On December 16, 2010, the Federal Reserve Board (“Board”) released its proposed rule to implement the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted on July 21, 2010. The Durbin Amendment amends the Electronic Fund Transfer Act by adding a new section 920 regarding interchange transaction fees and rules for payment card transactions. Comments on the proposed rule were due by February 22, 2011, and the rule goes into effect July 21, 2011. The new regulation will be located within Part 235 of Title 12 of the Code of Federal Regulations.
The proposed new Regulation II, Debit-Card Interchange Fees and Routing, establishes standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. These standards ostensibly do not apply to issuers that, together with their affiliates, have assets of less than $10B. There are two alternative fee standards that would apply to all covered issuers:
- Based on each issuer’s costs, with a safer harbor (initially set at 7 cents per transaction) with a cap (initially set at 12 cents per transaction); and
- A stand-alone cap (initially set at 12 cents per transaction).
Under the first alternative, issuers that wish to assess an interchange fee in excess of 7 cents per transaction would need to demonstrate that their costs exceed the safe harbor amount by dividing the costs incurred by the issuer with respect to electronic debit transactions during the calendar year preceding the start of the implementation period, divided by the number of electronic debit transactions on which the issuer charged or received an interchange transaction fee during that calendar year, not to exceed 12 cents per transaction. Costs are defined as only those that vary with the number of transactions sent to the issuer and that are attributable to:
- Receiving and processing requests for authorization of electronic debit transactions;
- Receiving and processing presentments and re-presentments of electronic debit transactions;
- Initiating, receiving, and processing charge-backs, adjustments, and similar transactions with respect to electronic debit transactions; and
- Transmitting or receiving funds for interbank settlement of electronic debit transactions; and posting electronic debit transactions to cardholder accounts, exclusive of fees charged by a payment card network with respect to an electronic debit transaction.
The proposed rule also prohibits ALL issuers and networks from restricting the number of networks over which debit card transactions may be processed. Again, there are two alternative approaches:
- One alternative would require at least two unaffiliated networks per debit card
- The other would require at least two unaffiliated networks per debit card for each type of cardholder authorization method (such as signature or PIN).
Regardless of which alternative is decided upon, the issuers and networks would be prohibited from inhibiting a merchant’s ability to direct the routing of debit card transactions over any network that the issuer enabled to process them.
Not surprisingly, this proposed rule has encountered great resistance from credit unions and community banks. In practice, the small institution (under $10B in assets) exemption is illusory. It is unclear how merchants and card networks would distinguish between small and large institutions. Would merchants deny debit cards issued by small institutions in favor of debit cards issued by large institutions with the knowledge that the large institutions are limited in their ability to charge higher interchange fees? In a letter to the Federal Reserve Board, endorsed by the National Association of Federal Credit Unions and the Independent Community Bankers of America, the Financial Services Roundtable stated, “With virtually unprecedented unanimity, every major bank and credit union trade association is writing to express opposition to the rule proposed by the Board of Governors of the Federal Reserve System.”
In congressional testimony, Federal Reserve Chairman, Ben S. Bernanke, Federal Reserve Board of Governor, Sarah Bloom Baskin, and Federal Deposit Insurance Corporation Chairman, Sheila Bair, voiced concerns that could slow implementation of the rule. Bernanke told the Senate Banking Committee that, “It is possible that because some merchants will reject more expensive cards from smaller institutions or because networks will not be willing to differentiate the interchange fee for issuers of different sizes, it is possible….that the interchange fees available to smaller institutions will be reduced to the same extent we would see for larger banks.” Bair testified that debit transaction fees would likely force smaller banks and credit unions to make up for lost revenue with higher account fees for their customers and members.
In a letter to the Board, the American Bankers Association (“ABA”) joined every major bank and credit union trade association urging the Board to rewrite the proposed rule on debit card interchange fees. The executive director of the ABA Card Policy Council, Kenneth J. Clayton, wrote, “…setting price caps is un-American and this is even worse. Banks won’t even be able to cover their expenses and will lose money on every transaction. If the rule isn’t changed, the result will be increased fees for bank customers to make up for lost interchange fees charged to retailers.” This letter also pointed out that free and low-cost checking accounts supported by interchange fees—and that are considered very important to low and moderate income customers—will no longer be available, forcing many Americans out of the banking system. Card networks have estimated that these interchange fee restrictions will reduce revenue by as much as 75%.
It is not clear what effect the opposition will have on the proposed rule change. Will the cap be increased to some value more reasonable than 12 cents per transaction? Possibly. However, regardless of the outcome of the Board’s rulemaking, it is imperative for all financial institutions to contemplate how they will compensate for lost revenue through debit interchange fees.
If you have any questions on this matter, please contact Mr. John B. C. Porter, Esq. John is the Managing Attorney in the Columbus Credit Union Group of Weltman, Weinberg & Reis Co., LPA. He can be reached at 614.857.4488 or firstname.lastname@example.org.
Filed under: litigation
by: Jennifer M. Monty, Esq.
It may seem impossible that a court could order that communication between an attorney and client be disclosed. It may seem even odder that a court would order an attorney to turn over her litigation file. However, if a privilege is not adequately protected, it can be waived, and a court may require such disclosure.
The law provides for two privileges: attorney-client privilege and work product doctrine. Both privileges must be asserted at the first instance when the privileged information is requested. Attorney-client privilege protects communications between an attorney and client (or an attorney’s agents, such as secretary or paralegal). Work product doctrine protects “documents and tangible things prepared in anticipation of litigation or for trial by or for another party or that party’s representative…” (Ohio Civ. R. 26(B)(3)). Courts often give greater protection to opinion work product, versus fact work product. Opinion work product generally describes an attorney’s mental impressions, legal theories or strategies and disclosure through discovery would allow the opposing party to benefit from the parties’ preparation. Fact work product includes witness statements or underlying facts that may be part of the attorney’s file, but would otherwise be discoverable.
Although most attorneys know to assert the privilege, there are specific safeguards that must be followed. To protect items under either attorney-client privilege or work product doctrine, an attorney must not only assert the privilege but also identify and list the “privileged” documents that the party is withholding. A proper privilege log should:
- Identify the discovery requests to which objection is made;
- State the grounds of the objection—either attorney-client communication or attorney work product doctrine;
- A table or chart showing for each document the custodian of the record, the author of the record, when it was created/modified, and a general description of the subject matter.
The purpose of providing the information is that it allows the opposing party to assess or challenge the claim that the document is privileged. In federal courts, the filing of a proper privilege log is an acceptable way to assert the privilege during the discovery process. The failure to properly assert a privilege, may waive the privilege. Therefore the question is whether failure to submit a privilege log (or proper privilege log) waives the attorney-client privilege or work product doctrine?
Currently, courts are split on appropriate sanctions for when a party fails to timely submit a privilege log or submits a deficient privilege log. Sanctions can include either monetary sanctions against the party who failed to properly submit a privilege log or a finding that the party has waived its privilege, which would require disclosure of otherwise privileged materials.
The Notes of the Advisory Committee to the Federal Rules of Civil Procedure discuss potential waiver: A “party must notify other parties if it is withholding materials otherwise subject to disclosure under the rule or pursuant to a discovery request because it is asserting a claim of privilege or work product production. To withhold materials without such notice is contrary to the rule, subjects the party to sanctions under Rule 37(b)(2), and may be viewed as a waiver of the privilege or protection.” The use of the word “may” rather than “shall” provides the reviewing court discretion in finding a sanction versus a waiver.
The decision of a court to monetarily sanction a party or find that there is waiver is often determined by the facts of the case. If the party has actively tried to properly respond, there is less likelihood that waiver will be found. As one court explained, “a waiver of privilege is a serious sanction reserved for cases of unjustified delay, inexcusable conduct, bad faith or other flagrant violation” (Applied Systems, Inc. v. Northern Ins. Co. of New York, 1997 U.S. Dist. LEXIS 16014, 1997 WL 639235, at *2 (N.D. Ill. Oct. 7, 1997)). Other courts have found that “Minor procedural violations, good faith attempts at compliance and other such mitigating circumstances bear against finding waiver.” (Heavin v. Owens-Corning Fiberglass, 2004 U.S. Dist. LEXIS 2265, 2004 WL 316072, at *12 (D. Kan. Feb. 3, 2004)).
Additionally, trial court discovery orders are reviewed under an abuse of discretion standard; on appeal an appellate court will often not overturn a trial court’s decision unless there is some showing that the trial court acted unreasonably, arbitrarily, or unconscionably.
The safest approach is to prepare a privilege log, identifying the documents that contain the privileged matter, and serve it on opposing counsel, concurrent with serving discovery requests. However, if a privilege log is not prepared (or is deficient), there are many arguments to make to avoid waiver of privilege. An attorney can argue attempted compliance with the rules, as well as the purpose of the privilege – to promote open exchanges between attorneys and clients and to protect an attorney’s litigation strategy.
Jennifer M. Monty is an Associate in Litigation & Defense; Consumer Finance Litigation, Commercial Business, Commercial Real Property and Federal Court Litigation Groups. She is also involved in WWR’s Real Estate Default Group. Jennifer is based in the Cleveland office and can be reached at (216) 685-1136 or email@example.com.
Filed under: Uncategorized
Editor’s note: this is the next article of a series discussing the pros and cons of certain side businesses that CU members may approach their credit unions to finance using a Side Business Loan.™
By Ramona Bell.
As the culture of our world changes and embraces sustainability, a new trend has been birthed that pushes for the creation of ecologically sound business ventures, where going “green” can be good for the would-be business owner as well as being ecologically sound. The notion of reducing, recycling, and reusing is no longer reserved for the die-hard conservationists of the world, but is now a life-style many individuals embrace with an active level of accomplishment and zeal. Channeling this energy into a viable side business opportunity seems like the next logical step, with an endless list of green possibilities. One of the sweeter endeavors to emerge involves the practice of backyard beekeeping. Individuals interested in this sub-culture of farming have the potential to strengthen their own personal communities and their financial standings, while also contributing to the global world market.
The practice of beekeeping itself has existed for thousands of years across the globe, and has played a crucial role in the pollination of plants. Successful pollinations not only result in higher honey yields, but also in higher food harvests. The appeal of small-scale beekeeping (referred to as backyard beekeeping), incorporates this geographic flexibility, with the maintenance of hives being open to rural and urban settings. For once, geographic location is not a predisposition to failure when financial success is concerned. The level of overall success still depends on the viable number of nectar/pollen producing plants in an area, but the area itself can exist on a downtown city roof, or in a country garden. In this situation, the bees do most of the work, and are willing to fly several miles to areas where pollen is present. This opens this type of side business up to almost any individual willing to put forth the effort needed to successfully raise bees.
Placing geographical opportunities aside, the land of milk and honey will not magically appear for the would-be beekeeper before a fair amount of research is conducted. Unless one can learn firsthand from an active beekeeper, an interested individual needs to become familiar with their personal environmental conditions, prominent patterns of weather, the types of plants present, and the types of bees that will survive best in a particular climate. Additional information will also be required concerning how to colonize and maintain hives, how to winterize bees, and how to handle occasional acts of aggression from the bees in the hive. While obtaining a start-up hive and bees is not financially draining, with some areas even offering the opportunity to rent a colony for a reduced price, their overall care can require some work. When examined from a minimalist standpoint, bees really only need a source of aged water, a hive, and a supply of nectar to collect. From a business owner’s standpoint, bees require patience and ideal conditions in order to produce a worthy amount of honey to harvest. This can involve building fences and walls in order to maintain swarm control, raise bee flight paths, and to provide protection for the hive. In the beginning, this will most likely be a trial-and-error process, with the backyard beekeeper learning as they go.
As stated earlier, research on this topic is crucial for success and needs to extend past the basics of bees to the legality of captive honey harvests. While it is completely legal to raise bees within in the United States, each state has its own set of rules and regulations concerning the number and types of hives kept. Before an individual invests any money, it would be wise to become familiar with the beekeeping laws of the state, so that any accidental infringements won’t jeopardize future success. On a related note, knowing a community will increase success as well. While bees do perform a very necessary task, many people are fearful of them and might oppose the colonization of bees in their neighbor’s backyard. Research and education are again key factors here; the more you know about bees and their habits, the more you can lessen the sting when it comes to sharing a community’s space. Additionally, many homeowner’s associations prohibit bee cultivation. If you live in an HOA community, review the restrictions first before spending any money.
With all of this being said, backyard beekeeping will not make you rich overnight, but it can with time, become a stable and earth-friendly source of extra income. By beekeeping, an individual will not cause any environmental damages and can contribute to the number of flowers pollinated in a specific area. This in turn will increase honey production, which can foster positive relationships between rural and urban members of a community. The survival of bees across the nation has been an issue of concern for the past several years, so undertaking a side business that can potentially improve conditions nationwide is also something to consider. While the likelihood of getting stung, either physically or financially, is always present, the dedicated individual can reap sweet rewards through patience and research.
Ramona Bell is a free-lance writer who is currently pursuing her Ph.D in Research Psychology.
Filed under: credit unions, Uncategorized | Tags: consumer reports, FACT Act, FACTA, Fair and Accurate Credit Transactions Act
By John B.C. Porter, Esq.
Effective January 1, 2011, credit unions that use consumer reports in connection with an extension of credit used for personal, family, or household purposes and provides this credit to the member on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of members of the credit union must provide the member a “risk-based pricing notice.” This requirement is one of the final vestiges of the Fair and Accurate Credit Transactions Act.
Just exactly what constitutes “material terms that are materially less favorable than the most favorable material terms”? In almost all cases, we’re talking about the annual percentage rate. Specifically, for open-end loans, it is the annual percentage rate, excluding any temporary initial rate that is lower than the rate that will apply after the temporary rate expires, any penalty rate that will apply upon the occurrence of one or more specific events, and any fixed annual percentage rate option for a home equity line of credit. For credit cards, it is the annual percentage rate that applies to purchases; and for closed-end credit, it is also the annual percentage rate. “Materially less favorable” means material terms (i.e., APR) provided to a member that differ from the terms provided to another member such that the cost of credit to the first member would be significantly greater than the cost of credit provided to the other member.
How do you know what members are receiving material terms that are materially less favorable than the most favorable material terms? Well, you could determine this by directly comparing the material terms offered to each member and the material terms offered to other members for a specific type of credit product. Who wants to do that? No one! The Federal Reserve has given credit unions easier options.
The first of which is the credit score proxy method. This method involves, through use of a representative sample of the members to which the credit union provided credit by specific credit products, determining the “cutoff score” that represents the point at which approximately 40 percent of the members to whom the credit union provides credit have higher credit scores and approximately 60 percent of the members to whom it provides credit have lower credit scores. The members who fall below the cutoff score would receive the risk-based pricing notice. This cutoff score must be recalculated no less than every two years.
For example, your credit union engages in risk-based pricing and the annual percentage rates it offers to members are based in part on credit score. The credit union takes a representative sample of its members’ credit scores to whom the credit union issued credit cards within the preceding three months. The credit union determines that approximately 40 percent of the sampled members have a credit score at or above 720. Thus, 720 is the cutoff score. A member applies to the credit union for a credit card. The credit union obtains a credit score for the member. The member’s credit score is 700. Since the member’s credit score falls below the 720 cutoff score, the credit union must provide a risk-based pricing notice to the member.
A credit union’s second option is to use the tiered pricing method. If a credit union sets the material terms of credit provided to a member by placing the member within one of a discrete number of pricing tiers for a specific type of credit product, based in part on a consumer report, the credit union may provide a risk-based pricing notice to each member who is not placed within the top pricing tier or tiers. If the tiered pricing has four or fewer pricing tiers, the credit union complies with the risk-based pricing notice requirement by providing the notice to each member to whom the credit union provides credit who does not qualify for the top tier. If there are five or more pricing tiers, the risk-based pricing notice must be given to each member who receives credit from the credit union who does not qualify for the top two tiers and any other tier that, together with the top two tiers, comprise no less than the top 30 percent, but no more than the top 40 percent, of the total number of tiers. For example, if a credit union has nine pricing tiers, the top three tiers comprise no less than the top 30 percent, but no more than the top 40 percent, of the tiers. Therefore, the credit union would provide a risk-based pricing notice to each member to whom it provides credit who falls within the bottom six tiers.
Alternatively, a credit union that issues credit cards may satisfy its obligation to provide the risk-based pricing notice to a member when it provides this notice to: (a) members who apply for a credit card either in connection with an application program, such as a direct mail offer or a take-one application, or in response to a solicitation and more than one possible annual percentage rates for purchases may apply under the program or solicitation and (b) based in part on a consumer report, the credit union provides a credit card to the member with an annual percentage rate that is greater than the lowest annual percentage rate available in connection with the application or solicitation. A credit union that issues credit cards, however, is not required to comply with the risk-based pricing notice if the member applies for a credit card for which the credit union provides a single annual percentage rate or the credit union offers the member the lowest annual percentage rate available under the credit card offer for which the member applied, even if a lower annual percentage rate is available under a different credit card offer issued by that credit union.
Credit unions must also provide members risk-based pricing notices when the credit union uses a consumer report in connection with a review of credit that has been extended to the member and, based at least in part on the consumer report, increases the annual percentage rate.
In closed-end credit transactions, the risk-based pricing notice must be provided to the member before consummation of the transaction, but not earlier than the time the decision to approve an application is communicated to the member. For open-end credit transactions, the risk-based pricing notice must be provided to the member before the first transaction is made under the plan, but not earlier than the time the decision to approve an application for credit is communicated to the member. In the case of a review of credit that has been extended to the member, the risk-based pricing notice must be provided to the member at the time the decision to increase the annual percentage rate based on a consumer report is communicated to the member. In cases where credit unions have contracted with third parties to facilitate credit transactions, e.g., automobile dealerships, third parties may provide the member with the risk-based pricing notice (even if a different credit score is obtained and used) within the timelines prescribed, thereby satisfying the credit union’s obligation.
Credit unions are not required to provide a risk-based pricing notice to members when members apply for specific material terms and those material terms are granted. For example, a member receives a firm offer of credit from a credit union. The terms of the firm offer are based in part on information from a consumer report that the credit union obtained under the Fair Credit Reporting Act’s firm offer of credit provisions. The solicitation offers the member a credit card with a single purchase annual percentage rate of 12 percent. The member applies for and receives a credit card with an annual percentage rate of 12 percent. Other members with the same credit card have a purchase annual percentage rate of 10 percent. Because the member applied for specific material terms and those material terms were granted, the credit union does not need to provide the member with an annual percentage rate of 12 percent with a risk-based pricing notice. Furthermore, in the event the member is declined credit altogether, credit unions need not send those members risk-based pricing notices if they provide said members with adverse action notices.
There is a final exception or alternative to providing the risk-based pricing notice as described above. Credit unions may choose to provide a credit score disclosure to every member who applies for and is provided credit by the credit union. Depending on the composition of your membership’s creditworthiness, this may be an attractive alternative for you. Appendix H to Regulation V provides model risk-based pricing notices and the exception notice. I implore you to use these notices to comply with these recent requirements under the FACT Act.
John B. C. Porter is a Managing Attorney in the Columbus Credit Union group. He can be reached at (614) 857-4488 or firstname.lastname@example.org.
By: Shari Storm
A few months ago, my colleague, Lee Wojnar, from O’bee Credit Union, introduced me and the other participants of Washington’s Credit University, to a marketing concept called tagging. As soon as he pointed it out, I started seeing it everywhere – on my REI catalog, on the bottle of my moisturizer, and most recently, at the airport.
Tags look like this:
Tags works like this:
1. A consumer downloads a simple tag reader app onto their smart phone.
2. A marketer orders a free tag (there are a couple places to get them from).
3. The marketer prints the tag on their marketing material and designs a corresponding webpage for it.
4. If a consumer wants more information about something that has a tag on it, they hold their smart phone up to the tag, click a button, and it launches the marketer’s web site.
This is a marketing executive’s dream come true! It lets a company:
1. Provide more information than a single poster, brochure or postcard can hold.
2. Gives the ability to update information in real time (via the website).
3. Captures how many consumers look at your material and take the step to get more information.
I appreciate them as a consumer as well. My REI tag sent me to a site where I could find the nearest store to wear I was standing (having I mentioned I love location marketing?). My moisturizer tag told me all sorts of information about the product and lastly this tag scheme was brilliant:
If you’ve been at the airport lately, I’m sure you’ve noticed a recent phenomenon – everyone at the airport has their nose in their mobile device. That is why this is such a great marketing campaign. I’m sitting at the airport with nothing to do and lo – 1stBank just invited me to a free game of Sudoku. For those of you addicted to the game, you have even a higher appreciation for this gift. Thank you 1stBank.
At any rate, I encourage you to check out tagging.
Shari Storm is Senior Vice President and Chief Marketing Officer of Verity Federal Credit Union and is the author of the book ‘Motherhood is the New MBA”, available here.
Filed under: Side Business Loans, Uncategorized | Tags: Side Business Lending, Side Business Loans
Editor’s note: this is the first of a series discussing the pros and cons of certain side businesses that CU members may approach their credit unions to finance using a Side Business Loan.™
By: Ramona Bell
Geographical areas that exhibit a multitude of meteorological variations can often be ideal for the start-up of a supplemental side-business endeavor. A perfect example of this is the possibility of creating a snow-plowing business in areas where winter weather can wreak long-term havoc on a community. Many individuals find the allure of this potential business glamorous since very little is initially needed to start working and collecting money. If an individual has a suitable truck and the proper plow components, and has the initiative to work erratic and long hours, the success of the business is essentially limitless. Coupled with the fact that many well-established snow plow drivers make between $16.00-$35.00 per hour (based on experience), you have the formula for a financially prosperous side-business project.
Despite this, snow plowing, like any side-business, still has the potential to send the would-be business owner pushing many other obstacles out-of-the-way long before the first snowfall. Financial start-up costs which include one or more vehicles, their overall and continued maintenance during the plowing season, fuel and snow-dissolving solvent costs, and proper insurance can be challenges faced early on and throughout the plowing season. The ability to drum up initial business can also be a problem, with many well-established plow and landscaping companies putting personal and private bids in way before the wintery season officially begins. On the marketing side, word-of-mouth is key in this particular niche, with personal recommendations being crucial to the success of a new business. More positive comments about a business can lead to either more personal or private contracts, or ideally, both.
Pushing aside everything from vehicle costs to often dangerous working conditions, the most elemental yet devastatingly crucial element to the success of a snow plowing business involves one simple word: Snow! Without snow, the need for such a service would dramatically decrease, leaving the business owner with insurance bills and vehicles costs, but with no way to satisfy them. Before one decides to embark on the creation of such a business, one has to be willing to acknowledge that the prediction of a financially successful year is nearly impossible to forecast. It is essentially a gamble that one must take, which can either pay-off handsomely if weather conditions are bad for many days over a season, or which can put the would-be business owner in a not-so comfortable financial position. The overall key here might be to start off small, with fewer financial risks, and then work up to a larger business that could handle the possibility of a weak winter. The notion of safety is paramount in the snow plowing world regardless, whether in reference to physically plowing or in relation to financial standings. No matter what, you don’t want to be left out in the cold.
Ramona Bell is a free-lance writer who is currently pursuing her Ph.D in Research Psychology.
By: Jennifer M. Monty, Esq. and Thomas Kendall, Esq.
Tax season creates questions for creditors and consumers alike. When do losses need to be taxed? Why is a consumer taxed for forgiveness of debt? Can the parties agree to waive the reporting requirement? Questions surround the issue, and it’s only made more complicated by the various ways a consumer and creditor agree to dispose of property.
When a creditor forgives, cancels, or discharges a debt, the creditor will need to file a 1099-C. Any forgiveness, cancellation or discharge potentially represents taxable income to the debtor. IRS regulations require a creditor to submit Form 1099-C in order to document the cancellation of more than $600 in principal. This requirement applies to secured and unsecured creditors alike. However, secured creditors may also have an obligation to file Form 1099-A, when they accept a property or when a property is abandoned.
When a Form 1099-C Must Be Filed
The most common type of form a creditor fills out is usually the Form 1099-C. This form -C must be filed when an “identifiable event” occurs with respect to the debt secured property. The identifiable event is when the debt is forgiven. In the case of a secured loan, the identifiable event is the canceling of debt, whether or not the creditor has re-sold the property.
Cancellation of debt is defined as money that is borrowed from a commercial lender and then later forgiven or cancelled by the lender. This working definition from the IRS is different than the use of it from a bank regulator’s standpoint. Generally accepted accounting principles and federal bank regulations provide that a retail loan that is past-due for 180 days should be classified as a loss and charged off. However, for purposes of issuing a 1099-C, the form must be filed when the debt is forgiven or cancelled, which may be after 180 days.
Examples of an identifiable event is an agreement to settle or cancel the debt between the debtor and creditor, or an agreement not to attempt to collect any remaining outstanding amounts. Any “identifiable event” which fixes the loss with certainty may be taken into consideration, repayment of the loan need not become absolutely impossible before a debt is considered discharged. The identifiable event can occur even when the creditor still has some technical right to repayment.
Following foreclosure, an identifiable event occurs when the creditor is barred from collecting the deficiency balance under state law (for example when the statute of limitations expires); the debtor and creditor sign a cancellation agreement; or a discharge results from a decision or defined policy of the creditor to discontinue collection of the deficiency. If the creditor intends to pursue the deficiency balance, the creditor should instead file Form 1099-A, listing the foreclosure sale price as the fair market value. If there is no deficiency balance, or a deficiency of less than $600, no 1099-C should be filed.
In the context of a deed in lieu of foreclosure, the identifiable event is the creditor’s execution of the deed-in-lieu agreement or instrument which states that the creditor is canceling or satisfying the debt. However, not every deed-in-lieu transaction will require reporting with a 1099-C form. If property is abandoned, or accepted in partial or full payment of a debt without any cancellation of indebtedness, only the 1099-A form needs to be completed. When there is still another co-debtor liable for the debt, the 1099-C form does not need to be completed. Nor is a creditor required to file a 1099-C form when only interest – not principal – is cancelled, or upon release of a guarantor.
For purposes of compliance, 1099-C must be mailed to the debtor by January 31st and to the IRS by February 28th of the tax year in which the debt was discharged.
When a Form 1099-A Must Be Filed
A mortgage lender must file Form 1099-A for the year in which the lender either took an interest in secured property or had reason to know that the secured property was abandoned by the borrower. The creditor’s obligation to complete Form 1099-A is not contingent upon cancellation of debt. The Form must be filed if the creditor accepts the secured property in partial or full satisfaction, even when the property’s fair market value exceeds the amount of the debt. The Form must be filed after the secured property is sold at foreclosure sale.
Abandonment occurs when “objective facts and circumstances indicate that the borrower intended to and has permanently discarded the property from use.” However, there is an important exception. If a creditor knows of the abandonment, but intends to commence foreclosure within three months, reporting is only required when the creditor eventually acquires an interest in the property, when a third party purchases the property, or at the end of the three-month period if no sale has yet taken place.
However, Form 1099-A is not required if a Form 1099-C is filed for the same year.
Relation between the 1099-A and 1099-C Forms
If an identifiable event of cancellation occurs in the same year that the creditor takes an interest in the secured property or the property is abandoned, the creditor is only required to file Form 1099-C. Form 1099-A should be filed only if: the secured property is abandoned and foreclosure has not been commenced within three months; the creditor accepts the deed in full or partial satisfaction of the debt, and intends to collect the deficiency; or when the property is sold at foreclosure sale and the deficiency has not been canceled in the same year.
What is Fair Market Value?
Both Form 1099-A and -C require the creditor to provide the fair market value (FMV) of the secured property. The FMV is either the appraised value of the property or the purchase price paid at a foreclosure sale. However, if Form 1099-A and 1099-C are both filed in the same year, the fair market value of the property is indicated on the 1099-A form, and the corresponding section of the 1099-C form is left blank; an updated FMV need not be determined.
Can the Parties Agree to Waive Reporting Requirements?
A creditor should not agree to waive any reporting requirements with a consumer. The reporting requirements are federal requirements. Once a creditor reports, the consumer can challenge the report with the IRS. To be safe, when settling a matter, a creditor should include language indicating that it does not make any representation regarding any tax implications and that a consumer should review with an independent tax advisor or counsel.
Muddling through the various reporting requirements can be daunting. If any questions arise, please contact Weltman, Weinberg & Reis Co., LPA (WWR).
Ms. Jennifer M. Monty, Esq. or Mr. Thomas Kendall, Esq.. Jennifer practices in Litigation & Defense located in the Cleveland office of WWR. She can be reached at 216.685.1136 or email@example.com. Thomas practices in Consumer Collections located in the Cincinnati office of WWR. He can be reached at 513.723.6052 or firstname.lastname@example.org.
Filed under: foreclosure | Tags: 21st Judicial Circuit, Bath county, documentation requirement, kentucky, Menifee County, Montgomery County, Rowan County
by Philip Q. Ratliff, Esq.
July 31, 2011 - The 21st judicial circuit in Kentucky, which encompasses the Counties of Bath, Menifee, Montgomery and Rowan, issued a general order affecting the documentation required in all new foreclosure complaints filed after February 1, 2011. These changes may significantly affect foreclosure timelines in these Counties, including the first legal date. This general order is nearly identical to an order recently adopted in Kenton County, KY, and there is a good possibility that this requirement will spread to additional counties in the coming months. These changes are similar to the requirements adopted by many Ohio Courts in recent years.
Effective February 1, 2011 and thereafter, all new foreclosure complaints must include a copy of the note and all endorsements, a recorded copy of the mortgage, and a copy of any and all assignments of the note and mortgage. Most importantly, the assignment of the note and mortgage to the named plaintiff must be executed prior to the filing of the complaint. The assignment need not be recorded prior to the filing of the complaint, although it must be recorded prior to filing a motion for judgment.
In addition to the foregoing, the complaint must include an affidavit by plaintiff, its representative, its attorney or servicer (a) documenting that the named plaintiff is the holder of the note and mortgage at the time the complaint is filed, and (b) identifying plaintiff as either the original note and mortgage holder, or as an assignee, trustee or successor-in-interest of the original. Further, the order requires the complaint to include documentation establishing any succession of interest, such as a corporate merger, if applicable.
These rule changes magnify the importance of providing foreclosure counsel with copies of any and all endorsements, allonges, and executed assignments of mortgage with any foreclosure referral in counties referenced above, and copies of any pertinent corporate merger documents (assuming the merger documentation does not readily appear on state or federal websites).
On foreclosure referrals received by WWR for these four Counties, we will notify you promptly upon receipt of the preliminary title report, the need for an assignment or assignments before proceeding and, if requested by our client, will prepare and send the necessary assignment(s) for execution to our client.
If you have any questions on this matter, please contact Mr. Philip Q. Ratliff, Esq. Phil is an associate focused on foreclosure and eviction in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA. He can be reached at 513.723.2215 or via email at email@example.com.