicant is married and resides in a community property state, or is relying upon property located in a community property state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if two conditions are met:

1. applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested under the creditor's standards of creditworthiness; and

2. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property.

Keep in mind, Regulation B is not just a consumer protection statute. It applies to all credit, regardless of who the applicant is and regardless of what the purpose of the loan is. If, for example, you refuse to extend credit to a minority-owned business because of the race of the owners or employees, you are violating the Equal Credit Opportunity Act and Regulation B. All credit decisions, credit advertisements, and treatment of borrowers should be color-blind, gender neutral, and made without regard to religion, marital status and all the other prohibited bases. Here’s a sample checklist:

Spousal Signature Checklist

Type of application Can you require the spouse to cosign or guarantee?

Can you require the signature of the spouse on security interest document(s)?

Individual application for secured credit. Borrower is independently creditworthy.

No. If the borrower individually qualifies for credit, you cannot request them to obtain any cosigner or guarantor.

Yes, if property is jointly owned. You cannot require the non-applicant spouse to quit-claim the property to the applicant.


Individual application for secured credit. Borrower does not qualify alone for the credit.

No. You can, however, request the applicant procure a cosigner or guarantor. You cannot require that the cosigner or guarantor be the applicant's spouse.

Yes, if property is jointly owned. You cannot require the non-applicant spouse to quit-claim the property to the applicant.

Individual application for unsecured credit. Applicant owns sufficient separate property to meet your creditworthiness guidelines.

No. No. This is unsecured credit.

Individual application for unsecured credit. The applicant is relying upon jointly owned property to establish creditworthiness. After you value the applicant's interest in the jointly owned property, you determine the applicant's interest does not support the amount and terms of the credit sought.

If the applicant's interest in the jointly owned property is not sufficient to establish creditworthiness, your options are to:

request a cosigner or guarantor;

offer to grant the applicant's request on a secured basis; or (see the next column over)You may not request that a nonapplicant joint owner sign any instrument as a condition of the credit extension unless the applicant's interest does not support the amount and terms of the credit sought.

If the value of the applicant's interest in the jointly owned property does not support the amount and terms of the credit sought, you can ask for the signature of the joint owner on an instrument that ensures access to the property in the event of the applicant's death or default, but does not impose personal liability unless necessary under state law (e.g., a limited guarantee).

Married applicant who resides in a community property state applies for unsecured credit.

Check the state law in the community property state where the applicant resides.

Check the state law in the community property state where the applicant resides.

Married applicant applies for unsecured credit and is relying upon property in a community property state to establish creditworthiness.

Check the state law in the community property state where the property is located.

Check the state law in the community property state where the property is located.


HOME EQUITY LINE OF CREDIT

Provisions for Home Equity Lines of Credit (HELOC’s) were formerly in section 226.5(b) of the Federal Reserve’s version of Regulation Z. These provisions are now found in 1026.40. Here are some of the basic considerations; they are in Subpart E of Truth in Lending

§ 1026.40 Requirements for home equity plans

The requirements of this section apply to open-end credit plans secured by the consumer's dwelling. For purposes of this section, an annual percentage rate is the annual percentage rate corresponding to the periodic rate as determined under §1026.14(b).

(f) Limitations on home equity plans. No creditor may, by contract or otherwise:

(1) Change the annual percentage rate unless:

(i) Such change is based on an index that is not under the creditor's control; and

(ii) Such index is available to the general public.

(2) Terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions that are subject to paragraph (f)(4) of this section) unless:

(i) There is fraud or material misrepresentation by the consumer in connection with the plan;

(ii) The consumer fails to meet the repayment terms of the agreement for any outstanding balance;

(iii) Any action or inaction by the consumer adversely affects the creditor's security for the plan, or any right of the creditor in such security; or

(iv) Federal law dealing with credit extended by a depository institution to its executive officers specifically requires that as a condition of the plan the credit shall become due and payable on demand, provided that the creditor includes such a provision in the initial agreement.

(4) For reverse mortgage transactions that are subject to §1026.33, terminate a plan and demand repayment of the entire outstanding balance in advance of the original term except:

(i) In the case of default;

(ii) If the consumer transfers title to the property securing the note;

(iii) If the consumer ceases using the property securing the note as the primary dwelling; or

(iv) Upon the consumer's death


REVERSE MORTGAGE ISSUES

Reg Z 1026.40(f) Limitations on home equity plans

1026.40(f)(4) For reverse mortgage transactions that are subject to §1026.33, terminate a plan and demand repayment of the entire outstanding balance in advance of the original term except:

(i) In the case of default;

(ii) If the consumer transfers title to the property securing the note;

(iii) If the consumer ceases using the property securing the note as the primary dwelling; or

(iv) Upon the consumer's death

Commentary to Reg Z for Reverse Mortgages in 1026.40(d)(5)(iii)

4. Reverse mortgages. Reverse mortgages, also known as reverse annuity or home equity conversion mortgages, in addition to permitting the consumer to obtain advances, may involve the disbursement of monthly advances to the consumer for a fixed period or until the occurrence of an event such as the consumer's death. Repayment of the reverse mortgage (generally a single payment of principal and accrued interest) may be required to be made at the end of the disbursements or, for example, upon the death of the consumer. In disclosing these plans, creditors must apply the following rules, as applicable:

i. If the reverse mortgage has a specified period for advances and disbursements but repayment is due only upon occurrence of a future event such as the death of the consumer, the creditor must assume that disbursements will be made until they are scheduled to end. The creditor must assume repayment will occur when disbursements end (or within a period following the final disbursement which is not longer than the regular interval between disbursements). This assumption should be used even though repayment may occur before or after the disbursements are scheduled to end. In such cases, the creditor may include a statement such as “The disclosures assume that you will repay the line at the time the draw period and our payments to you end. As provided in your agreement, your repayment may be required at a different time.” The single payment should be considered the “minimum periodic payment” and consequently would not be treated as a balloon payment. The example of the minimum payment under §1026.40(d)(5)(iii) should assume a single $10,000 draw.

ii. If the reverse mortgage has neither a specified period for advances or disbursements nor a specified repayment date and these terms will be determined solely by reference to future events, including the consumer's death, the creditor may assume that the draws and disbursements will end upon the consumer's death (estimated by using actuarial tables, for example) and that repayment will be required at the same time (or within a period following the date of the final disbursement which is not longer than the regular interval for disbursements). Alternatively, the


creditor may base the disclosures upon another future event it estimates will be most likely to occur first. (If terms will be determined by reference to future events which do not include the consumer's death, the creditor must base the disclosures upon the occurrence of the event estimated to be most likely to occur first.)

iii. In making the disclosures, the creditor must assume that all draws and disbursements and accrued interest will be paid by the consumer. For example, if the note has a non-recourse provision providing that the consumer is not obligated for an amount greater than the value of the house, the creditor must nonetheless assume that the full amount to be drawn or disbursed will be repaid. In this case, however, the creditor may include a statement such as “The disclosures assume full repayment of the amount advanced plus accrued interest, although the amount you may be required to pay is limited by your agreement.”

iv. Some reverse mortgages provide that some or all of the appreciation in the value of the property will be shared between the consumer and the creditor. The creditor must disclose the appreciation feature, including describing how the creditor's share will be determined, any limitations, and when the feature may be exercised.


FIL-28-2012 GUIDANCE ON MORTGAGE SERVICING FOR MILITARY HOMEOWNERS

Summary: The FDIC is issuing this Financial Institution Letter (FIL) to communicate

Interagency Guidance (Guidance) issued jointly with the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the National Credit Union Administration (the Agencies) to address unique circumstances involving some military homeowners after they receive Permanent Change of Station (PCS) orders. The Guidance highlights concerns about practices that have the potential to mislead or otherwise cause harm to homeowners with PCS orders, and reminds mortgage servicers to ensure that appropriate risk management policies, procedures, and training are in place.

Statement of Applicability to Institutions Under $1 Billion in Total Assets: The Guidance applies to mortgage servicing activities of all FDIC-supervised institutions related to military homeowners, including through the use of third parties.

Highlights:

PCS orders to move to a new duty station present unique challenges for military homeowners, particularly in cases where their homes have declined in value.

The Agencies have concerns about the following types of practices which have the potential to mislead or otherwise cause harm to military homeowners receiving PCS orders:

o Failing to clearly and timely communicate available assistance options, provide a reasonable means to learn the status of requests, and providing timely decisions on requests for assistance with reasons for any denial;

o Asking homeowners with PCS orders to waive legal rights in order to be evaluated for assistance; and

o Advising homeowners to skip payments to create the appearance of financial difficulty to qualify for assistance for which they would not otherwise qualify.

Financial institutions that engage in residential mortgage servicing should maintain appropriate policies, procedures, and training commensurate with the institution's customer base and the size and complexity of its operations, to ensure that their employees respond appropriately to requests for assistance from military homeowners receiving PCS orders.

Related Topics: Servicemembers Civil Relief Act FDIC Guidance for Managing Third-Party Risk

NOTE FOR ALL INSTITUTIONS: See the REVISED SCRA DELINQUENCY NOTICE IN THE APPENDIX and LINK to FREE TRAINING!

Interagency Guidance on Mortgage Servicing Practices Concerning Military Homeowners with Permanent Change of Station Orders

FIL-28-2012June 21, 2012


SCRA BASICS

The Servicemember's Civil Relief Act (SCRA) expanded and improved the former Soldiers' and Sailors' Civil Relief Act (SSCRA). The SCRA provides a wide range of protections for individuals entering, called to active duty in the military, or deployed servicemembers. It is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty and relieve stress on the family members of those deployed servicemembers. A few examples of the protections include:

Outstanding credit card debt Mortgage payments

In addition the new law:

Expands current law that protects servicemembers and their families from eviction from housing while on active duty due to nonpayment of rents that are $1,200 per month or less. Under the new provisions this protection would be significantly updated to meet today’s higher cost of living covering housing leases up to $2,932.31 per month and then be adjusted annually to account for inflation.

Provides a servicemember who receives permanent change of station orders or who is deployed to a new location for 90 days or more the right to terminate a housing lease.

Clarifies and restates existing law that limits to 6 percent interest on credit obligations incurred prior to military service or activation, including credit card debt, for active duty servicemembers. The SCRA unambiguously states that no interest above 6 percent can accrue for credit obligations (that were established prior to active duty or activation) while on active duty, nor can that excess interest become due once the servicemember leaves active duty instead that portion above 6 percent is permanently forgiven. Furthermore, the monthly payment must be reduced by the amount of interest saved during the covered period.


SCRA PROVISIONS FOR MORTGAGES AND TRUST DEEDS

See the link to an interagency SCRA webinar that was presented September 10, 2012 in the Appendix for more information. Here are some of the summaries that relate to SCRA Foreclosure Protections: There are NUMBEROUS protections available to service members for “short sales”, even when they are CURRENT on the mortgages. The borrower is exempt from deficiency judgments from Fannie Mae & Freddie Mac. SCRA Foreclosure Protections •Prohibits the sale, foreclosure or seizure of real or personal property for the breach of an obligation that is—(1) incurred by a service member prior to the service member’s military service, and (2) secured by a mortgage, deed of trust, or similar security interest. •Prohibition applies during the period of military service or within 9 months after the end of military service, without a court order or written agreement. •Law amended to extend coverage from 9 months to 12 months after the end of military service (effective February 2, 2013). Lender Responsibilities: •Lender seeking to foreclose is obligated to determine if mortgagor is a service member entitled to SCRA protections Information Sources: •Department of Defense Manpower Data Center https://www.dmdc.osd.mil/appj/scra/scraHome.do •Contact the borrower


SCRA WEBSITE

This is a screen shot of the SCRA website that should be checked to determine Active Duty Status for a service member when real estate collateral is involved in the decedent’s estate.

• Department of Defense Manpower Data Center https://www.dmdc.osd.mil/appj/scra/scraHome.do


CHAPTER 3 COMMUNICATION AND NOTICES


COMMON QUESTIONS AND ANSWERS FROM THE CONSUMER’S PERSPECTIVE

Anyone with internet access can quickly find resources to answer common questions about the death of a family member or spouse. This information was found on the e-how website; this is the link: http://www.ehow.com/deceased-bank-accounts/ Looking at these issues from the customer’s point of view may help your financial institution develop some training scripts and procedures. What Happens to an Estate if There Are No Heirs?

When an individual dies, he typically leaves behind instructions in a will that the court will use to distribute his property to heirs. If he doesn't leave a will, the probate court distributes his assets to his relatives according to state law. However, if the deceased individual has no living relatives, his property passes to the state.

What Happens if I Have a Shared Bank Account With Someone That Is Now Deceased? With a joint bank account, both the account holders own the funds in the account. As such, any one account holder can control the entire amount in the account. If someone who jointly holds an account with you dies, the money usually goes to you. There may be exceptions in certain circumstances. How to close a Deceased Spouse’s Bank Account? The death of a spouse can require you to complete many transactions, possibly including closing the deceased spouse's bank account. Whether the account is for checking or savings, the procedures should be similar, although each bank may have small variations or forms for you to complete. Closing the bank account ensures that there are no funds removed until the probate court appoints an executor to handle the estate. Documents Needed to Close a Deceased’s Bank Account Federal laws require banks and financial institutions to identify individuals who own and operate bank accounts. Financial institutions must have written identification procedures on file to ensure that no one other than the account signer can access money held in an account. When you die, your heirs and representatives of your estate have to produce documentation to identify themselves and documentation to prove that they have the authority to close your account Can an Executor Close a Bank Account of the Deceased? An executor of estate is essentially the person placed in charge of someone's financial affairs after he dies. Since a dead person cannot own or operate a bank account, the executor generally not only has the power but the responsibility to close down a decedent's bank account. Before this happens, the executor must properly administer the estate of the decedent.


How to Close a Deceased’s Bank Account and Open an Estate Account When a loved one passes away, getting financial matters in order can be challenging. One of the steps that you may need to take is closing down his checking account and opening an estate checking account. This way, you can pay any outstanding claims against the estate and distribute assets to beneficiaries easily. Can a Deceased Person’s Bank Release Money for the Funeral? Generally, when you die, the funds held inside your bank account become part of your estate. Federal banking laws do not require your bank to hand over funds to pay for your funeral unless someone authorized by the court to administer your estate withdraw funds. However, there are several circumstances in which your friends and relatives can access funds held in your account to cover your final expenses. (NOTE- SEE the LBA’s Answer to this question in the next section) How to Access a Deceased Peron’s Bank Account? You can only access a deceased person's bank account if you have an ownership stake in that account or if you have been appointed by the court to act as the executor of the deceased owner's estate. If you jointly owned the account with the deceased owner then upon the death of that owner the account belongs to you as an individual and you can continue to access it as you did before the other owner died. In order to access an account as a beneficiary or executor of an estate you must go to the bank in person and close the account.


QUESTIONS ABOUT FUNERAL EXPENSES

This information was provided by the LBA general counsel, David Boneno; the author wishes to thank the LBA for sharing this information. DISCLAIMER: THESE ARE LOUISIANA STATUTES – CHECK YOUR STATE LAW FOR SPECIFIC GUIDANCE!

Question: When a bank’s deposit customer dies and the bank has been put on notice but has not received any legal documents showing the opening of a succession (or estate outside of Louisiana), can the bank issue a check payable to a funeral home to pay the deceased’s funeral expenses?

A: Banks have raised this question periodically through the years, so there may be others who may be interested in this issue. There is no banking statute that authorizes the bank to issue a check directly payable to a funeral home for the deceased’s funeral expenses where there has been no court order or letters testamentary or other documentation presented to the bank authorizing payment. Remember that we are talking about a deposit account with only one owner. It is unclear why bankers think they can release a customer's funds directly to a funeral home without a succession. Perhaps banks are influenced by the law that grants a privilege for funeral charges over movable property of the deceased, meaning those charges that are incurred for the interment of a person deceased. (La. C.C. articles 3191 and 3192). A privilege is defined to mean a right, which the nature of a debt gives to a creditor, and which entitles him to be preferred before other creditors, even those who have mortgages. (La. C.C. article 3186). Thus, the funeral home has some legal rights to being paid ahead of other creditors out of the movable property of the deceased. Nevertheless, there is no language in these articles authorizing a bank to make a direct payment to a funeral home, nor is there language protecting a bank from liability in the event of a dispute.

There are two statutes that banks can turn to that allow family members to withdraw some funds from a deceased customer's account quickly that do not require the opening of a succession. The first statute is La. R.S. 6:315.1, which provides a procedure for transferring deposits to the surviving spouse and/or heirs. The statute is limited to circumstances where the deceased depositor left no will and had $5,000 or less on deposit. The procedure requires that the bank be presented with an affidavit establishing jurisdiction and relationship as specified in more detail in the statute.

The second statute that may provide assistance is La. R.S. 9:1513. It provides a procedure for paying the surviving spouse of a deceased depositor a sum not to exceed $10,000 out of the deposits of the decedent or out of the community between the surviving spouse and the decedent. The procedure requires that the surviving spouse present to the bank an affidavit stating that the total funds withdrawn do not exceed $10,000 from all depositories.

Perhaps these two statutes could offer a solution to a surviving spouse or heirs. The bank could release a limited amount of funds from the deceased’s accounts to the surviving spouse and/or heirs and they could then pay funeral expenses.


WHAT INFORMATION SHOULD BE SHARED?

When employees are asked for information from surviving family members or business associates, it’s CRITICAL to remember: ANSWERING THESE QUESTIONS MAY BE ABOVE YOUR PAY GRADE. DON’T GO THERE! When should information be shared about deposit and loan accounts?

1. Information can be provided to joint owners of a deposit account and co-makers of a loan 2. Check with your supervisor and your bank’s policy before sharing extensive information

with authorized signers. 3. Generally, guarantors of a loan should be given appropriate information about loan

accounts such as the loan balance and payment history. The guarantor will be called upon to satisfy the loan if the collateral, deposit accounts, or possible an insurance policy aren’t sufficient to pay the loan balance.

4. Surviving spouses and heirs may present an affidavit to request funds for funeral expenses. A BANK IS NOT REQUIRED TO AUTOMATICALLY RELEASE FUNDS FOR THIS PURPOSE.

5. Information may be shared with a court-appointed or otherwise authorized executor of the estate. BE CAREFUL TO UNDERSTAND THAT A POWER OF ATTORNEY CEASES TO BE VALID UPON THE DEATH OF THE CUSTOMER.


NOTICES TO CO-SIGNERS, GUARANTORS, AND JOINT ACCOUNT HOLDERS

Appropriate notices should continue to be sent to co-signers and guarantors. These notices would include monthly billing statements, delinquency notices, and year-end tax reporting information. Joint account holders should, of course, continue to receive statements. However, a financial institution employee should appreciate the sensitivity that a grieving spouse who may wish to have the decedent’s name removed from future statements, correspondence and records. Remember to change this information throughout the system of bank records, including the tax reporting system. If you have affiliates that use customer information for marketing they should also be asked to update their records. One area where this may be overlooked is in the safe deposit box area for a service charge that may renew automatically every year. Remember that these record changes will most likely only be made after reviewing a death certificate or appropriate estate or succession affidavits.


RESPA CHANGES EFFECTIVE JANUARY 10, 2014

The CFPB has issued hundreds of pages of changes to regulations that relate to consumer mortgages and servicing issues. A new section of RESPA became effective January 10, 2014 that requires specific action in the event of the death of a borrower. Your bank will be required to have written policies and procedures to address these issues. See the section in bold below in (b) (vii)

§ 1024.38 General servicing policies, procedures, and requirements.

(a) Reasonable policies and procedures. A servicer shall maintain policies and procedures that are reasonably designed to achieve the objectives set forth in paragraph (b) of this section.

(b) Objectives. (1) Accessing and providing timely and accurate information. The policies and procedures required by paragraph (a) of this section shall be reasonably designed to ensure that the servicer can:

(i) Provide accurate and timely disclosures to a borrower as required by this subpart or other applicable law;

(ii) Investigate, respond to, and, as appropriate, make corrections in response to complaints asserted by a borrower;

(iii) Provide a borrower with accurate and timely information and documents in response to the borrower’s requests for information with respect to the borrower’s mortgage loan;

(iv) Provide owners or assignees of mortgage loans with accurate and current information and documents about all mortgage loans they own;

(v) Submit documents or filings required for a foreclosure process, including documents or filings required by a court of competent jurisdiction, that reflect accurate and current information and that comply with applicable law; and

(vi) Upon notification of the death of a borrower, promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower’s mortgage loan.


COLLECTION AND FORECLOSURE ISSUES AND RIGHT TO CURE NOTICES

Generally speaking, a financial institution that becomes involved with collection issues that are leading to foreclosure the matter is referred to an outside attorney of the bank’s legal counsel. These are only a few of the issues involved in the foreclosure process for a decedent’s loan:

1. What type of collateral is involved in the foreclosure? Is it personal property, real estate (was it part of community property held with a spouse who is living in the residence?), commercial property, vehicles, deposit accounts, insurance proceeds, or other type of collateral. If the collateral is liquidated, can it satisfy the obligation or will there still be a deficiency? Are there any other remedies available? Has the collateral been located? Has it been appraised?

2. Who is the borrower? Does the foreclosure involve a sole proprietor, sole-member LLC, partnership, corporation, or other borrower type? Are other parties obligated, like a guarantor or co-maker? Is the borrower a service member?

3. Are there interested parties who could qualify for a new loan to satisfy the obligation? If so, do they have legal authority yet to borrow funds? Would the lender have adequate recourse against this party?

4. If a trust could operate the business, does it have authority to borrow money and pledge assets?

During the normal collection process, the UCCC or other consumer statutes may require a “right to cure” notice be sent for a payment default, unless the lender has agreed to provide notices otherwise for all defaults. The “death” of a borrower is not actually a payment default so no right to cure notice is required. The death of a borrower isn’t an event that can be “cured”. However, it may be your bank’s practice to provide right to cure notices for all loan defaults. If that’s the case, these notices should be provided to send the notice to co-makers or the estate of the decedent before taking action to repossess the collateral or collect the outstanding loan balance. It’s VERY IMPORANT to read the actual language in the loan documents to determine what notices have been promised to the borrower.


AUTHORIZED USER ON DECEDENT’S DEBIT CARD ACCOUNT

Authorized card user on decedent's account Question: We were just notified of the death of one of our debit cardholders. He passed away over the weekend. The person who told us about his passing is an authorized signer (not a joint owner) on our customer's account, and also has a debit card that accesses the account that she used to do shopping and other errands for our customer, who was often too ill to go out on his own. We know that we have to watch the account and stop paying any checks our customer drew once ten days have passed since his date of death, but what do we do about transactions conducted by the authorized signer, by check or by debit card? Answer: The authorized signer's access to the account officially ended on the depositor's date of death. Any authorizations that your customer may have given to have the account debited via ACH, remotely created check or debit card likewise ended on that date. Start by verifying that your customer has actually died. Although the authorized signer may be a reliable source, if you know of any other family member, consider contacting him or her to verify the information you've received, or keep an eye on the obituaries or funeral notices in the local paper. In the meantime, watch for checks that may have been dated (by the authorized signer) after the date of death. They should be returned "Depositor deceased" or "No authority to pay." Once you've confirmed the date of death and that your customer was the sole owner of the account, take action to discontinue paying any checks on the account beginning on the eleventh (calendar) day after the date of death, even those apparently signed by the customer before his death. Your authority (actually mandate) to do so is UCC §4-405 -- check the language of that section in your state's UCC. Review account activity to see if there's an indication that there were recurring ACH entries (debits or credits) and be prepared to send back any future such entries marked R15 (account holder deceased). Determine whether any recent ACH credits will need to be returned based on whether the depositor was eligible for the payment. For example, if there is an SSA direct deposit in the current calendar month, was the depositor alive on the first day of the current month? If he died on or before the last day of the previous month, SSA will look for a refund. Retrieve the authorized signer's debit card if you can. Hot list both cards to protect the bank from having to pay for any recurring debits not yet initiated.


CHAPTER 4 INSURANCE ISSUES


GENERAL COMMENTS ABOUT INSURANCE

Lenders and underwriters understand that each loan needs to have the strongest possible underwriting. This is particularly true in large-dollar commercial transactions where the bank will have the greatest exposure.

In addition to analyzing personal cash flow, debt-to-income, collateral value, net worth, business cash flow, and business continuity a lender may also consider suggesting some type of insurance. This is especially true in a business transaction where one or more individuals are essential to the success of running the business. While Warren Buffet may not need to borrow money for Berkshire-Hathaway, most lenders might hesitate to make a billion dollar loan without some cushion that insurance coverage would add to the strength of the credit.

The next section offers an overview of various types of insurance coverage.


FINANCIAL INSTITUTION LETTERS FIL 127-2004

Office of the Comptroller of the Currency Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation Office of Thrift Supervision

Interagency Statement on the Purchase and Risk Management of Life Insurance

Appendix

Common Types of Life Insurance

Life insurance can be categorized into two broad types: temporary (also called "term") insurance and permanent insurance. There are numerous variations of these products. However, most life insurance policies fall within one (or a combination) of the following categories.

Temporary (Term) Insurance

Temporary (term) insurance provides life insurance protection for a specified time period. Death benefits are payable only if the insured dies during the specified period. If a loss does not occur during the specified term, the policy lapses and provides no further protection. Term insurance premiums do not have a savings component; thus, term insurance does not create CSV.

Permanent Insurance

In contrast to term insurance, permanent insurance is intended to provide life insurance protection for the entire life of the insured, and its premium structure includes a savings component. Permanent insurance policy premiums typically have two components: the insurance component (e.g., mortality cost, administrative fees, and sales loads) and the savings component. Mortality cost represents the cost imposed on the policyholder by the insurance company to cover the amount of pure insurance protection for which the insurance company is at risk.

The savings component typically is referred to as CSV. The policyholder may use the CSV to make the minimum premium payments necessary to maintain the death benefit protection and may access the CSV by taking out loans or making partial surrenders. If permanent insurance is surrendered before death, surrender charges may be assessed against the CSV. Generally, surrender charges are assessed if the policy is surrendered within the first 10 to 15 years.

Two broad categories of permanent insurance are:


Whole Life - A traditional form of permanent insurance designed so that fixed premiums are paid for the entire life of the insured. Death benefit protection is provided for the entire life of the insured, assuming all premiums are paid.

Universal Life - A form of permanent insurance designed to provide flexibility in premium payments and death benefit protection. The policyholder can pay maximum premiums and maintain a very high CSV. Alternatively, the policyholder can make minimal payments in an amount just large enough to cover mortality and other insurance charges.

Purposes For Which Institutions Commonly Purchase Life Insurance:

Key Person Institutions often purchase life insurance to protect against the loss of "key persons" whose services are essential to the continuing success of the institution and whose untimely death would be disruptive. For example, an institution may purchase insurance on the life of an employee or director whose death would be of such consequence to the institution as to give it an insurable interest in his or her life. The determination of whether an individual is a key person does not turn on that individual's status as an officer or director, but on the nature of the individual's economic contribution to the institution. The first step in indemnifying an institution against the loss of a key person is to identify the key person. The next and possibly most difficult step is estimating the insurable value of the key person or the potential loss of income or other value that the institution may incur from the untimely death of that person. Because the most appropriate method for determining the value of a key person is dependent upon individual circumstances, the agencies have not established a formula or a specific process for estimating the value of a key person. Instead, the agencies expect institutions to consider and analyze all relevant factors and use their judgment to make a decision about the value of key persons. Key person life insurance should not be used in place of, and does not diminish the need for, adequate management succession planning. Indeed, if an institution has an adequate management succession plan, its reliance on a key person should decline as the person gets closer to retirement. Financing or Cost Recovery for Benefit Plans Like other businesses, institutions often use life insurance as a financing or cost recovery vehicle for pre- and post-retirement employee benefits, such as individual or group life insurance, health insurance, dental insurance, vision insurance, tuition reimbursement, deferred compensation, and pension benefits. Permanent insurance is used for this purpose. In these arrangements, an institution insures the lives of directors or employees in whom it has an insurable interest to reimburse the institution for the cost of employee benefits. The group of insured individuals may be different from the group that receives benefits. The institution's obligation to provide


employee benefits is separate and distinct from the purchase of the life insurance. The life insurance purchased by the institution remains an asset even after the employer's relationship with an insured employee is terminated. The employees who receive benefits, whether insured or not, have no ownership interest in the insurance (other than their general claim against the institution's assets arising from the institution's obligation to provide the stated employee benefits). There are two common methods of financing employee benefits through the purchase of life insurance. The first is the cost recovery method, which usually involves present value analysis. Typically, the institution projects the amount of the expected benefits owed to employees and then discounts this amount to determine the present value of the benefits. Then, the institution purchases a sufficient amount of life insurance on the lives of certain employees so that the gain (present value of the life insurance proceeds less the premium payments) from the insurance proceeds reimburses the institution for the benefit payments. Under this method, the institution absorbs the cost of providing the employee benefits and the cost of purchasing the life insurance. The institution holds the life insurance and collects the death benefit to reimburse the institution for the cost of the employee benefits and the insurance. The second method of financing employee benefits is known as cost offset. With this method, the institution projects the annual employee benefit expense associated with the benefit plan. Then, the institution purchases life insurance on the lives of certain employees. The amount earned on the CSV each year should not exceed the annual benefit expense. Split-Dollar Life Insurance Arrangements Institutions sometimes use split dollar life insurance arrangements to provide retirement benefits and death benefits to certain employees as part of their compensation. Under split dollar arrangements, the employer and the employee share the rights to the policy's CSV and death benefits. The employer and the employee may also share premium payments. If the employer pays the entire premium, the employee may need to recognize taxable income each year in accordance with federal income tax regulations. Split-dollar arrangements may be structured in a number of ways. The two most common types of split dollar arrangements are:

Endorsement Split-Dollar - The employer owns the policy and controls all rights of ownership. The employer provides the employee an endorsement of the portion of the death benefit specified in the plan agreement with the employee. The employee may designate a beneficiary for the designated portion of the death benefit. Under this arrangement, the employer typically holds the policy until the employee's death. At that time, the employee's beneficiary receives the designated portion of the death benefits, and the employer receives the remainder of the death benefits.

Collateral Assignment Split Dollar - The employee owns the policy and controls all rights of ownership. Under these arrangements, the employer usually pays the entire premium or a substantial part of the premium. The employee assigns a


collateral interest in the policy to the employer that is equal to the employer's interest in the policy. The employer's interest in the policy is set forth in the split-dollar agreement between the employer and the employee. Upon retirement, the employee may have an option to buy the employer's interest in the insurance policy. This transfer of the employer's interest to the employee is typically referred to as a "roll out." If a "roll-out" is not provided or exercised, the employer does not receive its interest in the policy until the employee's death.

Split-dollar life insurance is a very complex subject that can have unforeseen tax and legal consequences. Internal Revenue Service regulations issued in 200313 govern the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.14 These rules provide less favorable tax treatment to split-dollar arrangements than existed previously. Institutions considering entering into a split-dollar life insurance arrangement should consult qualified tax, insurance, and legal advisors. Life Insurance on Borrowers State law generally recognizes that a lender has an insurable interest in the life of a borrower to the extent of the borrower's obligation to the lender. In some states, the lender's insurable interest may equal the borrower's obligation plus the cost of insurance and the time value of money. Institutions are permitted to protect themselves against the risk of loss from the death of a borrower. This protection may be provided through self insurance, the purchase of debt cancellation contracts, or by the purchase of life insurance policies on borrowers. Institutions can take two approaches in purchasing life insurance on borrowers. First, an institution can purchase life insurance on an individual borrower for the purpose of protecting the institution specifically against loss arising from that borrower's death. Second, an institution may purchase life insurance on borrowers in a homogenous group of loans employing a cost recovery technique similar to that used in conjunction with employee benefit plans. Under this method, the institution insures the group of borrowers for the purpose of protecting the institution from loss arising from the death of any borrower in the homogenous pool. Examples of homogenous pools of loans include consumer loans that have distinctly similar characteristics, such as automobile loans, credit card loans, and residential real estate mortgages. When purchasing insurance on an individual borrower, an institution should, given the facts and circumstances known at the time of the insurance purchase, make a reasonable effort to structure the insurance policy in a manner consistent with the expected repayment of the borrower's loan. To accomplish this, management should estimate the risk of loss over the life of the loan and match the anticipated insurance proceeds to the risk of loss. Generally, the risk of loss will be closely related to the outstanding principal of the debt. The insurance policy should be structured so that the expected insurance proceeds never substantially exceed the risk of loss. When purchasing life insurance on borrowers in a homogenous pool of loans, an institution's management should, given the facts and circumstances known at the time of


the insurance purchase, make a reasonable effort to match the insurance proceeds on an aggregate basis to the total outstanding loan balances. If allowed by state law, institutions may match the insurance proceeds to the outstanding loan balances plus the cost of insurance on either a present value or future value basis. This relationship should be maintained throughout the duration of the program. The purchase of life insurance on a borrower is not an appropriate mechanism for affecting a recovery on an obligation that has been charged off, or is expected to be charged off, for reasons other than the borrower's death. In the case of a charged-off loan, the purchase of life insurance on the borrower does not protect the institution from a risk of loss since the loss has already occurred. Therefore, the institution does not need to purchase insurance. Acquiring insurance that an institution does not need may subject the institution to unwarranted risks, which would be an unsafe and unsound banking practice. In the case of a loan that the institution expects to charge off for reasons other than the borrower's death, the risk of loss is so pronounced that the purchase of life insurance by the institution at that time would be purely speculative and an unsafe and unsound banking practice. Internal Revenue Code Section 264(f) disallows a portion of an institution's interest deduction for debt incurred to purchase life insurance on borrowers. Institutions considering the purchase of insurance on borrowers should consult their tax advisors to determine the economic viability of this strategy. Life Insurance as Security for Loans Institutions sometimes take an interest in an existing life insurance policy as security for a loan. Institutions also make loans to individuals to purchase life insurance, taking a security interest in the policy, a practice known as "insurance premium financing." As with any other type of lending, extensions of credit secured by life insurance should be made on terms that are consistent with safe and sound banking practices. For instance, the borrower should be obligated to repay the loan according to an appropriate amortization schedule. Generally, an institution may not rely on its security interest in a life insurance policy to extend credit on terms that excuse the borrower from making interest and principal payments during the life of the borrower with the result that the institution is repaid only when the policy matures upon the death of the insured. Lending on such terms is generally speculative and an unsafe and unsound banking practice. Institutions may acquire ownership of life insurance policies for debts previously contracted (DPC) by invoking their security interest in a policy after a borrower defaults. Consistent with safety and soundness, institutions should use their best efforts to surrender or otherwise dispose of permanent life insurance acquired for DPC at the earliest reasonable opportunity.15 In the case of temporary insurance acquired for DPC, retention until the next renewal date or the next premium date, whichever comes first, will be considered reasonable.


SUMMARY OF 15 ISSUES

Is the “death” of a customer a triggering event for default

YES – in most cases; check the loan documents

How should lenders handle questions about the borrower's estate?

Provide information to only those who are entitled by joint obligation, ownership, or legal document authorization

What information can be shared?

See above, depends on the authority

Who is entitled to the information?

See loan documents, legal proceedings are typically included; joint borrowers, guarantors

What documents or information does a financial institution need before releasing the information?

Typically a court authorization such as letters testamentary or letters of administration

Is there standard language that your loan agreements should have regarding the death of a borrower?

YES – it should be done in accordance with the governing law of the loan and type of borrower

What if the deceased borrower was also a service member on active duty? What protections must be extended to the surviving family members?

See SCRA provisions; exercise caution and good documentation; check the Defense Manpower Data Center website if the loan is secured by real estate.

How should notices to co-borrowers, guarantors, and co-signers be given?

As provided by the loan documents

What is the effect of the death of a borrower on the foreclosure process?

Check YOUR state laws; involve legal counsel, check for SCRA status

HELOC’s and borrower’s death If sole owner it’s a default event How can a financial institution protect its collateral after the borrower has died?

Determine location, inventory, involve legal counsel, petition court as needed for claim or protection

How does the financial institution handle issues of guarantors, setoff and insurance when the borrower has died?

Notify guarantors; contact the executor or administrator to file the insurance claim

What do the banking regulations and exam guidelines say about the event of a borrower’s death?

Mentioned in Reverse Mortgage exam procedures in Regulation Z ; mentioned in HELOC restrictions, 1026.40

How does the death of a key person affect the loan?

Consider requiring “Key Person” insurance as part of the underwriting when appropriate

What are the pros and cons of credit life insurance?

See insurance section. Pros – it may pay the loan; cons – cost to borrower; pending restrictions to Reg Z in 2014.


SUGGESTIONS FOR DEALING WITH DECEASED LOAN CUSTOMERS

ACTION STEPS

It’s complicated. Make sure the well-intentioned frontline employees don’t try to handle complex questions or be placed in a position to release funds from a decedent’s deposit accounts without additional approvals. Make sure that employees understand that the “power of attorney” dies with the decedent.

Develop written procedures for collection staff for delinquent accounts of decedents, especially for service members. Any anticipated foreclosure actions should be reviewed by senior management or the bank’s internal or outside legal counsel. SCRA WILL BE A FOCUS IN YOUR NEXT EXAM; EXAMINERS WILL ASK FOR YOUR PROCEDURES AND TEST THEM FOR COMPLIANCE!. (See a link to a SCRA webinar that had speakers from all the agencies in the Appendix; it was held September 10, 2012)

Train all employees to be alert to scams regarding the decedent’s accounts. The elderly can be especially vulnerable to identity theft scams when a death occurs and enough information may be made available in obituary notices so that a thief can easily pose as family member.

Review Regulation B requirements for all loans. This includes reviewing the signature requirements when the loan is being underwritten. Be careful to protect the bank from fair lending issues as well as defenses in legal actions because the signatures were obtained without appropriate justification.

Train safe deposit attendants to only allow authorized owners of the box to view the contents of the box.

Assign a senior person to determine when and how to release deposit funds or any collateral related to a decedent’s accounts.


APPENDIX


REGULATION B - NOTICE FOR JOINT INTENT OF APPLICATION

A person’s intent to be a joint applicant must be given at the time of application. Using model application forms from Regulation B and routinely requesting this information from each applicant is the best way to avoid problems with this requirement.


POWER OF ATTORNEY STATUTES

Check your state statute for the precise language. Typically it will contain these provisions:

(A) A power of attorney terminates when any of the following occurs:

(1) THE PRINCIPAL DIES;

(2) The principal becomes incapacitated, if the power of attorney is not durable;

(3) The principal revokes the power of attorney;

(4) The power of attorney provides that it terminates;

(5) The purpose of the power of attorney is accomplished;

(6) The principal revokes the agent’s authority or the agent dies, becomes incapacitated, or resigns, and the power of attorney does not provide for another agent to act under the power of attorney.

(B) An agent’s authority terminates when any of the following occurs:

(1) The principal revokes the authority;

(2) The agent dies, becomes incapacitated, or resigns;

(3) An action is filed for the divorce, dissolution, or annulment of the agent’s marriage to the principal or their legal separation, unless the power of attorney otherwise provides;

(4) The power of attorney terminates.

(C) Unless the power of attorney otherwise provides, an agent’s authority is exercisable until the authority terminates under division (B) of this section, notwithstanding a lapse of time since the execution of the power of attorney.

(D) Termination of an agent’s authority or of a power of attorney is not effective as to the agent or another person that, without actual knowledge of the termination, acts in good faith under the power of attorney. An act so performed, unless otherwise invalid or unenforceable, binds the principal and the principal’s successors in interest.

(E) Incapacity of the principal of a power of attorney that is not durable does not revoke or terminate the power of attorney as to an agent or other person that, without actual knowledge of the incapacity, acts in good faith under the power of attorney. An act so performed, unless otherwise invalid or unenforceable, binds the principal and the principal’s successors in interest.


(F) The execution of a power of attorney does not revoke a power of attorney previously executed by the principal unless the subsequent power of attorney provides that the previous power of attorney is revoked or that all other powers of attorney are revoked.

Added by 129th General Assembly File No. 65, SB 117, § 1, eff. 3/22/2012.


DOCUMENTATION AND TYPES OF ESTATES

Formal Estate

Paperwork

Letters Testamentaryor

Letters of Administration

Relief from Administration if certain prerequisites are met

Or Small Estate Settling

Available in some states

Close Decedent’sAccounts

Check for amount

Timeframes

Affidavit requirements

Intestate or Testate or Both?

Open EstateAccount

© Gettechnical Inc.

Does paperwork come from another state? Most states require paperwork from state where property is

43


There are two primary types of estate settlement: 1. Testate – With a will. A testate Estate results from the will of the deceased, contained in a testament executed in

form prescribed by law 2. Intestate- Without a will. Intestate Estate results from provisions of law in favor of certain persons, in default of

testate successors


CHECK YOUR STATE LAW REGARDING MEMBERS IN MILITARY SERVICE

Some states have specific statutes about the death of a service member. CHECK YOUR STATE LAWS FOR ANY SPECIFIC REQUIREMENTS; this is a Louisiana statute.

From RS 41/511

§511. Death of homesteader while in service

In every case in which a homesteader under R.S. 41:501 through 509 was inducted into the armed services after his entry was allowed and died in service, his widow, if unmarried, or in case of her death or marriage, then his minor orphan children or his or their legal representatives, may proceed forthwith to make final proof upon the land so held by the deceased soldier and settler, and the death of such soldier while engaged in the service of the United States shall, in the administration of the homestead law, be construed to be equivalent to a performance of all requirements as to residence and cultivation for the full period of five years; and upon proof produced to the register of the land office by the widow, if unmarried, or in case of her death or marriage, then his minor orphan children or his or their legal representatives, that the applicant for patent is the widow, if unmarried, or in case of her death or marriage, his orphan children or his or their legal representatives, and that such soldier died while in the service of the United States as hereinbefore described, the patent for such land shall issue; provided that in such patent all mineral rights in the lands so patented shall be expressly reserved to the state of Louisiana, in pursuance of Article IV, Section 2 of the Constitution.*

Acts 1958, No. 444, §2.

*Reference is to 1921 Constitution; see, now, Const. Art. 9, §4

This is from RS 9:1443

§1443. Proof of presumption of death of military personnel

In a proceeding to open the succession of a person presumed dead, as provided in R.S. 9:1441, or in any other action or proceeding whatever in which the presumption of his death is an issue, this presumption may be proved by a certified copy of an official certificate of the armed service to which he was attached, or of pertinent excerpts from his service record, indicating that the armed service has accepted the presumption of his death.


SCRA INFO FROM HUD

Source: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/qasscra1 Questions & Answers for Reservists, Guardsmen and Other Military Personnel

The following information is provided regarding mortgage payment relief and protection from foreclosure provided under the Servicemembers Civil Relief Act (SCRA, formerly known as The Soldiers' and Sailors' Civil Relief Act of 1940) ("the Act").

Who Is Eligible?

The provisions of the Act apply to active duty military personnel who had a mortgage obligation prior to enlistment or prior to being ordered to active duty. This includes members of the Army, Navy, Marine Corps, Air Force, Coast Guard; commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration who are engaged in active service; reservists ordered to report for military service; persons ordered to report for induction under the Military Selective Service Act; and guardsmen called to active service for more than 30 consecutive days. In limited situations, dependents of servicemembers are also entitled to protections.

Servicemembers Civil Relief Act Notice (Mortgagee Letter 2006-28)

Pursuant to the statutory amendment, HUD has developed, in consultation with the Departments of Defense and Treasury, the form for the required notice of servicemember rights (Attachment 1, SCRA Notice Disclosure). All mortgage loans, including conventional mortgages and mortgages insured by HUD are subject to the notification requirement. The notice must:

Be sent to all homeowners who are in default on a residential mortgage; Include the toll-free military one-source number to call if servicemembers or their dependents require further assistance (1-800-342-9647); and

Be made within 45 days from the date a missed payment was due, unless thehomeowner pays the overdue amount before the expiration of the 45-day period.

Am I Entitled To Debt Payment Relief?

The Act limits the interest that may be charged on mortgages obtained by a service member (including debts incurred jointly with a spouse) before he or she entered into active military service. Mortgage lenders must, at your request, reduce the interest rate to no more than six percent per year during the period of active military service and one year thereafter and recalculate your payments to reflect the lower rate. This provision applies to both conventional and government-insured mortgages.

Is The Interest Rate Limitation Automatic?


No. To request this temporary interest rate reduction, you must submit a written request to your mortgage lender and include a copy of your military orders. The request may be submitted as soon as the orders are issued but must be provided to a mortgage lender no later than 180 days after the date of your release from active duty military service.

Am I Eligible Even if I Can Afford To Pay My Mortgage At A Higher Interest Rate?

If a mortgage lender believes that military service has not affected your ability to repay your mortgage, they have the right to ask a court to grant relief from the interest rate reduction. This is not very common.

What If I Can't Afford to Pay My Mortgage Even At the Lower Rate?

Your mortgage lender may allow you to stop paying the principal amount due on your loan during the period of active duty service. Lenders are not required to do this but they generally try to work with service members to keep them in their homes. You will still owe this amount but will not have to repay it until after your complete your active duty service.

Additionally, most lenders have other programs to assist borrowers who cannot make their mortgage payments. If you or your spouse find yourself in this position at any time before or after active duty service, contact your lender immediately and ask about loss mitigation options. Borrowers with FHA insured loans who are having difficulty making mortgage payments may also be eligible for forbearance and/or HUD's other Loss Mitigation Programs. More information about help for homeowners who are unable to make payments on a mortgage is available on the HUD website.

Am I Protected against Foreclosure?

The SCRA states that in a legal action to enforce a debt against real estate that is filed during, or within one year after the servicemember’s military service, a court may stop the proceedings for a period of time, or adjust the debt. In addition, the sale, foreclosure, or seizure of real estate shall not be valid if it occurs during or within one year after the servicemember’s military service unless the creditor has obtained a valid court order approving the sale, foreclosure, or seizure of the real estate.

The one year after military service legal protection period is effective through December 31, 2015 under provisions of “The Foreclosure Relief and Extension for Servicemembers Act of 2014” enacted on December 18, 2014 (Public Law 113-286). If this SCRA provision is not amended or revised, the legal protection period will revert to 90 days after military service effective January 1, 2016.


What Information Do I Need To Provide To My Lender?

When you or your representative contacts your mortgage lender, you should provide the following information:

Notice that you have been called to active duty; A copy of the orders from the military service notifying you of your activation; Your FHA case number; and Evidence that the debt precedes your activation date.

HUD has reminded FHA lenders of their obligation to follow the Act. If notified that a borrower is on active military duty, the lender must advise the borrower or representative of the adjusted amount due, provide adjusted coupons or billings, and ensure that the adjusted payments are not returned as insufficient payments.

Will My Payments Change Later? Will I Need To Pay Back The Interest Rate "Subsidy" At A Later Date?

The change in interest rate is not a subsidy. Interest in excess of 6 percent per year that would otherwise have been charged is forgiven. However, the reduction in the interest rate and monthly payment amount only applies during the period of active duty and one year thereafter. The interest rate will then revert back to the original interest rate, and the payment will be recalculated accordingly.

How Can I Learn More About Relief Available To Active Duty Military Personnel?

Servicemembers and dependents with questions about the SCRA may contact their unit’s Judge Advocate or an installation Legal Assistance Officer. A military legal assistance office locator for each branch of the armed forces is available at http://legalassistance.law.af.mil/content/locator.php.

“Military OneSource” is the U. S. Department of Defense’s information resource. For more information regarding legal issues and available assistance, please go to www.militaryonesource.mil/legal or call 1-800- 342-9647 (toll free from the Unites States). Dialing instructions for areas outside the United States are provided on the website.


SCRA ENFORCEMENT ACTIONS

These enforcement actions are part of the SCRA interagency training session held on September 9, 2012 U.S. v. Capital One (2012) DOJ’s first enterprise-wide SCRA case Allegations include: •Failure to comply with the 6% interest rate provisions on credit cards, motor vehicle loans, and other accounts •Unlawful foreclosures without court orders •Unlawful repossessions of motor vehicles without court orders •Unlawful default judgments on debts owed on credit cards, mortgages, and motor vehicles Relief Includes: •Approximately $12 million in payments to compensate for SCRA violations between July 2006 and July 2012 –$7 million to servicemembers, including: •$125,000 plus any lost equity with interest for each unlawful foreclosure •$10,000 plus any lost equity with interest for each unlawful vehicle repossession •$570 plus forgiveness of amount of judgment and post-judgment interest for each unlawful auto loan judgment or credit card default judgment •Minimum of 4X the amount of the overcharge for servicemembers who did not receive proper interest rate protection –$5 million fund for servicemembers who received insufficient 6% benefits for credit cards and motor vehicle finance loans and consumer loans National Servicer Settlement (2012) •Settlement agreements with Bank of America Corporation; Citigroup, Inc.; JP Morgan Chase & Co.; Ally Financial (formerly GMAC) ; and Wells Fargo & Co •Resolves allegations that the servicers violated the judicial foreclosure, non- judicial foreclosure and interest rate provisions of the SCRA Relief includes: •Full review of judicial and non-judicial foreclosures back to January 1, 2006 •Minimum of $116,785 + lost equity Review of mortgages for interest rate violations back to January 1, 2008 •Minimum of 4 times the amount wrongfully charged •All payments in addition to $25B settlement


DOJ SCRA ENFORCEMENT ACTIONS

February 9, 2015 Source: http://www.justice.gov/opa/pr/service-members-receive-over-123-million-unlawful-foreclosures-under-servicemembers-civil

Service Members to Receive Over $123 Million for Unlawful Foreclosures Under the Servicemembers Civil Relief Act

The Justice Department announced today that under its settlements with five of the nation’s largest mortgage servicers, 952 service members and their co-borrowers are eligible to receive over $123 million for non-judicial foreclosures that violated the Servicemembers Civil Relief Act (SCRA). The five mortgage servicers are JP Morgan Chase Bank N.A. (JP Morgan Chase); Wells Fargo Bank N.A. and Wells Fargo & Co. (Wells Fargo); Citi Residential Lending Inc., Citibank, NA and CitiMortgage Inc. (Citi); GMAC Mortgage, LLC, Ally Financial Inc. and Residential Capital LLC (GMAC Mortgage); and BAC Home Loans Servicing LP formerly known as Countrywide Home Loans Servicing LP (Bank of America).

In the first round of payments under the SCRA portion of the 2012 settlement known as the National Mortgage Settlement (NMS), 666 service members and their co-borrowers will receive over $88 million from JP Morgan Chase, Wells Fargo, Citi and GMAC Mortgage. The other 286 service members and their co-borrowers are receiving over $35 million from Bank of America through an earlier settlement. The non-judicial foreclosures at issue took place between Jan. 1, 2006, and Apr. 4, 2012.

“These unlawful judicial foreclosures forced hundreds of service members and their families out of their homes,” said Acting Associate Attorney General Stuart F. Delery. “While this compensation will provide a measure of relief, the fact is that service members should never have to worry about losing their home to an illegal foreclosure while they are serving our country. The department will continue to actively protect our service members and their families from such unjust actions.”

“We are very pleased that the men and women of the armed forces who were subjected to unlawful non-judicial foreclosures while they were serving our country are now receiving compensation,” said Acting Assistant Attorney General Vanita Gupta of the Civil Rights Division. “We look forward, in the coming months, to facilitating the compensation of additional service members who were subjected to unlawful judicial foreclosures or excess interest charges. We appreciate that JP Morgan Chase, Wells Fargo, Citi, GMAC Mortgage and Bank of America have been working cooperatively with the Justice Department to compensate the service members whose rights were violated.”

Section 533 of the SCRA prohibits non-judicial foreclosures against service members who are in military service or within the applicable post-service period, as long as they originated their mortgages before their period of military service began. Even in states that normally allow mortgage foreclosures to proceed non-judicially, the SCRA prohibits servicers from doing so against protected service members during their military service and applicable post-military service coverage period.


Under the NMS, for mortgages serviced by Wells Fargo, Citi and GMAC Mortgage, the identified service members will each receive $125,000, plus any lost equity in the property and interest on that equity. Eligible co-borrowers will also be compensated for their share of any lost equity in the property. To ensure consistency with an earlier private settlement, JP Morgan Chase will provide any identified service member either the property free and clear of any debt or the cash equivalent of the full value of the home at the time of sale, and the opportunity to submit a claim for compensation for any additional harm suffered, which will be determined by a special consultant, retired U.S. District Court Judge Edward N. Cahn. Payment amounts have been reduced for those service members or co-borrowers who have previously received compensation directly from the servicer or through a prior settlement, such as the independent foreclosure review conducted by the Office of the Comptroller of the Currency and the Federal Reserve Board. The Bank of America payments to identified service members with nonjudicial foreclosures were made under a 2011 settlement with the Department of Justice.

The NMS also provides compensation for two categories of service members: (1) those who were foreclosed upon pursuant to a court order where the mortgage servicer failed to file a proper affidavit with the court stating whether or not the service member was in military service; and (2) those service members who gave proper notice to the servicer, but were denied the full benefit of the SCRA’s 6% interest rate cap on pre-service mortgages. The service members entitled to compensation for these alleged violations will be identified later in 2015.


SCRA DELINQUENCY NOTICE

This is an updated form of the HUD-92070 to reflect the change to the expiration date. HUD's current version (as of 01/06/2015) does not allow for the extension of the protection period of one year for the foreclosure and related actions. The President signed a bill on 12/18/2014 extending the one-year post-active duty foreclosure protections.



HELOC RESTRICTIONS

Reg Z -1026.40 Paragraph 40(f)(2)(iii)

1. Impairment of security. A creditor may terminate a plan and accelerate the balance if the consumer's action or inaction adversely affects the creditor's security for the plan, or any right of the creditor in that security. Action or inaction by third parties does not, in itself, permit the creditor to terminate and accelerate.

2. Examples. i. A creditor may terminate and accelerate, for example, if:

A. The consumer transfers title to the property or sells the property without the permission of the creditor.

B. The consumer fails to maintain required insurance on the dwelling.

C. The consumer fails to pay taxes on the property.

D. The consumer permits the filing of a lien senior to that held by the creditor.

E. The sole consumer obligated on the plan dies.

F. The property is taken through eminent domain.

G. A prior lien holder forecloses.

ii. By contrast, the filing of a judgment against the consumer would permit termination and acceleration only if the amount of the judgment and collateral subject to the judgment is such that the creditor's security is adversely affected. If the consumer commits waste or otherwise destructively uses or fails to maintain the property such that the action adversely affects the security, the plan may be terminated and the balance accelerated. Illegal use of the property by the consumer would permit termination and acceleration if it subjects the property to seizure. If one of two consumers obligated on a plan dies the creditor may terminate the plan and accelerate the balance if the security is adversely affected. If the consumer moves out of the dwelling that secures the plan and that action adversely affects the security, the creditor may terminate a plan and accelerate the balance.