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          IBAT                                                                             Capitol Comments

                                       « FROM THE REGULATORS «
          Texas Finance Commission

          F  It was announced at the February 20 Finance Commission meeting that the Commission has been
          working with the State Comptroller of Public Accounts to hammer out the rules and procedures for
          remitting the 50-cent tax on administrative loan fees. They hope to finalize the rules and
          procedures within the next 30 days.

          «Banking Department

          F  The Banking Commissioner announced at the Finance Commission meeting that their department
          examiners were now examining banks for Year 2000 Compliance. Also, the Banking Department has
          made its report to the state legislature on its own Year 2000 readiness. The Finance Commission
          repealed, proposed for publication for comment, or adopted a number of regulations pertaining to
          trust companies, mostly to conform the regulations to the new Trust Company Act. They also voted
          to publish for comment a proposed rule dealing with check sellers which also do currency exchange;
          and acted as follows on two banking regulations:

          1.    Adopted Sections 12.11 and 12.61 concerning bank loan and investment limits. The rules for-
               merly referred to loans and investments that were legal when made but became nonconforming as
               a result of the enactment of the Texas Banking Act effective September 1, 1995, as “conforming”
               when in fact they do not conform to currently effective limits, and the amendment changes this
               erroneous terminology.

          2.    Adopted amendments to Sections 15.1 and 15.2 concerning filing and investigation fees
               applicable to corporate applications. The amendments were non-substantive.

          «Office of Consumer Credit Commissioner

          F By this time you would think that IBAT member banks are either making home equity loans or
          they have decided, for various reasons, not to offer them, and that the volume of phone calls to this
          office pertaining to home equity lending would have slowed to a trickle. Not so! We continue to
          receive many home equity lending related calls, a lot of which raise questions not addressed in the
          Consumer Credit Commissioner’s “Home Equity Lending Guidelines.” It would be impossible to
          summarize all such questions and our opinions as to the correct answer in this publication. Therefore,
          Karen Neeley has undertaken the task of writing a “Home Equity Lending Hotline” feature in The
          Texas Independent Banker, our monthly magazine, which is also on our home page (
          Watch for it. Also, at the Finance Commission meeting of February 20, the Consumer Credit
          Commissioner announced that they were working on a solution to the problem of a home equity loan
          on an urban lot which consists of more than one acre.

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          State Bar of Texas

          F   We have received numerous telephone calls from member banks’ new accounts personnel
          concerning customers who are waiting impatiently in the lobby with documentation in hand to set up
          living trusts. Many times these customers have attended a seminar or read an advertisement (often
          with the apparent endorsement of the AARP) targeting usually elderly customers and leading them to
          believe that they can avoid the hassle and large attorney’s fees of probate and estate taxes after their
          deaths by setting up a living trust. As you probably know, in Texas, an independent administration of
          a decedent’s estate is not a big deal, and usually the only attorney’s fee involved is for proving up the
          will. Moreover, the threshold for the payment of estate taxes is in excess of $1 million, and therefore
          does not apply to most estates. Further, your bank offers non-testamentary transfer accounts, like
          joint accounts with right of survivorship and POD accounts, which transfer assets outside of probate.
          All of these factors make a living trust unnecessary in most instances. Also, some of the living trust
          kits which your customers have purchased are often in the form of a workbook, complete with forms
          which may not be workable under Texas law or are just poorly drafted. For example, one banker
          reported a living trust agreement which included the customer’s safe deposit box. As you know, the
          safety deposit box belongs to the bank, and the customer leases space. The living trust should have
          referred to the contents of the safe deposit box.

          AARP has become concerned that some of these living trust programs appear to have the
          endorsement of the AARP and have written a disclaimer in the January-February, 1998 issue of
          Modern Maturity. An article in the February 6 edition of The Wall Street Journal was entitled
          “Some Revocable Living Trusts Can Cost Thousands of Dollars in Needless Taxes” and warned of
          fill-in-the-blanks forms, do-it-yourself books and software on estate planning, all sold on the basis
          that they are affiliated with AARP and exaggerated probate costs. The Attorneys General of
          Louisiana and Oregon have issued warnings about “trust mills” and the Supreme Court of Ohio has
          ordered two living trust vendors to cease operations. The Texas State Bar has also written
          “Interpretive Comment No. 22: Advertisement of Living Trusts” as follows:

              Without objective substantiation, a lawyer may not advertise that a particular approach to a legal
              problem utilized by that lawyer is superior in comparison to other accepted and appropriate
              approaches to the same problem. Such advertisements are potentially misleading and may create
              unjustified expectations in violation of Rules 7.02(a)(1) and (2). Comparisons in advertisements
              by lawyers for estate planning services frequently emphasize the exclusive use of revocable living
              trusts to transfer assets at death. In this context, a lawyer may not explicitly advertise, for
              example, that:

              1.   Living trusts will always save the client money.

              2.    The use of a living trust in and of itself will reduce or eliminate estate taxes otherwise
                   payable as a result of the client’s death.

              3.   Estate tax savings can be achieved only by use of a living trust.

              4.   The use of a living trust will achieve estate tax savings that cannot be achieved by using a

              5.   The probate process is always lengthy and complicated.

              6.   The probate process should always be avoided.

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              7.    The use of a living trust will reduce the total expenses incurred compared to expenses
                   incurred using other estate planning devices intended to address the same basic function.

              8.    The use of a living trust avoids lengthy delays experienced in the use of other estate planning
                   devices intended to address the same basic function.

              9. Lawyers use will-writing as a loss leader.

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          Texas Comptroller of Public Accounts

          F  State law requires financial institutions and other entities to report and turn over to the state
          personal property that is considered abandoned or unclaimed. The property must have been
          inactive for a set period of time, usually between three and five years, and the owner’s whereabouts
          must be unknown. Unclaimed property is property abandoned by the owner for three years or more.
          Examples include:

          ·   uncashed dividends and payroll or cashier’s checks;
          ·   stocks, mutual fund accounts, bonds;
          ·   credit balances, utility deposits, and other refunds;
          ·   inactive bank accounts with no customer contact for five years;
          ·   contents of a safe deposit box with delinquent rental fees for five years;
          ·   mineral interests or royalty payments;
          ·   court deposits.

          The deadline for filing and turning in unclaimed property of all types is November 1 of every year.
          Unclaimed property should not be sent to the State Comptroller’s Office until it has reached the
          required abandonment period as of June 30. The State Comptroller’s Office has no authority to grant
          extensions for late remittance of unclaimed property. They encourage entities holding abandoned
          and unclaimed property to make reasonable efforts to locate owners as soon as possible. The only
          property that should be remitted to the state is that for which the whereabouts of the owners are
          unknown to the holder. Expenses for search efforts may not be deducted from the property remitted
          to the state. It is important that the holder maintain records of the owner’s last-known address and
          social security number and include this information on the report to the state. If the property is not
          remitted in a timely fashion, the state has the authority to assess interest and penalties against the
          financial institution. Once the property has been reported, there is no time limit for the property
          owner to file a claim. Make all remittances payable to: Comptroller of Public Accounts. Send all
          holder reports (tape, diskette, paper) and cash remittances to:

                  Comptroller of Public Accounts
                  Unclaimed Property
                  P.O. Box 12019
                  Austin, Texas 78711-2019

          Report safe deposit box contents, safekeeping properties, and tangible loan collateral separately from
          other property. These items should not be sent with the November 1 report. You will be notified of
          the scheduled delivery date.

          Texas Ethics Commission

          F  In Ethics Advisory Opinion No. 389 the Commission was asked about the application of the
          Election Code to the use of political contributions to repay a bank loan for which a candidate is
          personally liable. The question raised was whether loan repayments from political contributions are
          considered to be “reimbursements of personal funds” if the candidate is personally liable on the loan.
          The Commission opined that this can not be characterized as “reimbursing” personal funds. This
          may give you some comfort if you have a loan to a political candidate. You don’t have to worry

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          about the source of repayment—only whether or not the loan is going to get repaid, which is enough
          of a worry!

          Office of the Comptroller of the Currency

          F  The OCC in Interpretive Letter #807, although specifically addressing home equity lines of credit,
          which we cannot do in Texas, does state that flood insurance requirements are triggered by a
          home equity loan. The Flood Disaster Protection Act (FDPA) and the OCC’s implementing
          regulation, 12 C.F.R. part 22, generally prohibit national banks from making, increasing, extending,
          or renewing a designated loan unless the building or mobile home and any personal property securing
          the loan is covered by flood insurance for the term of the loan. Flood insurance requirements are
          also triggered whenever a lender “makes, increases, extends or renews” a loan secured by a building
          or a mobile home. These requirements include:

          ·   Making a determination (using the standard flood hazard determination (SFHD) form) developed
              by FEMA whether the building or mobile home offered as collateral security for the loan is or will
              be located in a special flood hazard area in which flood insurance is available in a participating

          ·    If the property is located in a special flood hazard area (SFHA), providing written notices to the
              borrower and loan servicer that (a) informs them that the property is located in a SFHA; (b)
              describes the flood insurance purchase requirements; (c) states, if applicable, that flood insurance
              is available under the National Flood Insurance Program or through private insurers: and (d)
              states whether federal disaster relief assistance may be available in the event of damage to the
              building or mobile home caused by flooding in a federally declared disaster; and

          ·   If flood insurance must be purchased, notifying the Director of FEMA in writing of the identity of
              the servicer of the loan.

          The regulations provide that a lender may rely on a previous flood determination whenever a lender
          increases, extends, or renews a loan if:

          ·    the previous determination was made not more than seven years before the date of the
              transaction, and

          ·   the basis of the previous determination has been set forth on the SFHD form,


          ·   map revisions or updates after the previous determination have resulted in the building or mobile
              home being located in a SFHA, or

          ·   the lender contacts FEMA and determines that recent map revisions or updates affecting the
              property have occurred since the date of the previous determination.

          This provision helps to reduce the burden on banks to make new flood determinations when the bank
          is merely “extending, increasing or renewing” a pre-existing loan. Note that banks cannot rely on
          this provision when they “make” a loan.

          F The OCC has granted conditional approval of an application filed by Zions First National Bank,
          Salt Lake City, to offer digital signature products to its customers. The bank would be the first

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          financial institution of offer this service. Digital signatures are used for electronic authentication of
          the sender of an electronic message—much like a notary verifies the signature of an individual in a
          physical setting. The certificate process also will enable subscribers to be certain that
          communications received have not been altered during transmission. The OCC based its approval
          upon the rationale that the digital signature activity resembles verification and identification services,
          such as notary services, already performed by national banks and is, therefore, part of the process of
          banking. The state of Texas authorizes the use of “electronic” signatures in its version of the
          Uniform Commercial Code.

          Federal Deposit Insurance Corporation

          F  The FDIC has issued a paper identifying those risks to an institution’s information system secu-
          rity associated with Internet use and describing several risk controls. The paper, Security Risks
          Associated with the Internet, offers helpful information to financial institutions that use the Internet
          as an information resource or delivery channel. While the paper does not make specific
          recommendations as to which technical solutions an institution should deploy, it should help bank
          management to recognize the risks that the Internet presents and implement appropriate controls.
          Further, risks and controls should be evaluated on an ongoing basis.

          F The FDIC has announced that a reprint of its “Pocket Guide for Directors” has been sent to
          insured depository institutions and that additional copies of the Guide can be obtained from the
          agency. The booklet offers financial institution directors accessible and practical guidance in
          overseeing their institutions’ business. Parts of the Guide remind financial institution directors that
          they must:

          ·   maintain independence in their decision making;

          ·   keep informed of the activities and condition of their institution;

          ·   ensure that the institution’s day-to-day operations are in the hands of qualified management;

          ·   supervise management effectively; and

          ·   avoid preferential transactions involving insiders or their related interests.

          Federal Reserve Board

          F  The Federal Reserve Board has issued a final rule amending Reg Z affecting the disclosure of
          ARMs. The 15-year historical example of rates and payments is replaced by provisions allowing
          creditors to provide a statement that the periodic payment may substantially increase or decrease,
          together with a maximum interest rate and payment based on a $10,000 loan amount.

          F  The Federal Reserve Board recently released an interpretation of Reg O concerning a bank’s
          insider’s draws on a revolving line of credit. Any draws made by the insider more than 14 months
          after the bank’s board of directors approved the line of credit required an additional review by the
          board, regardless of whether the insider satisfied financial conditions established when the line of
          credit was approved. Allowing additional draws based only on the insider’s satisfaction of the
          financial conditions would improperly delegate the board’s loan approval duties to the bank’s lending
          or credit officers.

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          F  The Federal Reserve Board announced a new government-industry campaign to inform the public
          of its rights during vehicle leasing transactions. Central to the campaign is a brochure, Keys to
          Vehicle Leasing, which provides consumers with an overview of a closed-end lease, the most
          common type of vehicle lease used by the automotive industry. Under this type of lease
          arrangement, consumers may return the automobile, pay any end-of-lease cost, and walk away. The
          brochure also compares common facets of both buying and leasing a vehicle so that an individual can
          make a more informed decision. The brochure contains a sample closed-end lease so that consumers
          can become more familiar with the document. In addition, the brochure stipulates the leasing terms
          that a dealer must disclose to the consumer. For copies of the brochure, contact the Public Affairs
          Department of the Federal Reserve Bank of Dallas at 214/922-5254.

          F  In connection with its Operating Circular No. 3 (Collection of Cash Items and Returned
          Checks) the Fed has developed forms for making a claim of late return, responding to a claim of late
          return, and making a claim due to an underencoding error. Specific reference to these forms are
          found in paragraphs 18.4, 18.5, and 18.7 of the new Operating Circular No. 3. The new Operating
          Circular was distributed to all financial institutions in November of 1997. To get additional copies of
          the three claim forms for use with Operating Circular No. 3, contact Charles Hunter at the Federal
          Reserve Bank of Dallas at 214/922-6543.

          F  An updated list of over-the-counter stocks subject to the Reg U margin requirements was issued
          by the Fed, effective February 9, 1998. The revised OTC list contains 4,680 stocks. Also reflected
          on the list are 1,942 foreign stocks, which are listed in country order. To determine whether an OTC
          stock is subject to the 50-percent limitation under Reg U, a lender will need to determine whether the
          stock is traded in the National Tier of the NASDAQ Stock Market. This can be accomplished by
          consulting a newspaper, contacting the National Association of Securities Dealers, Inc. or the
          Securities and exchange Commission, or checking the NASD’s website at

          Federal Financial Institutions
          Examination Council

          F   The FFIEC has adopted an Interagency Policy Statement on the Internal Audit Function and its
          Outsourcing. The four agencies have increasingly emphasized the importance of sound
          risk-management processes and strong internal controls in evaluating the safety and soundness of
          depository institutions and holding companies. The internal audit function plays an important role in
          assessing and contributing to the ongoing effectiveness of the internal control system. Under the
          Interagency Guidelines Establishing Standards for Safety and Soundness in Appendix A to Part 364
          of the FDIC’s regulations, each institution should have an internal audit function that is appropriate
          to its size and the nature and scope of its activities. Accordingly, the policy statement provides
          guidance and sound practices for institutions to follow in order to effectively manage the internal
          audit function, whether this function is performed by an institution’s own employees or by outside
          experts under an “outsourcing” arrangement. Outsourcing occurs when an institution engages an
          independent public accounting firm or other outside professionals to perform work traditionally done
          by internal auditors. The policy statement provides guidance on how outsourcing arrangements may
          affect an examiner’s internal control assessment. It also discusses the effect these arrangements may
          have on the independence of an external auditor who also is providing internal audit services to an
          institution. Finally, the statement provides guidance to examiners on their reviews of internal audit
          functions and related matters.

          F The FFIEC has issued an advisory entitled “Safety and Soundness Guidelines Concerning the
          Year 2000 Business Risk.” These guidelines are intended to highlight the supervisory agencies’

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          expectations of bank senior management and the board of directors concerning the business-wide
          Year 2000 risks posed by vendors, business partners, counterparties and major loan customers, and
          provide reporting guidelines for information needed by the board of directors. They also clarify prior
          regulatory guidance and current expectations on the certification of products and services as Year
          2000 compliant. The FFIEC member agencies have monitored the progress of financial institutions in
          addressing the Year 2000 challenge since the issuance of their Interagency Statement on Year 2000
          in May, 1997.

          Department of Housing and
          Urban Development

          F   HUD has issued a final rule amending its RESPA regulations to establish a set of “best practices”
          for loan servicers to help borrowers avoid “payment shock” in escrow accounts. The final rule
          amending Reg X, which implements RESPA, went into effect February 20. HUD decided not to
          address the issue of payment shock directly, opting instead to recommend, but not mandate, a set of
          best practices that includes a voluntary agreement allowing mortgage loan servicers to accept
          overpayments by borrowers. In an effort to lower the initial costs of getting a mortgage, lenders
          often allow borrowers to pay into the escrow fund only the amount needed to make payments for the
          first six months of a mortgage. As a result, at the end of the first year, there is not enough money in
          the escrow account to pay real estate taxes, and lenders are forced to charge borrowers for the
          balance to make the tax payments. Also, the lower initial escrow amount often fails to cover much
          higher second-year taxes, with the result that consumers face much higher second-year taxes, with
          escrow bills sometimes hundreds of dollars higher than the first year. The final rule would allow
          lenders in a tax jurisdiction that allows tax payments on an installment basis to pay them in
          installments, provided the borrower agrees. HUD is also encouraging servicers to adopt the following
          best practices:

          ·    disbursing property taxes in installments unless a discount is offered for annual disbursements
              that the servicer, based on its best business judgment, believes is a large enough discount to be in
              the borrower’s interest, in which case the servicer makes disbursements annually; and

          ·    accommodating individual borrowers by switching those who complain to whichever method
              they prefer for the disbursement of property taxes.

           Independent Bankers Association of Texas                                         

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