Banks, Foreign Bank Agencies, and Trust Companies

Index - Outstanding Regulatory Guidance

Regulatory Guidance - 3001

August 7, 2001

Overview:

Code of Criminal Procedure Chapter 59, the civil asset forfeiture statute, authorizes and establishes a procedure for state law enforcement to seize and forfeit property related to criminal offenses. The scope of Chapter 59 is broad, and offenses that give rise to seizure and forfeiture generally include any felony offense.  Property that is subject to seizure and forfeiture is statutorily referred to as "contraband", and includes any: (i) property used in the commission of or to facilitate the crime; (ii) the proceeds of the crime; and (iii) property derived from or purchased with the proceeds of the crime. Not infrequently, a bank or other regulated financial institution holds property that may be subject to seizure and forfeiture by the State.

During the 77th Regular Session, the Texas Legislature amended Chapter 59.  Senate Bill 626, which becomes effective September 1, 2001, expands the protection afforded innocent lienholders and significantly changes the procedures that apply to the seizure of contraband held at regulated financial institutions. To put these changes and their significance in context, we believe it is helpful to briefly discuss some of the more problematic aspects of the prior law before explaining the recent amendments.

Texas Law from 1989 to Present:

Before the enactment of Senate Bill 626, Chapter 59 required a lienholder with a bona fide security interest in contraband other than real property to prove two things in order to protect that interest from forfeiture: one, that the security interest was acquired prior to or during the commission of the offense; and two, that at the time the security interest was acquired and perfected, the lienholder did not know or have reason to know of the criminal offense or that it was likely to occur.  A bank that acquired and perfected a security interest in contraband after the time the crime was committed lost that security interest no matter how "innocent" or ignorant of the crime the bank may have been.

The failure to protect an innocent lienholder that acquired and perfected a security interest after the commission of the crime was not the only problem that Chapter 59 created for banks.  Chapter 59 also authorized the State to withdraw seized contraband from a bank immediately upon service of the seizure warrant.  Such action, depending upon the amount of the seizure in relation to the bank's capital and assets, could jeopardize the bank's liquidity and potentially precipitate a de facto insolvency and bank closing.  Additionally, Chapter 59 included no provision for the sharing of information with, or giving notice to, state and federal banking regulators regarding contemplated asset seizures that could adversely affect these banking institutions.

Texas Law Effective September 1, 2001:

The revised law addresses these problems by: 1) recognizing the rights of the innocent lienholder who acquires and perfects its security interest after the commission of the offense but before the seizure of the property; 2) establishing specific procedures for the seizure of accounts and assets at regulated financial institutions; and 3) authorizing, and in some instances requiring, law enforcement´s disclosure of information to the Texas Banking Department in those instances when a bank employee is suspected to be involved in the crime.

Protection of Security Interests of Bona Fide Lienholders

The revised law continues to recognize the rights of the bona fide lienholder that acquires and perfects its security interest, in what is later determined to be contraband, before or during the commission of a criminal act that gives rise to forfeiture.  It does not change what the lienholder must establish in order to keep its interest from being forfeited.  Section 59.02(c) still requires the lienholder to establish that, at or before the time of acquiring and perfecting the interest, the lienholder did not know or should not reasonably have known of the act or omission giving rise to the forfeiture, or that it was likely to occur.

Unlike the prior law, however, the revised statute permits the lienholder who acquires and perfects its security interest after the commission of the offense, but before the seizure of the property, to protect that interest. To prevent the after-acquired security interest from being subject to forfeiture, the lienholder must establish that: 1) it was an interest holder for value at the time the interest in the property was acquired; and 2) it was "without reasonable cause to believe that the property was contraband and did not purposefully avoid learning that the property was contraband."  The new law also specifically provides that the rights of lienholders in seized property remain in effect while the forfeiture proceedings are pending as if the property had remained in the lienholder's possession.

Procedures for Seizure of Accounts and Assets at Regulated Financial Institutions

The revised law establishes specific procedures to govern the seizure of contraband held at a regulated financial institution when the contraband consists of depository accounts or assets in which the institution has a security interest. A bank served with a seizure warrant has two options:

A.  Pay the account or tender the assets at the time the warrant is served; or

B.  Transfer the account or assets to a segregated, interest-bearing account in the name of the attorney representing the state as trustee, where the account funds or assets must remain until disposed of by final order of the court in the forfeiture proceeding.

If the bank chooses option (B), the bank must:

1.         freeze and segregate the account or assets immediately upon service of the seizure warrant; and,

2.         provide the peace officer with evidence, certified by a bank officer, of the terms and amount of the account or a detailed inventory of the assets.

Except as authorized by the statute, no transaction involving the account or assets, other than the deposit or reinvestment of interest, dividends or similar payments, can occur without court approval.

If the bank fails to release or transfer the account or assets as required by the statute, and, as a result, cannot comply with the court's final forfeiture order, if that is the court´s decision, certain sanctions apply. The court can order the bank and its culpable officers, agents and employees to pay actual damages, attorneys' fees and court costs. Additionally, the court may find the bank and those culpable persons in contempt.

The new law establishes a safe harbor from liability for a bank that complies with its provisions.

Disclosure and Notice Provisions

The revised law authorizes the attorney representing state law enforcement to disclose information to the Banking Commissioner, including confidential information, relating to an actual or contemplated seizure involving a depository account in a financial institution or assets held by a financial institution as security for an obligation owed to the institution.

The state law enforcement attorney must notify the Banking Commissioner before taking any action under Chapter 59 that implicates a potentially culpable bank officer or director.  The Commissioner is to then notify appropriate state and federal regulators.

The information disclosed to the Banking Commissioner, and other state and federal financial institution regulators, is confidential, and a regulator who knowingly discloses the information, except as authorized by the statute, is subject to penalties.

Banker Guidance:

What does this mean? What must a bank do to protect itself against the risk that accounts held at the bank, or, more importantly, assets in which the bank has a security interest, will be seized and forfeited to the State?

1.   Banks should heighten their awareness of their loan customers, especially new relationships and those borrowers that deal in cash and cash equivalent assets.  Bankers should fully understand the nature of a borrower´s business, and perform and document background and reference checks for further assurance about the integrity of a borrowing relationship.  (A key component of the law´s revision places emphasis on the banker to know his customers.  Should the bank find itself in a seizure and forfeiture situation, the extent of that knowledge, and due diligence that is evidenced, will be critical.)

2.   When necessary, bankers should adequately document the origin of loan collateral to the fullest extent possible.  Supporting documentation could include a bill of sale, purchase money invoice, or a closing settlement statement for real property.  Certificates of deposit, equitable securities, and bonds held by third party institutions can present special challenges in determining the nature of their genesis.  Prior years´ tax returns should receive close review to determine possible asset holdings, sales, and investment capabilities.  Additionally, bank statements may need review to ascertain the extent of cash transactions. 

3.   Understand the use of loan proceeds.  Purchase money loans should be well documented with invoices and when possible, bank checks made payable to the selling party and the borrower.  Borrower accounts that receive deposited loan proceeds should be periodically reviewed in order that the intended use of the proceeds can be collaborated with their disposition. 

4.   The Board and management should formulate policies and procedures in the event that the bank is served a notice of seizure.  At a minimum the policy should address the following:

A.  Who is responsible for coordinating and interfacing with law enforcement officials (includes branch locations);

B.   How will different assets be segregated and who will be responsible for monitoring the segregated accounts (should the bank chose to retain, and not immediately turn funds over to law enforcement, the amount of funds held by the bank and verified by the bank at the time of inquiry, should be the same amount the bank has provided credit to the customer, i.e., collected funds); and,

C.  How and when will the board be notified.

Questions or comments about revised Chapter 59, Texas Criminal Code, should be directed to Deputy Commissioner Gayle Griffin or General Counsel Everette Jobe at 512-475-1300.

Attachments:   

Senate Bill 626

Analysis of Senate Bill 626

ATTACHMENT 1

S.B. No. 626

AN ACT

relating to liens on certain property related to certain criminal offenses and the effect of forfeiture of that property; providing penalties.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION1.Article 59.01, Code of Criminal Procedure, is amended by adding Subdivisions (9), (10), and (11) to read as follows:

(9) "Depository account" means the obligation of a regulated financial institution to pay the account owner under a written agreement, including a checking account, savings account, money market account, time deposit, NOW account, or certificate of deposit.

(10) "Primary state or federal financial institution regulator" means the state or federal regulatory agency that chartered and comprehensively regulates a regulated financial institution.

(11) "Regulated financial institution" means a depository institution chartered by a state or federal government, the deposits of which are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration.

SECTION 2. Subsections (c) through (g), Article 59.02, Code of Criminal Procedure, are amended to read as follows:

(c) An owner or interest holder's interest in property may not be forfeited under this chapter if the owner or interest holder proves by a preponderance of the evidence that the owner or interest holder[:

[(1)] acquired and perfected the interest:

(1) before or during the act or omission giving rise to forfeiture or, if the property is real property, he acquired an ownership interest, security interest, or lien interest before a lis pendens notice was filed under Article 59.04(g) of this code[;] and

[(2)] did not know or should not reasonably have known of the act or omission giving rise to the forfeiture or that it was likely to occur at or before the time of acquiring and perfecting the interest or, if the property is real property, at or before the time of acquiring the ownership interest, security interest, or lien interest; or

(2) after the act or omission giving rise to the forfeiture, but before the seizure of the property, and only if the owner or interest holder:

(A) was, at the time that the interest in the property was acquired, an owner or interest holder for value; and

(B) was without reasonable cause to believe that the property was contraband and did not purposefully avoid learning that the property was contraband.

(d) Notwithstanding any other law, if property is seized from the possession of an owner or interest holder who asserts an ownership interest, security interest, or lien interest in the property under applicable law, the owner or interest holder's rights remain in effect during the pendency of proceedings under this chapter as if possession of the property had remained with the owner or interest holder.

(e) On motion by any party or on the motion of the court, after notice in the manner provided by Article 59.04 of this code to all known owners and interest holders of property subject to forfeiture under this chapter, and after a hearing on the matter, the court may make appropriate orders to preserve and maintain the value of the property until a final disposition of the property is made under this chapter, including the sale of the property if that is the only method by which the value of the property may be preserved until final disposition.

(f)[(e)] Any property that is contraband and has been seized by the institutional division of the Texas Department of Criminal Justice shall be forfeited to the institutional division under the same rules and conditions as for other forfeitures.

(g)[(f)] An individual, firm, corporation, or other entity insured under a policy of title insurance may not assert a claim or cause of action on or because of the policy if the claim or cause of action is based on forfeiture under this chapter and, at or before the time of acquiring the ownership of real property, security interest in real property, or lien interest against real property, the insured knew or reasonably should have known of the act or omission giving rise to the forfeiture or that the act or omission was likely to occur.

(h)[(g)] The forfeiture provisions of this chapter apply to contraband as defined by Article 59.01(2)(B)(v) [(iv)] of this code only in a municipality with a population of 250,000 or more.

SECTION 3. Subsection (a), Article 59.03, Code of Criminal Procedure, is amended to read as follows:

(a) Property subject to forfeiture under this chapter, other than property described by Article 59.12, may be seized by any peace officer under authority of a search warrant.

SECTION 4. Subsection (b), Article 59.04, Code of Criminal Procedure, is amended to read as follows:

(b) A forfeiture proceeding commences under this chapter when the attorney representing the state files a notice of the seizure and intended forfeiture in the name of the state with the clerk of the district court in the county in which the seizure is made.  The attorney representing the state must attach to the notice the peace officer's sworn statement under Article 59.03 of this code or, if the property has been seized under Article 59.12(b), the statement of the terms and amount of the depository account or inventory of assets provided by the regulated financial institution to the peace officer executing the warrant in the manner described by Article 59.12(b).  Except as provided by Subsection (c) of this article, the attorney representing the state shall cause certified copies of the notice to be served on the following persons in the same manner as provided for the service of process by citation in civil cases:

(1) the owner of the property; and

(2) any interest holder in the property.

SECTION 5. Chapter 59, Code of Criminal Procedure, is amended by adding Articles 59.12, 59.13, and 59.14 to read as follows:

Art.59.12.SEIZURE OF ACCOUNTS AND ASSETS AT REGULATED FINANCIAL INSTITUTION.  (a)This article applies to property consisting of a depository account or assets in a regulated financial institution.

(b) A regulated financial institution, at the time a seizure warrant issued under Chapter 18 is served on the institution, may either:

(1) pay an account or tender assets held as security for an obligation owed to the institution at the time of the service of the seizure warrant; or

(2) transfer the depository account or assets to a segregated interest-bearing account in the name of the attorney representing the state as trustee, to remain in the account until the time has expired for an appeal from a decision of the court relating to the forfeiture of accounts or assets under Article 59.05.

(c) Immediately on service of the seizure warrant, the regulated financial institution shall take action as necessary to segregate the account or assets and shall provide evidence, certified by an officer of the institution, of the terms and amount of the account or a detailed inventory of the assets to the peace officer serving the warrant.  Except as otherwise provided by this article, a transaction involving an account or assets, other than the deposit or reinvestment of interest, dividends, or other normally recurring payments on the account or assets that do not involve distribution of proceeds to the owner, is not authorized unless approved by the court that issued the seizure warrant or, if a forfeiture action has been instituted, the court in which that action is pending.

(d) Any accrual to the value of the account or assets during the pendency of the forfeiture proceedings is subject to the procedures for the disbursement of interest under Article 59.08.

(e) If the regulated financial institution fails to release the depository account or assets to a peace officer pursuant to a seizure warrant or transfer the account or assets as required by Subsection (b), and as a result cannot comply with the court's forfeiture order, the court:

(1) shall order the regulated financial institution and its culpable officers, agents, or employees to pay actual damages, attorney's fees, and court costs incurred as a result of the institution's failure to comply; and

(2) may find the regulated financial institution and its culpable officers, agents, or employees in contempt.

(f) A regulated financial institution that complies with this article is not liable in damages because of the compliance.

(g) This article does not:

(1) impair the right of the state to obtain possession of physical evidence or to seize a depository account or other assets for purposes other than forfeiture under this chapter; or

(2) waive criminal or civil remedies available under other law.

Art.59.13.DISCLOSURE OF INFORMATION RELATING TO ACCOUNTS AND ASSETS AT REGULATED FINANCIAL INSTITUTION.  (a)The attorney representing the state may disclose information to the primary state or federal financial institution regulator, including grand jury information or otherwise confidential information, relating to any action contemplated or brought under this chapter that involves property consisting of a depository account in a regulated financial institution or assets held by a regulated financial institution as security for an obligation owed to a regulated financial institution.  An attorney representing the state who discloses information as permitted by this subsection is not subject to contempt under Article 20.02 for that disclosure.

(b) A primary state or federal financial institution regulator shall keep confidential any information provided by the attorney representing the state under Subsection (a).  The sharing of information under Subsection (a) by a representative of the state is not considered a waiver by the state of any privilege or claim of confidentiality.

(c) A regulator described by Subsection (b) commits an offense if the regulator knowingly discloses information in violation of this article.  An offense under this subsection is punishable by confinement in jail for a period not to exceed 30 days, a fine not to exceed $500, or both such confinement and fine.

Art.59.14.NOTICE TO PRIMARY STATE AND FEDERAL FINANCIAL INSTITUTION REGULATORS.  (a)Before taking any action under this chapter that implicates a potentially culpable officer or director of a regulated financial institution, the attorney representing the state shall notify the banking commissioner, who shall notify the appropriate state or federal financial institution regulator.

(b) A state or federal financial institution regulator shall keep confidential any information provided by the attorney representing the state under Subsection (a).

(c) A regulator described by Subsection (b) commits an offense if the regulator knowingly discloses information in violation of this article.  An offense under this subsection is punishable by confinement in jail for a period not to exceed 30 days, a fine not to exceed $500, or both such confinement and fine.

(d) The provision of notice under Subsection (a) is not considered a waiver by the state of any privilege or claim of confidentiality.

SECTION6. The change in law made by this Act applies only to a seizure that occurs on or after the effective date of this Act.  A seizure that occurs before the effective date of this Act is covered by the law in effect when the seizure occurred, and the former law is continued in effect for that purpose.

SECTION7. This Act takes effect September 1, 2001.

_______________________________     _______________________________

President of the Senate                          Speaker of the House

                              _______________________________

    Secretary of the Senate

I hereby certify that S.B. No. 626 passed the House, with amendment, on May 10, 2001, by a non-record vote.

                            _______________________________

Chief Clerk of the House

Approved:

_______________________________

Date

_______________________________

Governor

ATTACHMENT 2

SRC-JBJ S.B. 626 77(R)BILL ANALYSIS

Senate Research Center  S.B. 626
By: Duncan
Jurisprudence
6/21/2001
Enrolled

DIGEST AND PURPOSE

Under Texas law, the holder of a bona fide security interest in property other than real property may lose that lien or security to forfeiture even though the lienholder is innocent, not knowing or having reason to suspect that the property constitutes contraband.  S.B. 626 addresses several problems that may arise in the seizure of accounts held at banks and assets that have been pledged to secure loans made by banks.

RULEMAKING AUTHORITY

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.   

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Article 59.01, Code of Criminal Procedure, by adding

Subdivisions (9)-(11), to define "depository account," "primary state or federal financial institution regulator," and "regulated financial institution."

SECTION 2.  Amends Articles 59.02(c)-(g), Code of Criminal Procedure, to prohibit an owner or interest holder's interest in property from being forfeited under this chapter if the owner or interest holder proves by a preponderance of the evidence that certain specific conditions were met,

including that the owner or interest holder, after the act or omission giving rise to the forfeiture, but before the seizure of the property, and only if the owner or interest holder was, at the time that the interest in the property was acquired, an owner or interest holder for value, and was without reasonable cause to believe that the property was contraband and did not purposefully avoid learning that the property was contraband.

Provides that if property is seized from the possession of an owner or interest holder who asserts an ownership interest, security interest, or lien interest in the property under applicable law, notwithstanding any other law,  the owner or interest holder's rights remain in effect during the pendency of proceedings under this chapter as if possession of the property had remained with the owner or interest holder.  Provides that the forfeiture provisions of this chapter apply to contraband as defined by

Article 59.01(2)(B)(v), rather than (iv), of this code only in municipality with a population of 250,000 or more.

SECTION 3.  Amends Article 59.03, Code of Criminal Procedure, by amending Subsection (a) and adding Subsection (d), to authorize property subject to forfeiture under this chapter, other than property described by Article

59.12, to be seized by any peace officer under authority of a search warrant. 

SECTION 4.  Amends Article 59.04(b), Code of Criminal Procedure, to require the attorney representing the state to attach to the notice the peace officer's sworn statement under Article 59.03 of this code or, if the property has been seized under Article 59.12(b), the statement of the terms and amount of the depository account or inventory of assets provided by the regulated financial institution to the peace officer executing the warrant in the manner described by Article 59.12(b).

SECTION 5.  Amends Chapter 59, Code of Criminal Procedure, by adding

Articles 59.12-59.14, as follows:

Art. 59.12.  SEIZURE OF ACCOUNTS AND ASSETS AT REGULATED FINANCIAL INSTITUTION.

(a)  Provides that this article applies to property consisting of a depository account or assets in a regulated financial institution.

(b)  Authorizes a regulated financial institution, at the time a seizure warrant issued under Chapter 18 is served on the institution, to take either of two enumerated actions.

(c)  Requires the regulated financial institution, immediately on service of the seizure warrant, to take action as necessary to segregate the account or assets and to provide evidence, certified by an officer of the institution, of the terms and amount of the account or a detailed inventory of assets to the peace officer serving the warrant. Provides that a transaction involving an account or assets, other than the deposit or reinvestment of interest and except as otherwise provided by this article, or other normally recurring payments on the account or assets that do not involve distribution of proceeds to the owner is not authorized unless approved by the court that issued the seizure warrant or, if a forfeiture action has been instituted, the court in which that action is pending.

(d)  Provides that any accrual to the value of the account or assets during the pendency of the forfeiture proceedings is subject to the procedures for the disbursement of interest under Article 59.08.

(e)  Requires the court, if the regulated financial institution fails to release the depository account or assets to a peace officer pursuant to a seizure warrant or transfer the account or assets as required by Subsection

(b), and as a result cannot comply with the court's forfeiture order, to order the regulated financial institution and its culpable officers, agents, or employees to pay actual damages, attorney's fees, and court costs incurred as a result of the institution's failure to comply, and authorizes the court to find the regulated financial institution and its culpable officers, agents, or employees in contempt.

(f)  Provides that a regulated financial institution that complies with this article is not liable in damages because of the compliance.

(g)  Provides that this article does not impair the right of the state to obtain possession of physical evidence or to seize a depository account or other assets for purposes other than forfeiture under this chapter, or waive criminal remedies available under other law.

Art. 59.13.  DISCLOSURE OF INFORMATION RELATING TO ACCOUNTS AND ASSETS AT

REGULATED FINANCIAL INSTITUTION.  (a)  Authorizes the attorney representing the state to disclose information to the primary state or federal financial institution regulator, including grand jury information or otherwise confidential information, relating to any action contemplated or brought under this chapter that involves property consisting of a depository account in a regulated financial institution or assets held by a regulated financial institution as security for an obligation owed to a regulated financial institution.  Provides that an attorney representing the state who discloses information as permitted by this subsection is not subject to contempt under Article 20.02 for that disclosure.

(b)  Requires a primary state or federal financial institution regulator to keep confidential any information provided by the attorney representing the state under Subsection (a). Provides that the sharing of information under

Subsection (a) by a representative of the state is not considered a waiver by the state of any privilege or claim of confidentiality.

(c)  Provides that a regulator described by Subsection (b) commits an offense if the regulator knowingly discloses information in violation of this article.  Provides that an offense under this subsection is punishable by confinement in jail for a period not to exceed 30 days, a fine not to exceed $500, or both such confinement and fine.

Art. 59.14.  NOTICE TO PRIMARY STATE AND FEDERAL FINANCIAL INSTITUTION

REGULATORS.  (a)  Requires the attorney representing the state, before taking any action under this chapter that implicates a potentially culpable officer or director of a regulated financial institution, to notify the banking commissioner, who is required to then notify the appropriate state or federal financial institution regulator.

(b)  Requires a state or federal financial institution regulator to keep confidential any information provided by the attorney representing the state under Subsection (a).

  (c)  Provides that a regulator described by Subsection (b) commits an offense if the regulator knowingly discloses information in violation of this article.  Provides that an offense under this subsection is punishable by confinement in jail for a period not to exceed 30 days, a fine not to exceed $500, or both such confinement and fine.

(d)  Provides that the provision of notice under Subsection (a) is not considered a waiver of any privilege or claim of confidentiality.

SECTION 6.  Makes application of this Act prospective.

SECTION 7.  Effective date: September 1, 2001.

Regulatory Guidance - 3003

December 20, 2001

Background:

Recent supervisory actions by the Securities and Exchange Commission (SEC) against Robert L. Bentley, Entrust Group, and Bentley Financial Services, Inc. (collectively, Bentley), serve as a warning about fraudulent investment activities.  On October 23, 2001, the SEC filed suit against Bentley for suspected securities fraud.  Bentley, located in Paoli, Pennsylvania, allegedly committed fraud in the sale of securities to financial institutions, including banks, thrifts, and credit unions, and to individual investors.  Specifically, the SEC alleges that Bentley was representing to investors that they (Bentley) were selling federally-insured certificates of deposit (CDs) when, in fact, they were selling uninsured securities issued by Bentley.  The SEC also alleges that Bentley had to attract new investors in order to repay previous investors.  The Philadelphia District Court issued a Temporary Restraining Order against Bentley that freezes Bentley´s accounts and appoints a receiver to exercise control over Bentley´s assets. 

The FDIC has advised that institutions holding any funds, securities or other assets in the name of or for the benefit of Bentley should take steps necessary to comply with the terms of the Temporary Restraining Order.  Further, all financial institutions that have invested funds through Bentley are advised to confer with counsel about appropriate courses of action, including contacting the court-appointed Receiver about the institution´s investments.  The Receiver may be reached at 215-772-725.  (FDIC-PR-76-2001)

Risk Assessment:

The purpose of this regulatory guidance is to reemphasize the importance of closely scrutinizing all aspects of a financial transaction, including those perceived to contain little or no risk.  In the case of Bentley, investors may have failed to follow fundamental safety and soundness principals.  Discussed below are principal areas of concern regarding brokered CD activity.

Who is the broker dealer?

Fluctuations in the equity markets over the last year have prompted many investors to search for lower-risk investments; however, declining interest rates have complicated efforts to maintain satisfactory yields.  CDs have traditionally filled this demand, offering safety and a rate of return higher than other types of deposit accounts.  While insured depository institutions directly offer CDs, many brokerage firms and independent salespeople also offer these types of deposits.  These individuals and entities, known as "deposit brokers", can sometimes negotiate a higher rate of interest by promising to bring a certain amount of deposits to the institution.  The deposit broker then offers these "brokered CDs" to their customers. 

Many investors do not realize that there are no federal or state licensing requirements for deposit brokers.  Anyone from a person working alone at home to someone affiliated with a major financial services firm can be a deposit broker.  This situation places a greater burden upon the potential investor to fully investigate the credentials and qualifications of the deposit broker and the credibility of the transaction.

The burden of investigation and due diligence before committing bank funds to any investment remains with the bank´s Board of Directors.  Banks that rely on third parties for the purchase, settlement, or holding of any type investment should perform routine screening checks into the qualifications and backgrounds of these individuals or entities.  One of the initial actions taken before acquiring brokered CDs should involve determining whether the deposit broker is, or is required to be, registered with the Securities and Exchange Commission and/or the State Securities Board.  Registration and certain background information can be obtained from the National Association of Securities Dealers (NASD).  Brokers registered with the SEC will be listed in the NASD Central Registration Depository (CRD) and will have a unique number.  The CRD can be accessed via the Internet at www.nasdr.com "about your broker", or at NASD Regulation´s Public Disclosure toll-free Hotline at (800) 289-9999.  Additional information may also be available from the State Securities Board at (512) 305-8300 or www.ssb.state.tx.us, the Secretary of State at (512) 463-5701 or www.sos.state.tx.us, or the local chapter of the Better Business Bureau. 

How will the investment be held and who is the issuer?

The Board needs to approve the type and nature of ownership for brokered CDs, which can be held individually by the institution or by a group of unrelated investors.  As a general rule, banks should only use an unregistered firm or individual as a finder if the bank purchases the CD directly from the issuing depository institution.  This means that bank funds are sent directly to the issuing institution and the issuing institution´s records indicate the bank as owner of the investment.

If several investors own a portion of a master CD, the deposit broker will probably not list each person´s name in the title.  The purchasing institution should insist that account records of the issuing bank reflect that the broker is merely acting as an agent for the institution and the other owners (Example - "XYZ Brokerage as Custodian for Customers").  This will ensure that the bank´s portion of the CD qualifies for full FDIC coverage. 

In other instances, brokered CD purchases present a different concern and may involve one or more jumbo CDs which are federally insured, but are resold as "fractionalized" investments using the pool of CDs as collateral.  Investors may be misled into believing that they are buying the CDs themselves when in fact they are simply making an investment with the broker.  In this case, the broker may be selling investments which require him or her to have a securities broker dealer license.  Often, this fact is not disclosed.  Note:  Investments in brokered CDs as described above, in which the broker dealer is the recorded owner of the CD and the investment is actually with the broker dealer, will be subject to the bank´s legal loan limit. 

The responsibility for verifying the specific nature of ownership resides with the investor.  Each of the types previously described will affect the amount of deposit insurance coverage and the investor´s rights and remedies if legal proceedings are required for collection.  Additionally, the Board should require an unaffiliated third party "safekeeper" be used to record legal ownership rights when investments entail master CDs or fractionalized interests.

What are the characteristics of the investment?

The investment itself (brokered CD) may carry unique characteristics.  Brokered CDs could be "zero coupon" instruments, reflect a long-term maturity, contain a "call" provision benefiting the issuer, and/or may be quoted in simple interest rates.  Unscrupulous brokers attempt to cover these undesirable features by omitting certain information, using small print, or even offering to repurchase the investment to indicate liquidity.  Listed below are some of the basic characteristics of a brokered CD that should be determined through documented confirmation or verification with the issuer:

Maturity Date - Investors should confirm the maturity date and require verification in writing.  Many brokered CDs reflect maturity dates of five, ten, or even twenty years.

Call Feature(s) - Callable CDs give the issuing bank the right to terminate or "call" or redeem the CD after a set period of time.  The call is established for the benefit of the issuer and mitigates the issuer´s exposure to interest rate risk. 

Withdrawal Penalties - Deposit brokers often tout the fact that their CDs have no penalty for early withdrawal.  While technically true, these claims can be misleading.  If the investment is shared with other investors, the broker will have to find a buyer for investors wishing to sell their portion before maturity.  If interest rates have risen, the broker may be able to sell the investment only at a discount, impacting the value received. 

Interest Rate - The investor should require a disclosure statement that specifies the interest rate and whether it is fixed or variable.  Interest rates should be thoroughly analyzed and understood.  Decisions between investment options are difficult to analyze if yields are not comparable.  Bond equivalent yield is the industry convention for comparing yields and should be adopted by your institution.  When evaluating zero coupon CDs, avoid yield quotes based on simple interest yields because they will be misleading and appear artificially attractive. 

Other Recommendations:

The Board should approve comprehensive policies and procedures regarding the use of brokered CDs.  Investment decisions based solely on the representations of broker dealers or any third party can be dangerous.  Management should be required to verify pertinent information about potential investments in brokered CDs and execute verification procedures during the process.  On an ongoing basis, the bank´s internal or external audit programs should include a positive direct verification of these investments.

The Board should also establish limits on the volume and types of investments that will be negotiated with each deposit broker.  Such parameters are especially important when the investment is other than direct individual ownership and/or the brokered CD contains unique characteristics. 

The use of brokered CDs can be beneficial if these types of investments are fully understood and managed within a well defined plan that conforms to the institutions asset/liability goals and objectives.  During the examination process, Department examiners will review management´s policies, procedures, and practices regarding brokered CDs.  Any questions about this regulatory guidance should be directed to Robert (Bob) Bacon at (512) 475-1300 or bob.bacon@banking.state.tx.us.

Regulatory Guidance - 3004

December 20, 2001

Background:

In October 2001, the Securities Investor Protection Corporation (SIPC), received approval by the U.S. Bankruptcy Court in Minneapolis to consummate a transfer of 175,000 investor accounts at the financially troubled MJK Clearing, Inc. (MJK), a subsidiary of Minneapolis-based Stockwalk Group, Inc., to SWS Securities, Inc., a Dallas-based financial services company.  MJK was found to be out of compliance with federal rules requiring the maintenance of minimum capital levels.  The capital shortfall occurred due to the failure of another brokerage firm to deliver significant capital owed to MJK.  The Securities and Exchange and Commission (SEC) is investigating the events that led to the failure of MJK, which is the largest liquidation case ever handled by the SIPC.

The Department became aware that Texas-chartered banks along with institutions from other states had investments that were held by MJK.  Primarily, the investments of the Texas banks were fractionalized interests in certificates of deposit held as book entry and styled "Master Certificate as Agent for Customers".  The ensuing settlement may result in about 95% of the original investment being returned to the banks. 

The purpose of this Regulatory Guidance is to notify banks about the necessity of understanding the limitations of SIPC assistance and to caution against undue investment concentrations being held by a brokerage firm. 

Risk Assessment:

State bankers are reminded that the SIPC does not offer to investors the same blanket protection that the FDIC provides to bank depositors.  Generally, the SIPC only helps investors whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails.  However, special rules apply to banks.  The Securities Investor Protection Act of 1970, §78fff-3(a)(5) of 15 U.S.C., specifically prohibits SIPC funds from being used to pay claims of any failed brokerage firm customer who is a broker or dealer or bank acting for itself rather than for its own customer or customers.  Therefore, bank investments held by a brokerage firm are not eligible for assistance by the SIPC regarding claims that may result from a failure of the brokerage firm. 

In addition, other investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) that are not registered with the SEC under the Securities Act of 1933. 

In the case of the bank customers described above, the SIPC satisfied the net equity claims of the banks to the extent allowed under a ratable sharing basis between all the customers of the broker. 

Recommendations:

State bankers should become aware of the limitation of SIPC assistance afforded their institutions, and if necessary, amend their policies and procedures to prevent any undue concentrations of investments being held with a security broker or dealer registered under §78o(b) of 15 U.S.C..  Because of the absence of protection afforded banks through the SIPC, sufficient due diligence including careful screening and continuous monitoring should be used in selecting and using the services of a financial services broker. 

According to the SIPC, banks are entitled to receive any securities transacted through a broker if the investment meets the definition of "customer name securities".  This term means "securities which are held for the account of a customer on the filing date by or on behalf of the debtor (broker) and which on the filing date were registered in the name of the customer, or were in the process of being so registered pursuant to instructions from the debtor (broker), but does not include securities registered in the name of the customer which, by endorsement or otherwise, were in negotiable form", §78lll(3) of 15 U.S.C.

Banks are encouraged to contact the agencies listed below to aid in evaluating the services of a financial broker.

During the ordinary course of examinations, examiners will review the nature and extent that banks are using security brokers to hold investments.  The Board should adequately document their decisions in this regard including parameters used to evaluate security brokers used by their institution along with limits for any investments held in a capacity other than customer named securities.  

Questions about this regulatory guidance can be directed toward Robert (Bob) Bacon, Director of Strategic Support at 512-475-1300 or bob.bacon@banking.state.tx.us.

Regulatory Guidance - 3005

April 10, 2013 (rev.)

OVERVIEW:

Regulatory Guidance 3005 explains the requirements of 7 TAC §11.37 that state-chartered banks and trust companies and foreign bank agencies provide consumers with information about how to file a complaint with the Department, and 7 TAC §33.51, concerning the complaint notice requirements that apply to Money Services Act (MSA) license holders and their authorized delegates. The Finance Commission adopted revisions to 7 TAC §33.51 in March 2013 to accommodate changes in federal regulations with regard to consumer complaint notices. This Regulatory Guidance has been revised to include the adopted revisions to 7 TAC §33.51.  The rules, 7 TAC §11.37 and §33.51, can be found in Exhibit A and Exhibit B, respectively.

STATE-CHARTERED BANKS AND TRUST COMPANIES AND FOREIGN BANK BRANCHES AND AGENCIES:

7 TAC §11.37 applies to state-chartered banks and trust companies and the Texas state branches and agencies of foreign banks. The section requires these supervised entities to provide a notice to consumers on how to file a complaint concerning the entity with the Department.

Requirements and Recommendations - Section 11.37 first sets out the substance and form of the language that must be included in the notice, and then specifies how the notice must be provided. The wording of the notice is identical regardless of how it is provided and is shown in Exhibit C1.

(1)  Providing Notice - Supervised entities must provide the notice in the language in which the transaction is conducted. If the supervised entity is required to provide a "privacy notice" to consumers under a specific state or federal law, the entity must include the consumer complaint notice when it sends out the required privacy notice. If the entity is not required to provide a privacy notice, then it must provide the consumer complaint notice at the time the consumer first obtains a product or service from the entity.

(2)  Posting Notice - In addition to providing the consumer complaint notice as specified in Paragraph (1), the supervised entity must conspicuously post the required notice in each area or location where the entity conducts business on a face-to-face basis. If business is conducted in two or more languages at one or more locations, each area should post notices in all applicable languages. The posted notice(s) should be readable by a person with 20/20 vision from a reasonable distance. Posting notice on a bulletin board or in a place designated for other notifications, such as the Community Reinvestment Act notice, is acceptable.

(3) Providing Website Notice - If the supervised entity offers goods and services over the internet, the entity´s website must also contain or provide access to the required consumer complaint notice. Acceptable measures include posting the notice on a separate page of the website with a conspicuous link from those web pages offering goods and services to the notice page.

STATE-CHARTERED BANKS AND TRUST COMPANIES AND FOREIGN BANK BRANCHES AND AGENCIES ACTING AS AUTHORIZED DELEGATE FOR MSA LICENSE HOLDERS:

7 TAC §33.51(f) applies to a state-chartered bank or trust company and a Texas state branch or agency of a foreign bank that conducts money transmission as the authorized delegate of a MSA license holder.

Requirements and Recommendations - Under §33.51(f), a MSA license holder must require its authorized delegate to provide the required notice by one or more of the methods specified in §33.51(e)(3)(A), (B), and (C). A license holder must specify the method or methods to be used and provide the authorized delegate with the means by which to give the notice. A license holder that fails to do so, and/or an authorized delegate that fails to provide the notice as directed by the license holder, is subject to enforcement action. Enforcement actions may include suspension or termination of the authorized delegate designation.

The methods specified in §33.51(e)(3)(A), (B), and (C) are:

(1)  Including Notice on Payment Instrument or Access Device or Receipt (§33.51(e)(3)(A)) - The required notice, in at least 8 point type, may be included on each payment instrument or other access device or receipt the authorized delegate uses in connection with the license holder´s money transmission business, provided that:

a.  the payment instrument or other access device constitutes the only means of accessing the money the authorized delegate receives for transmission; or

b.  the authorized delegate issues a receipt for every money transmission transaction conducted.

(2)  Posting Notice (§33.51(e)(3)(B)) - If the authorized delegate personally receives all the funds for money transmission, the required notice may be posted where the authorized delegate conducts these activities with customers on a face-to-face basis.

(3)  Providing Separate Notice (§33.51(e)(3)(C)) - The required notice may be provided separately, provided that:

a.  not later than the time the transaction is conducted, the authorized delegate delivers the notice in a form that the customer can retain; or

b.  if the license holder uses an access device such as a stored value card and mails the device to the customer, the notice is included in the mailing; and

c.  if the same access device may be used continuously, such as a reloadable stored value card, the license holder also delivers the required notice to the customer at least once every twelve months; the notice may be included with a privacy statement or with another statement, or by another means, so long as the customer actually receives the notice within each twelve month period.

As a general matter, many MSA license holders specify posting under 7 TAC §33.51(e)(3)(B) as the method by which an authorized delegate that is a state-chartered bank or trust company or authorized foreign bank branch or agency must provide notice. If posting is the specified method, the bank, trust company or branch or agency may (1) post two separate notices, as reflected in Exhibits C1 and C3; or (2) with the consent of the license holder, post a combined notice as reflected in Exhibit C2. If the C3 or combined C2 notice is posted, the Department will consider the requirements of §33.51(f) to have been met by the license holder and the authorized delegate, even if the license holder has not itself provided the notice to the authorized delegate. The Department will also consider the C3 or combined C2 notice to satisfy §151.403(a)(6) of the MSA, which requires an authorized delegate to prominently display a notice that indicates the person is an authorized delegate of the MSA license holder. (Under §33.51(f), if an authorized delegate personally receives all funds paid by customers and the license holder requires the authorized delegate to post notice (see Paragraph (2) above), one posted notice may be used to satisfy the requirement of 7 TAC §33.51(f) and §151.403(a)(6) of the MSA).

NOTE:  7 TAC §11.37 requires that the notice be given to "consumers" of state-chartered banks and trust companies and foreign bank Texas branches and agencies. Section 11.37 defines "consumer" as an individual who obtains or has obtained a product or service that is to be used primarily for personal, family or household purposes. 7 TAC §33.51 requires that the notice be given to "customers", which term is defined as a person to whom a license holder provides or has provided money transmission services or conducted a money transmission transaction. Therefore, the combined notice reflected in the authorized delegate portion of Exhibit C2 references both "customer" and "consumer".

Again, 7 TAC §33.51 applies only if a state-chartered bank or trust company or foreign bank branch or agency is acting as the authorized delegate of a MSA license holder. Additionally, unless the license holder so directs, the §33.51 notice does not need to be included in a privacy notice that the state-chartered bank or trust company or foreign bank branch or agency is required to send under a specific state or federal law, or included on the website of the bank, trust company, or foreign bank branch or agency.

OTHER FINANCIAL INSTITUTIONS NOT CHARTERED OR LICENSED BY THE DEPARTMENT:

Several types of financial institutions that are not chartered or licensed by the Department may act as an authorized delegate for one or more MSA license holders.  These entities may include, for example, national banks; federal savings banks; state savings banks; thrifts; and credit unions. The 7 TAC §33.51 notice requirement is imposed upon these entities if they conduct money transmission as the authorized delegate of a license holder.  Each license holder is responsible for ensuring that the required notice is provided. Therefore, in order for the license holder to comply with this rule, the license holder must specify and provide the means for its authorized delegates that are not regulated by the Department to provide the required notice.

MSA LICENSE HOLDERS:

7 TAC §33.51 applies to persons licensed under the MSA. As explained below, the authorized delegate of a MSA license holder must also provide the required notice and the license holder must specify the method and provide the means by which the authorized delegate must give the notice.

Requirements and Recommendations - Section 33.51 requires a MSA license holder to provide a complaint notice that substantially conforms to the format and wording of the notice as reflected in Exhibit C4, and specifies how the notice must be provided. The same format and wording should be used regardless of how the notice is provided. Alternatively, if the federal Remittance Transfer Rule of Regulation E applies to a MSA license holder, the license holder may provide a complaint notice that conforms to the federal requirements in place of the notice reflected in Exhibit C4.  The notice must be provided in the language in which the transaction is conducted.

(1)  Providing Notice with "Privacy Notice" - If a MSA license holder must provide a privacy notice to Texas consumers under a specific state or federal law, the license holder must include the §33.51 notice with each privacy notice.

(2)  Providing Website Notice - If a MSA license holder maintains a website by which a Texas customer may remit money for transmission or obtain information about the license holder or the customer´s transaction, the §33.51 notice must be included on the website. The notice must be prominently displayed on the initial page the customer uses to initiate the remittance or access the information, or on a page available no more than one link from the initial page. The link must clearly describe the information available by clicking the link, e.g., "Texas customers click here for information about filing complaints about our money transmission or currency exchange product or service."

NOTE: If a license holder´s business is entirely internet-based, so that account relationships and transactions are initiated solely by means of the internet, the additional disclosures described in Paragraph (3) below are not required.

(3)  Providing Additional Notice - In addition to including the §33.51 notice in a required privacy notice and on the website, as applicable, a MSA license holder must tell customers how to file a complaint by one or more of the following methods:

a.  Including Notice on Payment Instrument or Access Device or Receipt ( §33.51(e)(3)(A)) - The notice, in at least 8 point type, may be included on each payment instrument or other access device or receipt used in connection with the license holder´s money transmission or currency exchange business, provided that:

i.  the payment instrument or other access device constitutes the only means of accessing the money received for transmission; or

ii.  the license holder issues a receipt for every money transmission or currency exchange transaction conducted.

b.  Posting Notice ( §33.51(e)(3)(B)) - If the license holder personally receives all the funds paid by customers, the notice may be posted where the license holder conducts money transmission or currency exchange activities with customers on a face-to-face basis.

c.  Providing Separate Notice (  §33.51(e)(3)(C)) - The notice may be provided separately, provided that:

i.  not later than the time the transaction is conducted, the license holder delivers the notice in a form that the customer can retain; or

ii.  if the license holder uses an access device such as a stored value card and mails the device to the customer, the notice is included in the mailing; and

iii.  if the same access device may be used continuously, such as a reloadable stored value card, the license holder also delivers the notice to the customer at least once every twelve months; the notice may be included with a privacy statement or with another statement, or by another means, so long as the customer actually receives the notice within each twelve month period.

Under 7 TAC §33.51(f), a MSA license holder that conducts business through an authorized delegate must require the delegate to provide the notice reflected in Exhibit C4 by one or more of the methods specified in §33.51(e)(3)(A), (B), and (C). The license holder must specify the method or methods to be used and provide the authorized delegate with the means by which to give the notice selected. The specified methods are set out in Paragraph (3) above, Providing Additional Notice.  An authorized delegate that fails to provide the required notice as directed by the license holder is subject to enforcement action, including suspension or termination of the authorized delegate designation.

Additionally, §151.403(a)(6) of the MSA requires an authorized delegate to prominently display a notice that indicates that the person is an authorized delegate of the MSA license holder. If an authorized delegate personally receives all funds paid by customers and the license holder requires the authorized delegate to post notice (see Paragraph 3(b) above, Providing Additional Notice, Posting Notice), one posted notice as reflected in Exhibit C3 may be used to satisfy the requirement of 7 TAC §33.51(f) and §151.403(a)(6) of the MSA. 

You can direct your questions about this regulatory guidance or 7 TAC §11.37 or §33.51 to the Director of Strategic Support at 512-475-1300.

EXHIBIT A

Section §11.37 applies to state-chartered bank and trust companies and the Texas state branches and agencies of foreign banks. As used in this section, the terms "I" and "You" refer to a bank, foreign bank branch or agency, or trust company that is chartered, licensed, or registered by the Texas Department of Banking.

7 TAC §11.37. How Do I Provide Information to Consumers on How to File a Complaint?

(a) Definitions

(1) "Consumer" means an individual who obtains or has obtained a product or service from you that is to be used primarily for personal, family, or household purposes.

(2) "Privacy notice" means any notice which you give regarding a consumer's right to privacy as required by a specific state or federal law.

(3) "Required notice" means a notice in a form set forth or provided for in subsection (b) (1) of this section.

(4) "You" means a bank, foreign bank, bank holding company, or trust company that is chartered, licensed, or registered by the Texas Department of Banking under the Finance Code.

(b) How do I provide notice of how to file complaints?

(1) You must use the following notice in order to let your consumers know how to file complaints:

The (your name) is (chartered, licensed, or registered) under the laws of the State of Texas and by state law is subject to regulatory oversight by the Texas Department of Banking.  Any consumer wishing to file a complaint against the (your name) should contact the Texas Department of Banking through one of the means indicated below:

In Person or U.S. Mail:  2601 North Lamar Boulevard, Suite 300, Austin, Texas  78705-4294

Telephone No.:  877/276-5554

Fax No.:  512/475-1313

E-mail:  consumer.complaints@dob.texas.gov

Website:  www.dob.texas.gov

(2) You must provide the required notice in the language in which a transaction is conducted.

(3) You must include the required notice with each privacy notice that you send out.

(4) Regardless of whether you are required by any state or federal law to give privacy notices, you must take appropriate steps to let your consumers know how to file complaints by giving them the required notice in compliance with paragraph (1) of this subsection.

(5) You must use the following measures to give the required notice:

(A) In each area where you conduct business on a face-to-face basis, you must conspicuously post the required notice.  A notice is deemed to be conspicuously posted if a consumer with 20/20 vision can read it from the place where he or she would typically conduct business or if it is included on a bulletin board, in plain view, on which all required notices to the general public (such as equal housing posters, licenses, Community Reinvestment Act notices, etc.) are posted.

(B) For consumers who are not given privacy notices, you must give the required notice when the consumer first obtains a product or service from you.

(C) Those portions of your website that offer consumer goods and services must contain access to the required notice.

Source: The provisions of this §11.37 adopted to be effective January 3, 2002, 26 TexReg 10850; amended to be effective November 4, 2010, 35 TexReg 9695.

EXHIBIT B

Section §33.51 applies to persons licensed under the MSA and their authorized delegates. As a general matter, the terms "I" and "You" as used within this section refer to license holders and authorized delegates. However, the term "You", as used in the required notice, refers to the customer.

7 TAC §33.51.  How Do I Provide Information to My Customers about How to File a Complaint?

(a)  Does this section apply to me?  This section applies if you hold a money transmission or currency exchange license issued by the department under Finance Code, Chapter 151.

(b)  Definitions.  Words used in this section that are defined in Finance Code, Chapter 151, have the same meaning as defined in the Finance Code. The following words and terms, when used in this section, shall have the following meanings unless the text clearly indicates otherwise.

(1)  Conspicuously posted -- Displayed so that a customer with 20/20 vision can read it from the place where he or she would typically conduct business with you or, alternatively, on a bulletin board, in plain view, on which you post notices to the general public (such as equal housing posters, licenses, Community Reinvestment Act notices, etc.).

(2)  Customer -- Any person to whom, either directly or through an authorized delegate, you provide or have provided money transmission or currency exchange products or services or for whom you conduct or have conducted a money transmission or currency exchange transaction.

(3)  Privacy notice -- Any notice regarding a person's right to privacy that you are required to give under a specific state or federal law.

(4)  Required notice -- The notice described in subsection (d) of this section.

(c)  Must I provide notice to customers about how to file complaints?  Yes. You must tell each of your Texas customers how to file a complaint concerning the money transmission or currency exchange business you conduct under Finance Code, Chapter 151, in accordance with this section.

(d)  What must the notice say?

(1)  You must use:

(A)  a notice that conforms to the complaint notice requirements of the Remittance Transfer Rule of Regulation E (12 C.F.R. Part 1005, Subpart B), such as described by 12 C.F.R. §1005.31(b)(2)(vi), if the Remittance Transfer Rule applies to you; or

(B)  a notice that substantially conforms to the language and form of the following notice:  If you have a complaint, first contact the consumer assistance division of (Name of License Holder) at (License Holder consumer assistance telephone number), if you still have an unresolved complaint regarding the company's money transmission or currency exchange activity, please direct your complaint to:  Texas Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705, 1-877-276-5554 (toll free), www.dob.texas.gov.

(2)  You must provide the required notice in the language in which the transaction is conducted.

(e)  How and where must I provide the required notice?

(1)  If a state or federal law requires you to send a privacy notice to your customers, you must include the required notice with each privacy notice.

(2)  If you maintain a website by which a customer may remit money for transmission or obtain information about you or the customer's transaction or an existing account, you must include the required notice on your website. The notice must be prominently displayed on the initial page the customer uses to initiate the remittance or access the information, or on a page available no more than one link from the initial page. The link must clearly describe the information available by clicking the link, e.g., "Texas customers click here for information about filing complaints about our money transmission or currency exchange product or service."

(3)  In addition to including the required notice in a privacy notice in accordance with paragraph (1) of this subsection and on your website in accordance with paragraph (2) of this subsection, you must tell customers how to file complaints by one or more of the following methods:

(A)  You may include the required notice in at least 8 point type, on each payment instrument or other access device or receipt used in connection with your money transmission or currency exchange business, provided that:

(i)  the payment instrument or other access device constitutes the only means of accessing the money received for transmission; or

(ii)  you issue a receipt for every money transmission or currency exchange transaction you conduct. 

(B)  If you personally receive all the funds paid by your customers, you may conspicuously post the required notice where you conduct money transmission or currency exchange activities with customers on a face to face basis.

(C)  You may provide each customer with the required notice separately, provided that:

(i)  not later than the time the transaction is conducted, you deliver the required notice in a form that your customer can retain; or

(ii)  if you use an access device, such as a stored value card, in your money services business and mail the device to your customer, you include the required notice in the mailing; and

(iii)  if the same access device may be used continuously, such as a reloadable stored value card, you also deliver the required notice to your customer at least once every twelve months. You may include the required notice with a privacy statement, with or on another statement, or by another means so long as the customer actually receives the notice within each twelve-month period.

(4)  If your business is entirely internet based, so that account relationships and transactions are initiated solely by means of the internet, the additional disclosures described in paragraph (3) of this subsection are not required.

(f)  How do I provide the required notice if I conduct business through authorized delegates?

(1)  If you conduct business through one or more authorized delegates, each authorized delegate must provide the required notice by one or more of the methods described in subsection (e)(3) of this section. You must specify the method or methods to be used by your authorized delegate and provide your authorized delegate with the means by which to give the notice you select.

(2)  If your authorized delegate personally receives all funds paid by your customers and you require your authorized delegate to post the required notice described in subsection (e)(3)(B) of this section, you may use one posted notice to provide the required notice and the authorized delegate designation required under Finance Code, §151.403(a)(6).

(g)  Am I subject to an enforcement action if I do not provide the required notice?  Yes. You are subject to enforcement sanctions under Finance Code, Chapter 151, Subchapter H, if you:

(1)  fail to provide the required notice in accordance with this section; or

(2)  fail to specify the method and provide the means by which your authorized delegate must give the required notice in accordance with subsection (f)(1) of this section.

(h)  Is my authorized delegate subject to an enforcement action if the delegate does not provide the required notice?  Yes, if you have complied with subsection (f)(1) of this section. If you have specified the method and provided the means by which your authorized delegate must give the required notice, your authorized delegate is subject to enforcement sanctions if the delegate fails to provide the required notice as directed.

Source: The provisions of this §33.51 adopted to be effective May 18, 2006, 31 TexReg 3869; amended to be effective July 8, 2010, 35 TexReg 5805; amended to be effective November 4, 2010, 35 TexReg 9698; amended to be effective March 7, 2013, 38 TexReg 1357.

EXHIBIT C1

Notice for State-Chartered Banks and Trust Companies and Texas State
Branches and Agencies of Foreign Banks

(7 TAC §11.37)

NOTICE

EXHIBIT C2

Combined Notice for State-Chartered Banks and Trust Companies and
Texas State Branches and Agencies of Foreign Banks Acting as Authorized
Delegate of License Holder under the Money Services Act, Chapter 151 of the
Texas Finance Code

(7 TAC §11.37 and  §33.51 and  §151.403(a)(6) of the MSA)

[NOTE: 7 TAC  §11.37 requires that the Notice include the Department´s suite number, full zip code, fax number, and consumer complaint email address, information that is not specifically required under 7 TAC §33.51.  To comply with both sections, the combined notice must provide this additional information as indicated  in the Combined Notice below.]

COMBINED NOTICE

EXHIBIT C3

Notice for Authorized Delegate of License Holder under the
Money Services Act, Chapter 151 of the Texas Finance Code

(7 TAC §33.51(f) and  §151.403(a)(6) of the MSA)

[NOTE: 7 TAC §11.37 requires that the Notice provided by state-chartered banks and trust companies and foreign banks that maintain Texas branches and agencies include the Department´s suite number, full zip code, fax number, and consumer complaint email address. 7 TAC §33.51 does not specifically require a MSA license holder to include this information, which is shown below in brackets.  However, we suggest that MSA license holders provide the additional, bracketed information in the §33.51 Notice below.]

NOTICE

EXHIBIT C4

Notice for License Holder under the Money Services Act, Chapter 151
of the Texas Finance Code

(7 TAC §33.51)

[NOTE: 7 TAC §11.37 requires that the Notice provided by state-chartered banks and trust companies and foreign banks that maintain Texas branches and agencies include the Department´s suite number, full zip code, fax number, and consumer complaint email address. 7 TAC §33.51 does not specifically require a MSA license holder to include this information, which is shown below in brackets.  However, we suggest that MSA license holders provide the additional, bracketed information in the §33.51 Notice below.]

NOTICE

Regulatory Guidance - 3007

January 23, 2007

Background:

The Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act of 1999 or GLBA, includes provisions to protect consumers' personal financial information held by financial institutions.  GLBA gives authority to eight federal agencies and the states to administer and enforce the Financial Privacy Rule and the Safeguards Rule.  The Financial Privacy Rule governs the collection and disclosure of customers' personal financial information by financial institutions.  The Safeguards Rule requires all financial institutions to design, implement and maintain safeguards to protect customer information.

Financial institutions include not only banks, but also trust companies.  GLBA directs banking agencies to review their regulations and guidelines to ensure that financial institutions have policies, procedures and controls in place to prevent the unauthorized disclosure of customer financial information and to deter and detect fraudulent access to such information.

The Federal Financial Institutions Examination Council (FFIEC) and the Federal Trade Commission (FTC) issued guidelines that will assist trust companies in understanding and implementing what is required for GLBA compliance. FFIEC guidelines can be found at: http://ithandbook.ffiec.gov/it-booklets/e-banking/risk-management-of-e-banking-activities/information-security-program/security-guidelines.aspx?prev=1. 

Our examiners will use FFIEC guidelines to evaluate your compliance.  These guidelines are widely used, so trust companies have a large number of compliance tools and guides available from vendors and Internet resources. 

This guidance is provided to assist Texas-chartered trust companies in complying with GLBA. 

Guidelines:

The Board of Directors and management should approach GLBA compliance with a logical process including a thorough risk assessment, and a comprehensive information security program.  A comprehensive written information security program will include administrative, technical, and physical safeguards appropriate for the size and complexity of the institution and the nature and scope of its activities.  The information security program will be designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the information, and protect against unauthorized access to or use of such information. 

The Board of Directors, or an appropriate committee of the Board, shall approve the institution's written information security program, and oversee its development, implementation, and maintenance, including assigning specific responsibility for its implementation.

Risk Assessment Program:

The risk assessment program should focus on securing information, both electronic and paper based. It must:

� Identify services and systems utilized (hardware and software);

� Identify the reasonably foreseeable threats associated with each system and service;

� Determine the likelihood of each threat (High, Medium, Low, or 1-5, or other measure);

� Assess the potential damage of each threat (High, Medium, Low, or 1-5, etc.);

� Develop policies and procedures to address identified risks; and,

� Assess the adequacy of policies, procedures, and other arrangements to control risks.

Comprehensive Information Security Program:

After completing a risk assessment, the institution must develop an information security program that should address:

� Board of Directors' oversight and assignment of responsibility;

� Program adjustments in light of strategic or technology changes;

� Periodic policy and procedural review, monitoring, and adjustment;

� Annual review of access controls and restrictions to systems and workstations;

� Regular internal and external security assessments to verify network security posture;

� Remote access procedures and controls;

� Virus protection standards;

� Encryption standards for electronically transmitted or stored data;

� Backup and recovery procedures;

� Annual training and education of staff regarding the information security program;

� Vendor oversight that monitors and requires service providers handling customer data to contractually agree to implement security measures that meet GLBA guidelines;

� Program adjustments in light of any relevant changes from monitoring and evaluation; and,

� Annual reports to the board that describe the overall status of the information security program and the institution's compliance with GLBA guidelines.

Conclusion:

The Board of Directors is responsible for the information security program and should ensure that your institution is complying will all applicable GLBA requirements.  The Department is ready to assist you in this regard by responding to your questions.  Feel free to contact Regional Director Larry Walker at (817) 640-4050 or Larry.Walker@banking.state.tx.us, who will coordinate a response to your questions.

Regulatory Guidance - 3008

May 1, 2018

BACKGROUND

The Texas Legislature has recognized the need for legislation to help combat mortgage fraud problems and during the 80th Legislative Session passed the Residential Mortgage Fraud Act (Act), House Bill 716. Subsequently, this Regulatory Guidance was issued in January 2008.

Effective September 1, 2017, the 85th Legislature abolished the Residential Mortgage Task Force (SB 526). This revision removes references to the Task Force. The importance of the Regulatory Guidance continues.

OVERVIEW

Texas Finance Code §343.105, titled “Notice of Penalties for Making False or Misleading Written Statement”, requires a lender, mortgage banker, or licensed mortgage broker to provide each applicant for a home loan a written notice at closing indicating that intentionally or knowingly making a materially false or misleading written statement to obtain property or credit is a violation of Section 32.32, Texas Penal Code. The criminal penalties for making false or misleading written statements are listed in the disclosure. This section of the Texas Finance Code also provides suggested language for the required notice and stipulates that the applicant shall verify the information and execute the notice. All residential mortgage loans closed on or after September 1, 2007 shall have an executed notice by each applicant. A copy of this section of the statute and a sample of the notice are found in Exhibits A and B, respectively.

Texas Government Code §402.033 requires a person who determines or reasonably suspects that fraudulent activity has been committed or is about to committed to report the information to an authorized governmental agency. Authorized governmental agencies include the attorney general; a local, state or federal law enforcement agency; a U.S., county, or district prosecuting attorney; or one of the following state agencies:

• Department of Public Safety;

• Texas Department of Insurance;

• Office of Consumer Credit Commissioner;

• Texas Department of Banking;

• Texas Credit Union Department;

• Department of Savings and Mortgage Lending;

• Texas Real Estate Commission;

• Texas Appraiser Licensing and Certification Board; or

• Texas Department of Housing and Community Affairs.

If a person reports the information to the attorney general, the attorney general shall notify an appropriate law enforcement agency with jurisdiction to investigate the fraudulent activity. If a financial institution or person voluntarily reports fraudulent activity, neither the reporting party nor the notified agency can disclose to anyone involved in the fraudulent activity that the act has been reported. Any party voluntarily reporting possible fraudulent activity will not be liable to any person under any state or federal law or regulation for the report. This will not eliminate or diminish any common law or statutory privilege or immunity. It should be noted that an authorized governmental agency may share confidential information or information to which access is otherwise restricted by law with one or more other authorized governmental agencies.

GUIDELINES

The required "Notice of Penalties for Making False or Misleading Written Statement" is a separate document which should be provided to each applicant of a one to four family home loan at the time of closing. It is recommended that if a revision or renewal is made to an existing home loan which requires an underwriting decision, then the Notice of Penalties for Making False or Misleading Written Statement should be executed.

If a financial institution suspects mortgage fraud, the financial institution shall first submit a Suspicious Activity Report to FinCEN as required by 31 CFR Chapter X, and then contact one of the authorized governmental agencies. To contact the Department of suspected mortgage fraud, the financial institution should utilize the fraud report form found under the Consumer Assistance section of the Department's website, www.dob.texas.gov, and mail or fax it to:

Texas Department of Banking
Attention: Consumer Assistance Activities
2601 North Lamar Boulevard
Austin, TX 78705
Fax 512/475-1313

You can direct your questions about this regulatory guidance or §343.105 of the Texas Finance Code to the Director of Strategic Support at 512-475-1300.

EXHIBIT A

§343.105.  NOTICE OF PENALTIES FOR MAKING FALSE OR MISLEADING WRITTEN STATEMENT.

(a)  A lender, mortgage banker, or licensed mortgage broker shall provide to each applicant for a home loan a written notice at closing.

(b)  The notice must:

(1)  be provided on a separate document; 

(2)  be in at least 14-point type; and

(3)  have the following or substantially similar language: 

"Warning: Intentionally or knowingly making a materially false or misleading written statement to obtain property or credit, including a mortgage loan, is a violation of Section 32.32, Texas Penal Code, and, depending on the amount of the loan or value of the property, is punishable by imprisonment for a term of 2 years to 99 years and a fine not to exceed $10,000.

"I/we, the undersigned home loan applicant(s), represent that I/we have received, read, and understand this notice of penalties for making a materially false or misleading written statement to obtain a home loan.

"I/we represent that all statements and representations contained in my/our written home loan application, including statements or representations regarding my/our identity, employment, annual income, and intent to occupy the residential real property secured by the home loan, are true and correct as of the date of loan closing."

(c)  On receipt of the notice, the loan applicant shall verify the information and execute the notice.

(d)  The failure of a lender, mortgage banker, or licensed mortgage broker to provide a notice complying with this section to each applicant for a home loan does not affect the validity or enforceability of the home loan by any holder of the loan.

Added by Acts 2007, 80th Leg., R.S., Ch. 285, § 1, eff. September 1, 2007.

EXHIBIT B

-- SAMPLE NOTICE --

Regulatory Guidance - 3009

August 5, 2009

Overview:

This guidance is issued to raise awareness among Texas state-chartered banks regarding potential risk to banks with loan participation agreements if the lead bank fails. Loan participants may suffer a loss in situations where the lead bank fails and the loan customer's deposits (including pledged deposits) are offset against their outstanding loan(s). Instead of participating pro-rata in the setoff amount, the participating bank will be issued a Receiver's Certificate in the amount of the setoff from the Federal Deposit Insurance Corporation (FDIC) as receiver of the lead bank.

Background:

Generally, a bank that purchases a loan participation is entitled to receive its pro-rata share of any payments made by the borrower, as provided in the loan participation agreement.  In addition, in the event the borrower defaults and loan collateral is foreclosed upon, foreclosure proceeds will also be paid to the loan participant in accordance with the participation agreement.  When a bank fails, the FDIC will either sell the borrower's loan at closing or retain it in the receivership estate.  In either case, the borrower is still obligated to pay the debt.  If the borrower has deposits in the failed bank, the borrower has the right to set off any of his/her deposits against any indebtedness owed to the failed bank, or the FDIC, as receiver, may initiate such action, particularly if a borrower's loan is in default.  

A string of court cases in the 1980's have established that such an offset is not a payment; it is a bookkeeping transaction or "a mere shifting of credits."  Only the balance of a loan after a setoff is deducted is considered part of the assets of a failed bank.  Because the setoff does not augment the receivership estate, there are no proceeds to be passed on to the loan participant.  As a result, a loan participant may suffer a loss if the borrower or receiver exercises a right of set off against the failed lead bank.  Demand deposits and certificates of deposit pledged as collateral on a loan will also be considered a setoff when applied to the loan balance in a failed bank situation.  The loan participant is therefore left with a general unsecured claim against the receivership for the amount of the setoff.  After the setoff, the loan participant continues to receive its pro-rata share of any payments made by the borrower or any proceeds of foreclosed loan collateral.

A participated loan balance may also be reduced, post-failure, by the borrower using deposit insurance funds.  When a bank fails, the insured portion of a deposit is paid by the FDIC to the depositor and these deposit insurance funds are therefore not part of the failed bank's estate. The borrower's use of the proceeds of deposit insurance to make a payment on a loan is treated differently than a setoff because these funds are considered "new money" contributed by a third party (the FDIC).  The depositor is free to decide how to use the deposit insurance funds.  If the borrower chooses to use these funds to make a payment on the participated loan, the payment would be allocated among the receiver and the participant bank according to the participation agreement. Typically, a depositor will only setoff the uninsured amount of its deposit, and will accept deposit insurance on the insured amount from the FDIC as deposit insurer.

Potential Risk Scenarios:

The effect of a setoff on a loan participation interest is illustrated in the following examples.

Bank A loans Borrower $1,000,000 and Bank B has a 50% participation interest in the loan.  Borrower has $300,000 on deposit with Bank A, of which $250,000 is FDIC insured.  Bank A fails.  Borrower elects to exercise his/her right to set off the entire $300,000 deposit against the $1,000,000 debt.  The Borrower's debt to Bank A would then be reduced to $700,000.  Bank B's 50% participation in the outstanding balance of this loan is now $350,000. However, instead of this being a cash reduction, the FDIC would provide Bank B a Receiver's Certificate in the amount of $150,000, which is 50% of the setoff.  This represents Bank B's general unsecured claim against the receivership.  One month later, Borrower makes a $100,000 payment on the loan from Bank A.  Bank B receives its pro rata share of the payment ($50,000).  Bank B is left with a general unsecured claim of $150,000 and a remaining participation interest of $300,000.

In the scenario above, Borrower set off both the insured and the uninsured deposits against the loan.  Borrower could have elected to receive the deposit insurance proceeds instead of setting off the entire deposit against the debt. If Borrower had received $250,000 in deposit insurance from the FDIC, the remaining $50,000 uninsured deposit would be set off against the loan.  Bank B would have a $25,000 general unsecured claim against the receivership and would receive its 50% participation interest ($475,000) in the $950,000 balance of the loan that is subsequently paid by the Borrower.  If the borrower chose to receive the $250,000 in deposit insurance and then pay this amount on the loan balance, Bank B would receive its 50% participation interest as a cash payment ($125,000).

Recommendation:

Bank management is reminded of the importance of monitoring participation interests and reducing concentrations of loans purchased from any one financial institution, regardless of loan type. Banks are strongly encouraged to perform sufficient monitoring and analysis to ensure that the lead bank is not a high risk institution. Participating banks should request borrower deposit information to determine the extent of any uninsured deposits and potential setoffs.

Loan participation agreements vary and state-chartered banks should consult with their legal counsel in analyzing their loan participation risks.

You can direct your questions about this regulatory guidance to Kurt Purdom, Director of Bank and Trust Supervision Division, at 512-475-1300.

Regulatory Guidance - 3010

September 13, 2010

New accounting rules that impact the way banks account for loan participations became effective January 1, 2010.  The Financial Accounting Standards Board (FASB) issued Statement No. 166, Accounting for Transfers of Financial Assets (FAS 166), which revises FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  FAS 166 addresses when transfers of financial assets may be accounted for as a sale.  Part of this revision involved establishing characteristics of a "participating interest."  Loan participations that do not possess the characteristics set out in FAS 166 cannot be treated as a sale and would therefore remain on the balance sheet of the transferor.

Because of its affect on which assets remain on a bank's balance sheet, this accounting change will impact a bank's regulatory capital ratios and allowance for loan and lease losses.  Those effects have been addressed by the Federal regulatory agencies.

This change in accounting standards is unrelated to the requirements for the determination of legal lending limit for a Texas state-chartered bank.  Therefore, despite this change in accounting treatment, the Department's treatment of loan participations for legal lending limit purposes has not changed. 

Title 7 Texas Administrative Code §12.3 establishes how loans or extensions of credit will be treated in the determination of the legal lending limit for a Texas state-chartered bank.  Section 12.3(b)(3) provides that a portion of a loan sold as a participation on a non-recourse basis will not be considered a loan for legal lending limit calculations so long as the participation results in a pro rata sharing of credit risk proportionate to respective interests of the originating and participating lenders.  The rule additionally provides that this is true even if payments on the loan are not shared on a pro-rata basis.

Pursuant to 7 TAC §12.3, Texas chartered banks that have participation agreements structured to divide payments on a basis other than pro-rata (such as the commonly used last in - first out (LIFO), or first in - first out (FIFO) basis) can still have these participated accounts netted from the total loan balance for legal lending limit purposes provided the participation agreement includes a provision that the participation will convert to a pro-rata distribution in the event of default or a comparable event.

Therefore, loan participations that meet the requirements of 7 TAC §12.3, will be deducted for legal lending limit calculations, regardless of the accounting treatment of the loan provided under FAS 166.  Should you have questions, please contact the Legal Division at 512-475-1300.