Are New York Car Liens More Vulnerable To Theft?

Are New York car liens more vulnerable to fraud as a result of a new law (Chapter 493 of the Laws of 2012) that will take effect on June 17th ?  At a recent presentation hosted by New York Bankruptcy and Collection Attorney Rudy Meola, whose analysis of this issue provided the impetus for this blog, he said the answer is yes.

For a few years now, dealers have been agitated by the length of time it takes some financial institutions to clear title on used cars that dealers want to resell.  To address this problem, a new law will permit dealers who receive motor vehicles and arranges for the satisfaction of any security interest in these vehicles but for which a release of the security interest has not been issued to send proof to the Department of Motor Vehicles that a car lien has been satisfied.  Dealers must first provide lien holders with two weeks notice.  The Department will have only 15 days after receiving the dealer’s information to issue a clean certificate.  The dealers can satisfy their requirement by providing the DMV with evidence that the security interest has been satisfied such as by submitting evidence of an electronic funds transfer, a cashiers check or “other evidence as determined to be satisfactory by the Commissioner” so long as it is accompanied by evidence that the amount delivered to the lien holder satisfied the outstanding lien.  The strongest protection under the bill for credit unions is that car dealers who apply for the clean liens will be responsible for indemnifying the purchaser and lien holder of the vehicle.

So, if the law works as envisioned those institutions that quickly provide dealers with evidence that a car lien has been satisfied will not face any problems.  After all, dealers would be responsible for them if they get a DMV release and there is still an outstanding lien on the property.  Rudy’s concern is that this protection will not be sufficient to protect against crooks who forge the required dealer documentation and are able to turn around and sell stolen property with clear title.  Under Rudy’s scenario, the indemnification protections would not kick in because a car dealer never requested DMV to issue a new title in the first place.  For all intents and purposes, the credit union would have no realistic means of getting back any money for its unsatisfied car loan.  By the way, it’s a good thing Rudy uses his powers for good instead of evil.  He could cost us all a lot of money if he ever turns to the dark side.

As the law takes effect, we will have to keep an eye out to see if any of the worst case scenarios are realized.  In the meantime, the law underscores the importance of quickly releasing liens on car loans that have been satisfied.  I’ll be driving down to God’s country, aka Long Island, in my second-hand vehicle tomorrow on which one of our local credit unions holds the lien.  That means I’ll be back on Tuesday with another blog.

Another Drilling Roadblock?

Last week, another roadblock was put in the way of the State’s authorization of the use of high-powered hydraulic fracturing to mine natural gas in New York’s Southern Tier.  In the matter of Norse Energy Corp. USA v. Town of Dryden, New York’s Appellate Division, Third Department, which includes Albany and therefore has jurisdiction over many issues dealing with government powers, upheld a decision that individual towns could effectively ban hydraulic fracturing.  The case was brought by, among others, a mining company that had leased 22,000 acres of property in anticipation of the State approving the hydrofracking technique.

The case was brought after the Town of Dryden passed a local ordinance in 2011 banning all activities related to the exploration, production and storage of natural gas.  The decision is just the latest set back for applicants of drilling authorization.  With or without the Court’s ruling, no drilling can take place unless it is approved by the State’s Department of Environmental Conservation and the DEC’s review process has dragged on longer than anyone anticipated with no indication that it is going to end soon.  In fact, the Governor has shown about as much enthusiasm for approving hydraulic fracturing lately as a mother going to Chuck E. Cheese to celebrate Mother’s Day.

I’ve pointed out in previous blogs that credit unions, particularly in the Southern Tier, but ultimately in any area where gas drilling could take place, have a stake in monitoring the outcome of this debate.  Whether you are for or against hydrofracking, until we know for sure what impact the presence of drilling leases will have on the sale of mortgages to the secondary market, credit unions should take steps to ensure that their mortgage contracts adequately protect their right to approve or disapprove of any leases that a member may wish to enter into, just to cite one example.

In addition, while the ruling is certainly a set back, it may actually provide a pathway for the state to approve hydraulic fracturing in those communities that want it.  By giving localities the power to ban hydrofracking if they choose to, state regulators can now be assured that the process is only utilized in those communities that want it, which could help politicians looking for the best way to resolve this issue.

More Legal Trapdoors For Employers Looking To Hire

What should you be able to ask a potential employee during a job interview? Are there certain jobs for which inquiring about someone’s employment status is reasonable and others where it isn’t? Recently enacted legislation by the New York City Council as well as other proposal floating around at both the state and national level underscore that if some legislators have their way, you are going to need a lawyer in the room when interviewing prospective job applicants.

Exhibit one is a local law passed by the New York City Council over the veto of Mayor Michael Bloomberg, who actually has extensive experience in hiring people in the private sector. This law makes it unlawful for an employer to discriminate based on a job applicant’s employment status. The ordinance not only prohibits, with certain exceptions, an employer from publishing job postings listing current employment as a requirement for the job, but creates a private right of action and empowers the city to impose hefty fines on employers who violate these provisions. Employers are still allowed to inquire about a person’s employment status but if they do so the burden is on them to show why it is reasonable to be asking such questions in the first place. Remember, only our brethren based in New York City must comply with this new requirement. But, as anyone who attended our yearly walk-around the state capitol yesterday may have sensed, New York City carries a lot of weight in the legislature and proposals like this often end up being debated at the state level.

A second proposal being considered by the Council has a little more traction nationally. Recently, the Council held a hearing on a proposal banning the use of credit reports as part of the hiring process. A similar proposal has been introduced both in Congress and in the state legislature. The Fair Credit Reporting Act already mandates that applicants be put on notice when their credit reports are going to be reviewed as part of an employer’s due diligence. In expressing opposition to the proposal, a representative from the Bloomberg Administration pointed out that unlike similar proposals that have been enacted in states and localities across the country, the Council’s proposal makes no exception for credit unions, banks and other financial institutions for whom a job applicant’s ability to handle money is certainly something worth considering before making an offer.

Against the backdrop of the persistently high unemployment rates we are experiencing, proponents of these measures argue that disqualifying someone from job consideration due to their unemployment is, like racial characteristics, another example of disqualifying someone based on attributes over which they have no control. The problem with this logic is that it categorically assumes that employers discriminate against job applicants. This conveniently overlooks the fact that there are many situations where someone’s credit report or employment status is relevant, particularly when you are trying to whittle down a field of more than one qualified applicant. Furthermore, one of the reasons why this country is so much more productive on a per capita basis than every other nation in the world (including China) is because we try not to make it too expensive to hire and fire people. The more well intended legislators place legalistic straight jackets on what can and can’t be considered when making determinations, the more expensive it’s going to be to hire anyone, and that is bad news for the unemployed.

Updated: New York’s Levy And Restraint Laws: The Gift That Keeps On Giving

I’m updating this morning’s blog to clarify that the inflation adjusted amount of funds that the state now changes every three years only applies to exempt funds  that have been deposited electronically or by direct deposit within the last 45 days.  The threshold for this exemption was originally set at $2,500.  I don’t want to make a confusing statute even worse.

 New York’s levy and restraint laws involve, in the words of Nassau County District Court Judge Fred J. Hirsh, ”complex and convoluted practices and procedures to determine if funds on deposit in a judgment debtors bank account are exempt from execution pursuant to CPLR 5222-a.”  Because of pending changes to New York’s minimum wage law and a case to be decided by New York’s Court of Appeals, this statutory framework, which judging by the number of calls to the Association’s compliance hotline is among the most vexing state-level requirements, is about to get another turn in the spotlight.

Although I suspect that most of the New York readers of this blog already know this, remember that under New York law a statutorily prescribed minimum amount of funds is automatically exempt from levy and restraint.  This amount is adjusted for inflation every three years and now stands at a hefty $2,625 for statutorily exempt payments that were deposited electronically or by direct deposit within the last forty-five days, 
In addition, when a judgment creditor seeks to restrain or levy an account it must give the credit union exemption claim forms that are passed on to the member.  The failure to provide such forms makes the levy or restraint void, meaning it is not to be honored.

What happens when a financial institution mistakenly honors a restraining notice that should actually have been ignored because the member did not have money in the account above the statutory threshold or didn’t receive the exemption claim form?  Can the bank or credit union be sued?  If so, can the suit be part of a class action lawsuit seeking damages for the illegal practices or is the member constrained by a special proceeding?  Recently, the Court of Appeals for the Second Circuit certified these questions to New York’s highest court, its Court of Appeals.

You see, federal courts are only supposed to interpret and impose well settled state law.  In Cruz v. TD Bank, NA, account holders are trying to start class action lawsuits alleging that banks can be sued when they wrongly impose restraints on accounts that don’t contain money in excess of the statutory threshold.  Another case involving Capital One alleges that the bank restrained funds on an account below the statutory threshold.

I know credit unions continue to make a good faith effort to comply with the statute, but in my ever so humble opinion, the statute clearly protects financial institutions that make honest mistakes in implementing this Rube Goldberg contraption intended to protect debtors who have legally binding judgments against them.  Let’s hope the Court of Appeals doesn’t expand the potential scope of liability in an area of the law that already imposes too much cost on credit unions on a daily basis.

New York’s new state budget will also have an impact on levy and restraints.  The Legislature and the Governor agreed to raise the state’s minimum wage from $7.25 to $9 an hour over the next three years, beginning with an increase to $8 by the end of 2013.  The minimum amount of money exempted from levy and restraint is equal to the higher of 240 times the federal or state minimum wage “in effect at the time the earnings are payable.”  This means that not only will the exemption be going up, but because it will be going up in stages, whoever handles your levy and restraints is going to have to be cognizant of when the wage increases kick in.  Hopefully this is something that New York’s Department of Financial Services will provide notice of on its website.

New York’s Levy And Restraint Laws: The Gift That Keeps On Giving

New York’s levy and restraint laws involve, in the words of Nassau County District Court Judge Fred J. Hirsh, ”complex and convoluted practices and procedures to determine if funds on deposit in a judgment debtors bank account are exempt from execution pursuant to CPLR 5222-a.”  Because of pending changes to New York’s minimum wage law and a case to be decided by New York’s Court of Appeals, this statutory framework, which judging by the number of calls to the Association’s compliance hotline is among the most vexing state-level requirements, is about to get another turn in the spotlight.

Although I suspect that most of the New York readers of this blog already know this, remember that under New York law a statutorily prescribed minimum amount of funds is automatically exempt from levy and restraint.  This amount is adjusted for inflation every three years and now stands at a hefty $2,625 for .statutorily exempt payments that were deposited electronically or by direct deposit within the last forty-five days, 
  In addition, when a judgment creditor seeks to restrain or levy an account it must give the credit union exemption claim forms that are passed on to the member.  The failure to provide such forms makes the levy or restraint void, meaning it is not to be honored.

What happens when a financial institution mistakenly honors a restraining notice that should actually have been ignored because the member did not have money in the account above the statutory threshold or didn’t receive the exemption claim form?  Can the bank or credit union be sued?  If so, can the suit be part of a class action lawsuit seeking damages for the illegal practices or is the member constrained by a special proceeding?  Recently, the Court of Appeals for the Second Circuit certified these questions to New York’s highest court, its Court of Appeals.

You see, federal courts are only supposed to interpret and impose well settled state law.  In Cruz v. TD Bank, NA, account holders are trying to start class action lawsuits alleging that banks can be sued when they wrongly impose restraints on accounts that don’t contain money in excess of the statutory threshold.  Another case involving Capital One alleges that the bank restrained funds on an account below the statutory threshold.

I know credit unions continue to make a good faith effort to comply with the statute, but in my ever so humble opinion, the statute clearly protects financial institutions that make honest mistakes in implementing this Rube Goldberg contraption intended to protect debtors who have legally binding judgments against them.  Let’s hope the Court of Appeals doesn’t expand the potential scope of liability in an area of the law that already imposes too much cost on credit unions on a daily basis.

New York’s new state budget will also have an impact on levy and restraints.  The Legislature and the Governor agreed to raise the state’s minimum wage from $7.25 to $9 an hour over the next three years, beginning with an increase to $8 by the end of 2013.  The minimum amount of money exempted from levy and restraint is equal to the higher of 240 times the federal or state minimum wage “in effect at the time the earnings are payable.”  This means that not only will the exemption be going up, but because it will be going up in stages, whoever handles your levy and restraints is going to have to be cognizant of when the wage increases kick in.  Hopefully this is something that New York’s Department of Financial Services will provide notice of on its website.

Did NCUA Do Its Due Diligence?

Well, it was 41 degrees and pouring in Pinehurst, North Carolina yesterday which means that if you were looking for an early season round of golf, you’d have been better off heading to Albany, NY where it was a balmy and sunny 46 degrees.  All in all, it is the type of weather ideal for getting stuff off your chest before the weekend rather than waiting until Monday.  Plus, I want to see if I can get a post out before another New York politician is indicted.  So here it goes.

Imagine your credit union had to retain a counsel to prosecute a major lawsuit involving millions of dollars.  Considering the amount of money at stake, you won’t have any trouble finding lawyers interested in taking the case.  How many lawyers should you interview?  Should your General Counsel interview only the two law firms you decide to retain?  Hopefully your answer to the last question is no.  In my ever so humble opinion, due diligence requires a thorough vetting process when important litigation is going to take place and that means interviewing several qualified firms.

The reason why I am bringing this up now is because earlier this week NCUA announced that it has now obtained $355 million in settlements against those banks that have chosen to settle lawsuits brought against them by the agency alleging that the banks knowingly peddled sub-par securities to corporate credit unions that ultimately went bankrupt.  What NCUA neglected to mention in its press release is that approximately 25% of the money will be given over to the law firms handling the litigation as part of a contingency fee arrangement.  This arrangement never bothered me and when NCUA’s Inspector General looked into the issue at the urging of Congressman Darryl Issa it was given a thumbs up.  However, in the same letter to the Congressman detailing NCUA’s arrangement, the IG also explained that NCUA didn’t follow its own procedures with regard to retaining lawyers for litigation in excess of $150,000.

NCUA’s procedures recommend that the Office of General Counsel interview at least three firms and advise that when this procedure is not used NCUA prepare a written memo explaining the reasons why.  Neither of these steps were followed and I find this a real head-scratcher.  After all, there is not a top flight firm in the country that wouldn’t have been willing to quickly make a pitch for work potentially worth hundreds of millions of dollars.

I am not questioning the quality of the firms ultimately retained by NCUA but when NCUA retained these firms, it was making a decision that could potentially impact the bottom line of every credit union in the country.  When issues like this arise in the future, and unfortunately they will, credit unions should expect more  due diligence from the agency.  On that note, have a nice weekend and I’ll blog to you from warm and toasty Albany Monday morning.

Is Bluebird A Vulture in Disguise?

Is the news yesterday that AMEX will now be providing deposit insurance on its prepaid reloadable cards a game changer that poses yet another threat to the credit union way of doing business or simply yet another example of the need to remain ultracompetitive with your banking products in a financial service sector already transformed by technology?  I don’t know the answer, but if I was running a credit union, it’s a question I would be asking this morning.

Bluebird is the prepaid store-bought card launched by American Express in October 2012.  What makes it such an intriguing product, beyond the credibility of its corporate creator (would you be more likely to buy a financial product from Kim Kardashian or American Express?), is that it is distributed in WalMart stores.  WalMart has graciously agreed to reload the cards on behalf of users, which means that a person using this prepaid card never has to go into a credit union, or bank for that matter, to cash checks or pay bills; in short, the type of things which cause people to go into financial institutions in the first place.

By announcing that it was already shifting its publicly stated business plan not to apply for federal deposit insurance, the corporation clearly feels that reloadable prepaid cards are going to be more than niche products bought on a whim on a visit to a retail store and in fact an acceptable way for consumers to conduct their business.  The seeds for yesterday’s decision were formed quietly in a 2008 legal opinion by the FDIC in which it overruled a previous interpretation and held that prepaid storage cards could be eligible for share insurance if, among other things, the money held on the cards could be traced to a specific consumer and was ultimately held by a bank.  In other words, for FDIC purposes, its function rather than its format matters when it comes to determining whether a prepaid card is a bank account in a person’s wallet.

The best argument that I can see against worrying too much about prepaid cards is that the business model simply isn’t sustainable.  Some believe these are nothing more than glorified checking accounts that are dependent on fee-income at a time when fees are under attack.  In any event, at some point a prepaid card consumer is going to want to get a mortgage, get a car or pay for college.  To me, this argument misses the point.  As the stigma against prepaid cards wanes, there is nothing to stop the Bluebirds of today from offering expanded banking services tomorrow, tapping into the same group of working class and young members who enjoy not having to step into a branch, let alone become a member of something called a credit union.

On that happy note, as they say in Disney, have a magical day.

Indirect Lending Limits

In Friday’s blog, I talked about unintentional discrimination in mortgage lending.  Now that I have read the CFPB’s recent guidance on indirect automobile lending and its potential to violate the Equal Credit Opportunity Act, I figure this is as good a Monday as any to remind credit unions of some of the special risks associated with indirect automobile lending programs.

In its guidance released on Thursday the CFPB asserted that policies that allow auto dealers to mark up lender established buy rates and that compensate dealers for so doing pose a significant risk of violating the Equal Credit Opportunity Act by creating pricing disparities on the basis of race, national origin and other potentially prohibited bases.  The analogies between CFPB’s concerns about indirect auto lending and HUD’s concerns about mortgage practices that could potentially violate the Fair Housing Act are clear.

For example, in an indirect lending program, a lender may indicate at what rate it is going to purchase a loan but give the auto dealer the authority to negotiate a higher rate.  However, just as in the case of mortgage lending, simply because a lender is exercising discretion on a case by case basis, it isn’t shielded from discrimination liability if in exercising that discretion the effect is higher rates for minority customers or other groups protected by law.

First, some practical compliance advice.  From a credit union perspective, nothing in this guidance surprises me.  NCUA has expressed compliance concerns with indirect lending programs for several years.  Your contracts should specify what party is going to do the ultimate underwriting and that such lending should be done in conformity with the Equal Credit Opportunity Act.  In addition, when you enter into an indirect lending relationship, the credit union is still the institution ultimately responsible for ensuring that the car borrower is eligible for membership in your credit union and that appropriate Bank Secrecy Act protocols have been followed.  These are not the type of concerns that are going to be on the top of the list of your local car dealer.  To the extent you don’t exercise this oversight, you are putting your credit union’s reputation in jeopardy and running afoul not only of various regulations, but of NCUA’s due diligence guidance.  Bottom line:  there is nothing in this guidance which should surprise credit unions or cause a shift in their existing procedures if they have already been doing things properly.

However, in its press release, the National Automobile Dealers Association lays the groundwork for legally challenging the guidance.  First, it argues that CFPB doesn’t have adequate research to back up its assertion that indirect lending practices are violating the Equal Credit Opportunity Act.  Second, it argues that the CFPB should have worked with both the Federal Trade Commission and the Federal Reserve Board before imposing a guidance on the industry.  This cleverly subtle press release is a warning shot that litigation may soon follow.  As I said on Friday, disparate impact litigation may be the next big legal issue.

Unsealed Gas Drilling Settlement Underscores Need For CU Vigilence

As readers of this blog will know, I have consistently urged credit unions in areas where members are being asked to lease property to hydro-fracking companies to take steps to protect the value of their mortgage collateral.  Recently, documents unsealed by a Pennsylvania court involving drilling on the Pennsylvania side of the Marcellus Shale demonstrates precisely why this is so important.

Earlier this week, a judge unsealed a settlement between a Pennsylvania family and Marcellus Shale development companies.  The $750,000 settlement, which the companies wanted to keep confidential, stemmed from allegations that the family’s property was made worthless and they suffered health problems as a result of drilling, which took place on adjacent property.  According to the Wall Street Journal, a lawsuit technically was never filed and as part of the settlement the family also agreed that any future health claims would be settled through arbitration.

Now, I have no idea about the underlying merits of the claims, but I do know that for those of you who don’t think drilling could have consequences for your lending practice, the settlement underscores yet again why this type of thinking is just plain wrong.  As the months turn into years, it’s possible that Governor Cuomo will never lift New York’s moratorium on high-powered hydro-fracking, but if he does, it will be too late to do anything about the leases that your members have already granted.

With that backdrop in mind, the case demonstrates the need for appraisers who are skilled in assessing the impact that gas drilling may have on property values in a given area.  Remember, the people who settled in this case didn’t even have gas drilling taking place on their own property, but their property value was impacted by the activity nonetheless.

Also, as the holder of the mortgage, the credit union has to give itself a seat at the table in any lease negotiations.  At the very least, members should be put on notice that any agreement to enter into a gas drilling lease requires the approval of the credit union.  If you do find yourself reviewing a lease agreement, there are further stipulations you can try to negotiate including making sure that the mortgage is one of the first things paid off with any gas drilling royalties.

Finally, the big question remains:  will Fannie and Freddie be willing to accept mortgages that are subject to gas leases as an acceptable exception to title?  Remember that hydro-fracking has been taking place across the country and I haven’t been able to find a single recorded case of Fannie or Freddie refusing to take a mortgage.  In addition, my brethren in Pennsylvania haven’t had any issues with the GSE’s yet.  But, when you start hearing about out-of-court settlements involving several hundred thousand dollars, it is hard to believe that this won’t at least raise some eyebrows in the secondary market community.  Remember that even if a mortgage is sold to Fannie and Freddie, they are typically going to have the right to make a lender repurchase property that is subject to environmental hazards.

NYS Budget Close to Done

If press reports are accurate, legislators could be voting on budget bills to enact the 2013-2014 State Budget by Sunday or early Monday.  The unofficial deadline is Passover.  The budget deal calls for a little more than $135 billion in spending.  If all goes according to plan, the Legislature will be taking three weeks off, meaning that everyone will be good and refreshed for our upcoming Government Affairs Conference.

Can A Qualified Mortgage Violate the Law?

NCUA announced this week that it will be hosting a Fair Housing Webinar on April 4.  It has also come out with an industry letter addressing the issue.  Needless to say, housing policy is getting a lot of scrutiny and here’s a reason why.  The first thing any compliance officer learns about lending is that credit unions and banks are legally prohibited not only from making loans that intentionally discriminate against an individual, but also from implementing policies and practices that have the effect of discriminating against a person on an illegal basis, such as the person’s sex, race  or age.

The interesting thing is that a plain reading of the Fair Housing Act (FHA) does not speak of outlawing policies that have the unintentional effect of disproportionately impacting a protected group.  HUD, however, has interpreted the statute this way and by and large the courts have agreed.  So why in February did it promulgate regulations that it says simply codifies existing disparate impact regulations?  In other words, HUD proposed a regulation not to change existing law but to summarize existing law, which it argues, is well settled.  Now, as I like to say, lawyers are paid to be paranoids, but, as Henry Kissinger liked to say even paranoids have enemies.  Something fishy is going on here.

There’s been growing legal analysis lately of a very intriguing question:  can a bank or credit union have a policy of only providing qualified mortgages under the Dodd-Frank Act, which are supposed to be given a “safe harbor” from legal action and still violate HUD’s interpretation of the FHA.  The answer, judging by HUD’s response in the preamble to its regulations, seems to be maybe.  Specifically, during the comment period to HUD’s new regulation, lenders complying with the new Dodd-Frank mortgage requirements questioned whether they will face increased liability as a result of HUD’s interpretation of disparate impact regulations.  The working assumption is that a lending institution that decides simply to provide qualified mortgages may disproportionately impact minority groups that are less likely to meet the stricter underwriting standards.

HUD’s response is not reassuring.  HUD reiterated that a lender is free to defend any allegations of illegal discriminatory effects by meeting its burden of proof demonstrating that there is a legally sufficient justification for its underwriting standards.  It goes on to repeatedly state that nothing has really changed, although it does think that lenders should review their internal lending policies explaining that it hopes its new rule will encourage lenders, who already have analyzed the impact that their policies have on lending decisions, to “review those analyses in light of its new regulations.”

Here’s the problem.  Lenders meeting qualified mortgage standards are not supposed to have a burden of proof imposed on them.  By pointing out lenders are free to meet their burden of proof to demonstrate why a lending policy is legally sufficient, HUD seems to be suggesting that a qualified mortgage policy will still have to be justified where borrowers can show that it has a discriminatory impact on mortgage lending.  So much for the safe harbor.

To be fair, some people argue that this analysis is nonsense.  This is no different than existing law, they argue, where lenders have always had the burden of justifying policies that do have a negative impact on minority groups.  Plus, if Fannie and Freddie are willing to buy a mortgage, it is going to be considered a qualified mortgage, so what’s the big deal.  First, prior to Dodd-Frank, there has never been a federally mandated underwriting standard intended to apply to all mortgages and no lending institution should strive to comply with those standards only to be sued for meeting them.

Second, don’t be so sure that Fannie and Freddie’s underwriting standards won’t face legal scrutiny.  HUD has moved in the past to work with the GSEs when it felt their policies were hurting minorities and lending advocates would presumably be more than willing to do so in the future.