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From the Regulators and the Courts

By Blair Rugh 13 Jul 2016

Regulation B: “Branch” Redlining

The proposed settlement and consent order that the Justice Department and the CFPB recently announced takes on a new twist – redlining by branch locations.  Although the settlement agreement referred to instances of disparate treatment of protected class applicants, the principal complaint appears to be an allegation of “redlining,” not just in the traditional sense, but in its branch locations. The bank had 22 branch locations in the Memphis area.  20 of the branches were in areas where the population was in excess of 80% non-minority. Two branches were in areas where the population was 50% to 80% non-minority, and no branches were in areas that were in excess of 50% minority.


Whether the bank’s branching pattern alone would have attracted the ire of the regulators or whether the instances of disparate treatment pushed them over the line is unknown. In either case, financial institutions should review their branch pattern. If it is similar to that of the bank in the Memphis area, they should make a concerted outreach effort to the minority community in their market area through their advertising and other marketing efforts.


Regulation Z:  Exercising the Right of Rescission Timing 

There is no longer any confusion about the timing of what a borrower must do to exercise his or her right of rescission. A borrower gave its lender a notice of right to rescind exactly three years after the loan closing alleging that the rescission notice that it was given at closing was inadequate. Slightly over a year later, the borrower instituted a law suit for rescission. The lender claimed that the Truth in Lending Act required the borrower to actually bring the law suit within the three year period. The Supreme Court of the United States ruled for the borrower. It said that all the statute requires is for the rescission notice to be provided to the lender within the three year period. The case was remanded back to the trial court for the determination of whether the original notice of right to rescind was adequate.


Social Security Offsets 

42 U.S.C. § 407(a), involving Social Security benefits, provides:

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.


In other words, a person may not assign future social security payments, and those payments are not subject to legal claim by the person’s creditors.


Washington Mutual Bank’s deposit agreement contained a standard provision that it reserved the right to pay items that would cause an overdraft in a depositor’s account. If the account was paid into overdraft, the overdraft amount was a liability of the depositor, was immediately due and payable, and the depositor agreed that the bank could satisfy the amount from any future deposits. In this case, the depositor wrote a check that overdrew his account, the bank paid it creating an overdraft and an overdraft fee. There was subsequently an electronic deposit to the account of the depositor’s social security benefits. The bank paid a portion of the deposit to the overdraft and the overdraft fee.


Mr. Lopez, the depositor brought a class action against the bank alleging that the action of the bank constituted an “other legal process” and violated the social security rules. In its original opinion, the 9th Circuit Court of Appeals ruled in favor of Mr. Lopez. Subsequently, however, the court withdrew its original opinion and issued a new opinion reversing itself and ruling in favor of the bank.


The court held, “In this case, the plaintiffs voluntarily opened an account with the bank and executed an account holder agreement which outlined the terms and conditions of the bank's overdraft policies.  They also established a direct deposit for their benefits (an agreement to which Washington Mutual was not a party).  The plaintiffs remained free at all times to close their account or change their direct deposit instructions. Because they did not do so, Washington Mutual argues, each deposit to the account after an overdraft should be treated as a voluntary payment of a debt incurred. We agree.”


There is a conflict with a decision in Tom v. First American Credit Union. In that case, a depositor pledged a deposit account into which social security payments were received as additional collateral for a loan. When the loan went into default, the credit union took the funds from the account to satisfy the delinquency. A different court said that was a violation of the social security rules.


The moral of the story is to be very cautious anytime social security benefits are pledged directly or indirectly as collateral for an obligation, but taking the payments to satisfy an overdraft or account fees is permissible.

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