2017 Texas Legislative Recap of New Laws Affecting Financial Institutions Operating in Texas

Every other year, the Texas Legislature convenes for roughly six months in Austin. Given the tight time frame and biennial nature, sessions of the Texas Legislature tend to be “fast and furious” (and also full of some drama). There were a total of 6,631 bills filed in the 2017 Texas Legislative Session. The Texas House filed 4,333 bills, of which 700 passed. The Texas Senate filed 2,298, of which 511 passed. Texas Governor Abbott vetoed 50 bills prior to the June 18, 2017, veto deadline. Below are summaries and effective dates of the major new laws that affect financial institutions operating in Texas.

New Texas Laws Effective September 1, 2017

Multi-Party Account Disclosure – SB 714

SB 714 contains changes to the Texas Estates Code that are good news for financial institutions.

Section 113.052 of the Texas Estates Code contains the Uniform Single-Party or Multiple-Party Account Form that financial institutions must provide to their customers at account opening and modification. The form contains disclosures explaining the types of accounts available and requires the customer to select an account type. Section 115.053 of the Texas Estates Code contains requirements for using the form. 

Under existing law, a financial institution must either use the model form, as provided for in Section 113.052 of the Texas Estates Code, or vary the format of the form and comply with certain additional requirements under Section 113.053(b).

SB 714 amends Sections 113.052 and 113.053 of the Estates Code by resolving several issues that resulted from 2015 amendments to this law:

• The requirement that the customer initial to the right-hand side of each and every disclosure has been replaced with a single acknowledgement section that the customer must sign at the bottom of the model form instead. (Note that the customer must still initial to the left of the type of account that the customer wants to open.)
• For financial institutions that vary the format of the form, the disclosures may now be included with other documents—and do not have to be provided completely separately from other documents—so long as the disclosures required by Section 113.052 of the Texas Estates Code are the first items in the documentation. (Note that this requirement applies only to financial institutions that vary the format of the form and not to financial institutions that follow the format set forth in Section 115.052 of the Texas Estates Code.)
• The 14-point boldfaced type previously required for a financial institution that varies the form no longer applies.
• The requirement that the disclosures be provided in Spanish if discussions preceding the account opening or account modification were conducted in Spanish no longer applies.
• Financial institutions are no longer required to include in the form any disclosures for types of accounts that the financial institution does not offer.
• The law provides new exclusions for legal entity customers, including governmental entities, and legal representatives of other persons.

Credit unions are still exempt from the law. Additionally, there are still no penalties for noncompliance under the law. Note, however, that UDAAP issues could arise if a financial institution discloses in a way that could be construed as an unfair, deceptive, or abusive act or practice. 

Financial institutions may need to update their standard account forms to address these changes. Financial institutions that do not vary the form will need to add the new acknowledgment section to the end of the form and remove any language instructing the customer to initial to the right of each disclosure. Going forward, the form should instruct the customer to initial only next to the type of account in which the customer wants to enroll. Additionally, financial institutions may want to remove disclosures for any types of accounts the financial institution does not offer. Financial institutions that vary the form will need to ensure that if the required disclosures are provided in conjunction with other documentation, the disclosures required by Section 113.052 of the Texas Estates Code are the first items in that documentation.

Significant Changes Affect Durable Powers of Attorney (POA)– HB 1974

HB 1974, which will amend Chapter 751 of the Texas Estates Code, contains a number of substantive changes to the prior statute and case law. These changes apply to all POAs including those executed before these statutory changes go into effect.

First, it includes presumptions favoring the validity of a POA:

• A POA executed in Texas is valid if it is a writing designating an agent, signed by the principal and notarized.
• A POA executed in another state, is valid if its execution complies with the law of that state.
• A photcopy or faxed or e-mail copy of an original POA has the same effect as the original and may be relied upon without liability.

Second, there can be more agents and more powers delegated to the agent. If the POA names co-agents, they may exercise their authority independently of one another unless the POA states otherwise. Further, the powers of the agent may be expanded. If the POA expressly authorizes the action, the agent has the authority to:

• Create, amend, revoke or terminate an inter vivos trust;
• Make a gift;
• Create or change rights of survivorship;
• Create or change a beneficiary designation on an account (including establishing or changing a POD account or trust account); or
• Delegate authority granted the POA.

If the POA does include these powers, the agent cannot name himself or anyone to whom he owes a legal obligation of support (spouse, child, etc.) as the beneficiary or survivor unless the agent is an ancestor, spouse or descendant of the principal.  (Expect some family disputes on the use of Mom’s funds.)

Third, there may be penalties for failure to honor a POA. A person presented with a power of attorney shall accept the POA or, before accepting the POA, request an agent’s certification (there is a statutory form for this); request an opinion of counsel (there are time limits and procedures for this); or, if applicable, request an English translation of the POA (again, time limits apply.)

Unless one of these conditions applies, a person may refuse to accept the POA only on the following statutory grounds:

• The principal is not already a customer;
• The agent wishes to expand the customer relationship between the principal and the institution;
• Engaging in the particular transaction with the agent or the principal is inconsistent with state law or federal statutes, rules or regulations; a request from a law enforcement agency; or a policy adopted in good faith to comply with state law or federal statutes rules, regulations, guidance or executive order;
• A suspicious activity report (SAR) has been filed with respect to the principal or agent;
• The person has a good faith belief that the principal or agent has a prior criminal history involving financial crimes;
• The person has a previous unsatisfactory relationship with the agent due to or resulting in material loss, financial mismanagement by the agent, litigation between the person and agent;
• The person has actual knowledge of the termination of the agent’s authority;
• The agent refuses to comply with a request for an agent’s certification, opinion of counsel or English translation;
• Regardless of an agent’s certification, opinion of counsel, or translation, the person has a good faith belief that the POA is not valid, the agent does not have authority to act as attempted, or the act would violate the terms of an entity’s governing documents or an agreement affecting a business entity;
• The person has actual knowledge that a judicial proceeding to construe the POA has been commenced and is pending or that a proceeding has ended with the POA being found invalid or that the agent lacks authority for a particular transaction;
• The person makes or has made or has actual knowledge that another has made a report to law enforcement or a state or federal agency stating a good faith belief that the principal is subject to physical or financial abuse (see Elder Financial Abuse below);
• The person receives conflicting instructions from co-agents acting under the same POA;
• The law of the jurisdiction that applies to the POA (an out of state POA) does not require acceptance.

Refusal to accept the POA must be in writing and include the reason(s) for the refusal. For some of the reasons stated above (including a claim that is inconsistent with a request from a law enforcement agency and the filing of an SAR), the refusal must be signed under penalty of perjury stating reasons for the refusal. (Apparently, the drafters were unaware of other statutory and regulatory provisions preventing this disclosure.)

There is a “safe harbor” provision: a person (a bank) is not considered to have actual knowledge of a fact relating to a POA, principal or agent if the employee conducting the transaction does not have actual knowledge of the fact. But there is also a club: a principal or agent may bring a cause of action against a person who refuses to accept a POA. The exclusive remedy is an order compelling the person to accept the POA and an award to the plaintiff of court costs and “reasonable and necessary” attorney’s fees. 

This act may raise to a number of issues for banks: how to monitor the laws of other states; how to reconcile conflicting instructions from co-agents; how time limits in this act affect deadlines in other statutes and regulations; how a bank can disclose the fact of an investigation or that an SAR has been filed when other statutes and regulations forbid this. Expect more to come on this topic.

Elder Financial Abuse – HB 3921

HB 3921 adds a new chapter to the Texas Finance Code addressing financial exploitation of vulnerable adults (i.e., persons 65 years or older and persons with disabilities). New Chapter 280 requires certain internal and external reporting, permits certain notifications to third parties associated with vulnerable adults, allows financial institutions to place temporary holds on accounts related to suspected financial exploitation, and provides financial institutions with immunity from liability arising in connection with certain actions taken under Chapter 280.

Beginning September 1, 2017, a financial institution employee must file an internal report if the employee suspects financial exploitation of a vulnerable adult. The financial institution, itself, is required to investigate each such internal report and submit an external report to the Texas Department of Family and Protective Services (the “DFPS”). The DFPS report must contain certain information and be submitted not later than the earlier of: 1) completion of the financial institution’s assessment of the suspected financial exploitation, or 2) five business days after an employee files an internal report or the financial institution otherwise has cause to believe financial exploitation has occurred. Each financial institution must also adopt internal policies and procedures for complying with the new internal and external reporting requirements.

If a financial institution submits a report to the DFPS, the financial institution is permitted to take additional actions. The financial institution can notify a third party that is “reasonably associated with the vulnerable adult”  about the suspected financial exploitation so long as the third party is not a suspected wrong-doer in connection with the financial exploitation. The financial institution can also place a hold on a transaction that involves the vulnerable adult’s account if the account is believed to relate to the suspected financial exploitation. If the financial institution places a hold, the hold will expire 10 business days after the financial institution submits the report to the DFPS. The financial institution may extend the hold if requested by a state or federal agency or law enforcement or by petitioning and obtaining an order from a court. Financial institutions must adopt policies and procedures for placing a hold on a transaction involving a vulnerable adult’s account.

The new law provides immunity to financial institutions and their employees from liability in connection with notifications, reports, testimony, and participation in judicial proceedings involving suspected financial exploitation of vulnerable adults.

Similar provisions were also added to the Texas Securities Act (Title 19 of the Texas Civil Statutes).

Financial institutions will need to update a number of internal policies and procedures to address these changes. For instance, records retention policies should be updated to include appropriate procedures and retention periods for records relevant to any suspected financial exploitation. Financial institutions will also need to develop new or update existing policies and procedures addressing both internal and external reporting of suspected financial exploitation as well as notifying third parties. Policies and procedures for placing holds on transactions involving vulnerable adults will also need to be developed and implemented.

New Texas Laws Effective January 1, 2018

Home Equity – SJR 60/HJR 99

The home equity bill proposes a constitutional amendment that would do several things. First, the amendment would lower from 3 percent to 2 percent the cap on fees that can be charged to a borrower to initiate a home equity loan, but the amendment would carveout from the cap any fees for appraisals, property surveys, state base premiums, and title exam reports. The new carveout to the 2 percent cap would be especially helpful for smaller loan amounts.

The amendment would also permit a homeowner to refinance a home equity loan into a traditional mortgage so long as certain conditions are met. The refinance must not be closed earlier than one year after the original loan was closed. The refinance must generally not advance any additional funds (one exception is that actual costs and reserves required by the lender to refinance the debt may be included in the refinance). Additionally, the refinance of a home equity loan must not exceed 80 percent of the fair market value of the property. The minimum debit amount on a home equity line of credit remains unchanged; $4,000.

Under the amendment, homestead property that is designated for any type of agricultural use will become eligible for home equity loans. Under current law, property designated for agricultural use is generally not eligible for a home equity loan unless the property is used primarily for milk production.

The amendment would require that a disclosure be provided to a borrower who refinances a home equity line of credit into a traditional mortgage. The disclosure contains specific language about what the applicant is giving up by refinancing to a traditional mortgage. The borrower must be provided with the disclosure not later than the third business day after the refinance application is submitted and at least 12 days before the closing date of the refinance.

Voters will be asked to approve the proposed constitutional amendment November 7, 2017. If approved, the amendment will become effective January 1, 2018.

Electronic Notary – HB 1217

The enactment of HB 1217 makes Texas the latest state to pass legislation providing for electronic notarization. HB 1217 amends the Texas Government Code by authorizing and establishing qualifications for a notary public to be appointed and commissioned as an online notary public.

Online notaries will generally be subject to the same requirements as traditional notaries under current law. The Secretary of State will, however, need to adopt rules for facilitating online notarizations using two-way radio and audio conferencing as well as requirements for submitting an application to the Secretary of State to become an online notary.

The new law provides authority for a notary to perform an online notarization by establishing that an online notary public is a notary public for purposes of Texas laws governing notaries public. The functions that online notaries can perform are not limitless though; under the new law, online notaries public can perform online notarizations only for the following types of documents:

• A document involving real estate located in Texas;
• A document or agreement relating to a transaction in which at least one of the parties is a Texas resident or authorized to conduct business in Texas;
• An agreement or instrument securing a debt that is payable at a location in Texas;
• A document that is intended to be filed in state public records;
• An acknowledgment or affirmation made by a person while the person is physically located in Texas;
• A document signed by a person who is a Texas resident at the time of signing, as evidenced by a valid government-issued identification credential that includes a photograph and current Texas address.

While additional steps must still be taken by the Secretary of State to provide rules for performing online notarizations, this marks a huge step in further facilitating certain electronic transactions, such as electronic mortgages.

If you have any questions about the topics presented in this alert, please contact Erin Fonté (512-703-6318 or efonte@dykema.com), David West (210-554-5277 or dwest@dykema.com), Jaqueline Allen (214-698-7832 or jallen@dykema.com), or your Dykema relationship attorney.