Posts filed under ‘Legal Watch’
When Congress passed the Telephone Consumer Protection Act (TCPA) in 1991, a smart phone was an oxymoron and automated recordings were as grating as fingernails running across a chalkboard. Fast forward to the Siri world of 2013. Even though it was intended to protect consumers from being inundated with automated solicitations, it is now emerging as the latest legal speedtrap used by plaintiff’s lawyers willing to nickel and dime businesses that have the audacity to try to collect on a debt owed them.
If you think this is an exaggeration you might be interested in knowing that Bank of America agreed to a $32 million settlement for alleged violations of the TCPA, and that a recent decision by the federal Court of Appeals for the Third Circuit, if followed by other courts, will make the TCPA into another one of those nettlesome consumer protection statutes that marginally benefit consumers and make compliance more expensive, but help plaintiff lawyers send their kids to college.
First, everything I’m talking about just applies to the use of automated phone calls. If you just reach out and touch your debtors the old fashioned way, the TCPA doesn’t apply to you. Plus, the prohibitions I’m talking about don’t apply to informational phone calls. So the recorded message I just listened to reminding me of an upcoming doctor’s appointment aren’t affected by the statute, nor would a phone call to a member informing them of a low account balance or suspicious credit card activity.
The TCPA makes it unlawful for any person to make any call using any automated telephone system or artificial or pre-recorded voice to any land line phone, cell phone or pager (remember when pagers were cutting edge technology?). The prohibition does not apply to consumers who have voluntarily consented to receive phone calls from businesses by, for example, giving a credit union their land line telephone number when they open an account. The FCC has interpreted the statute as putting the burden on the business making a phone call to prove that the consumer has consented to be called. Violators can be slapped with statutory damages equal to $500 for every single negligent violation of the statute or $1,500 for every willful violation of its provisions.
In mid October, regulations took effect which are important to your marketing department if you ever plan on sending out one of those obnoxious autodialer advertisements. Most importantly, members must now provide clear and conspicuous consent to receive autodialed marketing pitches. This means that simply getting a member to give you his or her telephone number as part of the account opening process is no longer adequate to demonstrate your compliance with the law. Instead, there has to be a written consent on the part of the member. If you get this consent either with an in-person signature or in conformity with the E-Sign Act, you can rest easy.
Everything I’ve said clearly applies to members who provide you with a traditional land line number. But what happens if the member gives you a cell phone number instead? Here’s where the courts are beginning to make things a little dicey. First, in that Bank of America settlement referred to above, the Bank decided to settle a class action in which the plaintiffs contended that the Bank or its agents “illegally contacted” debtors via their cell phone with a pre-recorded message. In other words, the fact that Bank of America was willing to settle is an indication that there are special risks when reaching out to someone’s cell phone and this is why you are beginning to see lawsuits in which alleged violations of the federal Fair Debt Collections Practices Act are coupled with allegations of TCPA violations.
Another troubling example of this trend is Gager v. Dell Financial Services, in which a delinquent debtor claimed that the company was violating the TCPA by continuing to send pre-recorded messages to her cell after she told the company she no longer wanted to be contacted. The company pointed out that she had previously consented to being called but the Court ruled that this consent could be withdrawn at anytime and that the exception for robo-dialing members with whom you have an established relationship only applied to land line phones.
If you are in Third Circuit’s jurisdiction your credit union has fewer collection options for the consumer who relies on her cell phone as compared to the consumer who continues to cling to the increasingly antiquated land-line phone. The good news is that this ruling is inconsistent with at least two New York federal court rulings, which have held that the TCPA doesn’t give consumers the right to revoke automated phone calls. Unfortunately, the FCC’s regulations didn’t address the issue of if and when a member can revoke prior consent. However, the preamble material clearly strengthens the argument that the existing business relationship exception does not apply to cell phone usage.
This is one of those arcane areas of law where mistakes are both easy to make and easy to avoid. If your credit union contracts with third party debt collectors, I would reach out to them and see what precautions if any they are taking to make sure they don’t get tripped up by the TCPA.
Since the CFPB unveiled its Qualified Mortgage regulations that take effect in January, a once esoteric question obsessed over by legal geeks has been the following: can a lending institution exclusively provide mortgages that constitute Qualified Mortgages under the CFPB’s regulations and violate fair lending laws? Yesterday, several agencies, including the NCUA, answered this question with a qualified no, but their guidance underscores why fair lending laws are going to be a prominent area for compliance officers and lawyers in the months and years to come.
Since many of you read this blog when you get to work and have not yet finished your second cup of coffee, I’ll provide you a quick primer on the QM ability to repay distinction one last time (promises, promises). All mortgages must now be granted only after the lender can document why the borrower has the ability to repay the mortgage loan. While so-called ATR mortgages receive no special legal protections in the event that a borrower contests a foreclosure, so long as the credit union can document that it has taken basic underwriting criteria into account, the credit union will be on solid legal ground. In contrast, qualified mortgages are mortgages that meet specific criteria outlined by the regulations. For example, to be a QM a borrower must have a maximum debt to income ratio of 43%, points and fees that generally exceed no more than 3% of the mortgage loan (although this varies depending on the size of the mortgage), or be eligible for sale to Fannie or Freddie. QM mortgages receive important legal protections, at least in theory, for which ATR mortgages do not qualify. If the system works as envisioned, a delinquent home buyer will have no defense to a foreclosure on a documented QM mortgage.
Which brings us to the nub of today’s blog. The Equal Credit Opportunity Act outlaws credit practices and procedures that have the effect, whether or not intended, of disproportionately impacting people on the basis of, among other things, race, sex, national origin and age. Now, let’s say you’re a bank or credit union that decides that the best way to comply with all these new Dodd-Frank requirements is to just make QM mortgages. The simple truth is that this policy shift would have a disparate impact on minority groups since the more stringent criteria puts groups of people who have, in the aggregate, less financial means at a disadvantage. Will lending institutions be violating the law by shifting to QM only mortgages? At least according to this group of regulators, the answer is probably not. Specifically, the guidance provides as follows: “the Bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable to the borrower. Nevertheless, the agencies recognize that some creditors might be inclined to originate all or predominantly Qualified Mortgages, particularly when the Ability to Repay rule first takes effect.”
This is great language, but as with almost all things legal, it comes with the type of twist that helps keep people hooked on attorneys and compliance officers. In almost a throw-away line in the memo, the agencies state that they “believe” that the same principles apply to the Fair Housing Act, another federal law that outlaws housing discrimination more broadly than does the Equal Credit Opportunity Act.
Why the hesitation? For one thing, the Supreme Court will be hearing a case later this term in which it will decide whether disparate impact analysis is even authorized under the Fair Housing Act. In addition, the FHA has independent authority to interpret the Fair Housing Act and it, noticeably, did not sign off on this memo. This is particularly important since the FHA has highlighted the continuing importance of disparate impact analysis by promulgating regulations on this issue earlier this year. This raises the very real possibility that while one set of regulators will be sanctioning QM loans, another regulator will seek to discourage their use, at least when such practices have the impact of depressing home ownership for protected classes.
I’ll be blogging more about this in the future. In the meantime, have a nice day.
As readers of this blog and those credit unions unfortunate enough to get caught in the cross fire know, the state has taken aim against pay day lenders who provide loans to New Yorkers. Specifically, in early August it sent out cease and desist letters to 32 Internet pay day lenders; criticized NACHA rules for not enabling institutions to do more to block the processing of pay day loans; and sent a letter to 117 institutions, including credit unions, strongly urging them to assist the state’s efforts in curtailing pay day lending activity.
Among the pay day lenders subject to the state’s wrath were Indian Tribes based in Michigan and Oklahoma. These tribes have sued the state claiming that its activities interfere with their sovereignty.
Round One of what may end up being a very protracted legal dispute went to the state. For those of you who like boxing, the fight is not over yet, but let’s say the Indian Tribes certainly received a standing eight count. In The Otoe-Missouria Tribe of Indians, et al v. NYS Department of Financial Services, et al, the Tribes sought to get a preliminary injunction blocking the state from further interference with its payday lending activity. As a general rule, preliminary injunctions are granted to parties who can show that they are likely to win in a lawsuit and are being harmed by the ongoing activity over which they are suing. The issue comes down to whether or not Internet activity takes place on Indian land. It is pretty well settled that activities taking place wholly on Indian reservations are exempt from state law unless Congress says otherwise. The Indian tribes argued that they own and control the websites through which the payday loans are offered and that consumers are clearly informed that payday loans are subject to tribal law.
In its ruling, the Court said that none of this mattered since “consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds, or repay those proceeds with interest.” The Court concluded that consumers “have not in any legally meaningful sense travelled to tribal land.” New York State can regulate this off-reservation activity.
The decision still leaves credit unions and other financial institutions whose members receive pay day loan proceeds via ACH transactions (so called ”receiving depository financial institutions”) in a legal grey area. Simply put, it is still not realistic to expect RDFIs to monitor where a specific electronic transaction originated and if it is legal in that given jurisdiction. If any changes are to be made, the onus has to be placed on the institution originating the requested money transfer since that institution is in the best position to know if the activity being triggered is lawful. However, the decision does strengthen the state’s hand as it seeks to clamp down on Internet payday lenders.
Perhaps the best thing about this weekend for Giants fans is that we aren’t obligated to sit through three hours of losing football on Sunday. We already got that out of our system last night. There’s always hockey season and basketball is right around the corner. Your faithful blogger is taking some time off next week, but I should be back before week’s end. In the meantime, let’s hope common sense prevails and that most politicians realize, like my four year old already does, that defaulting on debt payments is a BAD thing to do.
I have two thoughts this morning. First, however much the merchants are paying their lawyers, it’s worth it, and my General Tsao’s Chicken just got more expensive.
On Friday, a federal district court in Manhattan struck down New York’s law prohibiting retailers from charging surcharges on credit card purchases (see Expressions Hair Design et al v. Schneiderman, No. 13 Civ. 3775 (JSR), Oct. 3, 2013). New York is one of ten states that restrict such charges. Prior to last year, the statute wasn’t all that important because surcharge bans were included in the standard merchant contract between merchants and VISA and MasterCard. Following last year’s anti-trust settlement under which Visa and MasterCard agreed to do away with this provision, a group of retailers brought a suit claiming, among other things, that the statute violated the first amendment.
The offending statute, which has been in place since 1984, provides as follows: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.” – See NYS General Business Law, section 518.
According to the judge, this statute is unconstitutional and vague and keeps retailers from explaining to consumers the true costs related to a transaction. For example, the existing law already permits retailers to offer discounts for individuals who pay in cash. This is why gas station owners consistently offer lower prices for people who pay in currency as opposed to a charge card. The crux of what the judge contends is wrong with what he describes as an “Alice in Wonderland” piece of legislation is that a gasoline station owner careful or sophisticated enough to always characterize the lower prices as a discount for cash is not violating any provision of the law; but if a colleague down the street described the higher price as a credit card surcharge, he has violated the law.
To the Judge, the distinction between a surcharge and a discount comes down to semantics. Very respectfully speaking, in my ever so humble opinion, semantics matter. As explained by the Oxford American Dictionary, a surcharge is “an additional charge or payment from: retailers will be able to surcharge credit-card users.” Let’s be honest, the language clearly does matter as merchants have been trying for more than 3 1/2 decades now to remove bans on surcharges, first on the federal level and now on the state level. If the New York State Legislature wants to deter discrimination against credit card users by prohibiting the use of credit card surcharges, it is free to do so and the language is well understood. The fact that from an economic standpoint there is little practical distinction between a discount and a surcharge is irrelevant to the statute’s legality.
I hope this is one the AG is going to appeal. As for my General Tsao’s chicken, when my blog, like this one, takes a little too long to write and I go out for lunch instead of relying on leftovers, I go to a Mom and Pop Chinese place down the street run by a nice couple that for years has deterred me from using my credit card by charging two dollars every time I use a card to pay. I doubt they knew they were violating the law, but now that a federal judge has told them that their free speech rights were being violated by not being able to gauge me, they can breathe a little easier.
Here is my government shut-down quote of the day from Long Island House Representative Peter King:
“I don’t consider these guys conservatives. I think the party is going in an isolationist trend. It’s appealing to the lowest common denominator in many ways. And this whole threat of defunding the government, to me, is not conservative at all,” said King, who added later: “Maybe we do live in different worlds. These guys from the Ted Cruz wing live in their own echo chamber.”
This week marked the latest consumer frenzy accompanying the release of what feels like the twentieth version of the iPhone. Whereas many of you may enjoy the sight of adults arriving at work with the eagerness of children going to school the day after their birthday to show off their newest toys, I am unabashedly part of a profession dedicated to protecting people against their over-exhuberance. So, remember that every time your employee brings a new portable device to work, it raises important issues related to data protection that are particularly important for financial institutions to remember.
Surveys indicate that the vast majority of companies authorize employees to bring their own devices into the workplace (so called BYOD policies) as opposed to buying the gadgets for work use only. Let’s be honest, an office that doesn’t have a WiFi hookup, let alone let their employees keep up with their “Facebook friends” during downtimes may be doing the right thing on paper, but isn’t exactly creating the type of environment to attract the best and the brightest, at least if they’re under 40.
But, as Pedro Pavon points out in an excellent article in the September issue of the ABA’s Business Law Today Journal, “BYOD policy presents companies with a myriad of risks and challenges . . .” Lawyers advising clients need to emphasize that “the biggest risk with BYOD is data loss.” I think this is particularly true of financial institutions irrespective of your size. The line between work and home blurs every time an employee responds to an after work email; stores a password on his or her smartphone; or forwards a document to a co-worker while on the way to work. Ask yourself a simple question: if one of your employees misplaces her cell phone today, what information could a hacker have access to tomorrow? If you don’t know the answer, or you do know the answer but think there is nothing you can do about it, then it is time to sit down with your IT people and your policy drafter and get to work.
According to the article, one option is to use technology specifically designed to monitor mobile hardware. The software will, for example, allow you to wipe the data off a smart phone and track a smartphone’s whereabouts. You could also mandate the use of PINS on someone’s personal smartphone. The problem with all of this, of course, is that the company is seeking to take control of someone’s personal device. When you wipe my cell phone clean and I find it in the laundry pile the next day, I am going to be less than amused that I have to reconstruct the contact list from my poker group just because my employer is justifiably paranoid. The best bit of advice from Pavon is that as companies acquire tracking software and develop policies, employees are told exactly what information and capabilities employers want to give themselves in return for allowing employees to bring their own devices.
A second piece of the puzzle is that employers responsible for monitoring smart phone usage know exactly where the company’s legitimate need to monitor employee technology cross the line from legitimate work purposes to voyeurism. This line won’t always be easy to figure out, but having everyone buy in to not only the use of technology in the workplace, but the need for legitimate protections from data breach are the crucial first step that none of you should put off.
Late yesterday evening, NCUA demonstrated yet again how aggressive it is willing to get in trying to recoup credit union losses caused by the actions of the banking industry during the financial crisis. It is suing the banks and the British Banking Association, which administered the LIBOR alleging that they conspired to manipulate interest rates and that this manipulation harmed credit unions including WestCorp, US Central and Members United.
LIBOR is supposed to reflect the cost at which banks are willing to lend to each other. The complaint alleges that as cracks began to appear in the banking system, the more than a dozen banks that reported their borrowing costs knowingly underestimated these costs. There was a fear that a bank that honestly reported that it was costing more to take out loans from other banks would signal that it was in trouble.
The complaint alleges that “defendants controlled what LIBOR quote would be reported and therefore controlled the value of investments tied to LIBOR.” NCUA argues that since credit unions had investments tied to LIBOR, the returns on these investments were artificially low. Under anti-trust law, which authorizes treble damages, credit unions could theoretically receive a windfall wiping out the costs of the special assessments to pay back the government for the costs of the corporate clean-up.
But notice, I said theoretically. NCUA faces several hurdles in bringing a successful lawsuit. First, let’s assume that it can demonstrate a conspiracy to manipulate the LIBOR – no easy task since 16 banks contributed quotes that made up the rate. It will still have to demonstrate what damages it suffered as a result of this manipulation. For example, if LIBOR was kept artificially low, then that means that credit unions that tied loans to the LIBOR actually saved money by paying less in interest to their members. And, even with the benefit of the extender statute, the statute of limitations will again be an issue in this case.
NCUA is contending that the relevant conspiracy started as early as 2005. Someone is going to argue that there was more than enough time to identify the malfeasance. Still, I give NCUA loads of credit for bringing the lawsuit. The almost casual way in which the Lords of Finance decided to manipulate interest rates affecting trillions of dollars in investments is the best example of how finance is at times dangerously close to becoming a monopoly detached from any free market realities.
Teddy Roosevelt broke up the major trusts because of the danger they posed more than a century ago. I actually would love to see anti-trust laws used to break up the major investment banks, but since that fantasy will never come true, this could be the next best thing. Just don’t count your money any time soon.
Call it the Thriller in Manilla. With potentially billions of dollars at stake, on Friday Judge Leon agreed to a joint request of both the merchants and financial institutions to stay his ruling invalidating the Federal Reserve’s Interchange Fee Cap until a federal appeals court decides whether Judge Leon got it right when he ruled that the Fed ignored Congressional intent when it imposed a $0.21 interchange fee cap. It also appears that the appeal will be heard on an expedited basis with the Federal Reserve’s and supporting amicus briefs (e.g. CUNA and NAFCU, among others) due October 21 with our good friends the merchants having 30 days to respond. This means we should have a decision no later than early next year, which in terms of an appellate case is faster than the speed of light.
The best piece of news I saw in the papers supporting an expedited appeal is that the merchants concede that there is no basis for retroactively making financial institutions pay them for the money they’ve “lost” as a result of the allegedly excessive interchange fee cap. Specifically, in their joint filing with banks, the merchants argue that while they have lost approximately $4 billion, “it is doubtful that this court (the court of appeals) or the district court could order the Board to require regulated banks to refund already paid interchange fees as part of any rule-making.” Judge Leon earlier suggested that he might have the power to order such compensation for the merchants.
Although the appeal allows a fresh set of eyes to examine the issues, the parameters of the legal debate basically come down to one question. Was the Durbin Amendment so clearly written that the Federal Reserve Board abused its discretion when it promulgated these regulations?
I recently wrote a blog expressing concerns about proposals placing an affirmative obligation on the part of credit unions to report suspected elder abuse. As pernicious as this problem is, the best way to attack it is to ensure that the law provides adequate protection for those who suspect foul play as opposed to putting more pressure on our front line staff to recognize and act on evidence of suspected abuse.
One solution, as highlighted in a recent discussion at the Association’s Legal and Compliance Conference, is to file a SAR. Judging by the statistics, this is becoming an increasingly common practice and provides maximum protection to the credit union reporting the suspected abuse. The problem is that an awful lot of damage can be done between the time a SAR is filed and if and when it is acted on. Fortunately, existing law provides another narrow, but important protection, at least in New York State.
Merrill Lynch Pierce Fenner & Smith, Inc. suspected that one of its account holders suffered from dementia. It even had a letter from her doctor stating that within a month of granting the power of attorney, she lacked the legal capacity to understand what she was doing when she created the document to help manage her affairs. Merrill Lynch refused to honor the delegation of agency power which was granted to an agent in December of 2010 and instead a proceeding was commenced under New York’s General Obligation Law under Section 5-1504(2) and 5-1510(2)(i) to compel acceptance. The use of the law in this situation puts the onus on a court to ultimately decide if the power of attorney should be recognized.
As a result, a credit union with doubts as to whether or not a power of attorney should be honored has the authority to commence a special proceeding. This isn’t as complicated as it sounds. Special proceedings are more analogous to arbitrations than they are a trial. The resolution of the Merrill Lynch case shows how difficult some of these decisions can be. The judge ruled that the account holder had the capacity to enter into the power of attorney. He noted that even when a member has dementia, depending on how advanced the condition is, a person may still have capacity to make binding power of attorney decisions.
Ultimately, these are difficult, fact sensitive decisions. Expanded use of quick legal proceedings, a willingness to file SARs when appropriate, and, as I argued previously, statutory language that maximizes protection for institutions that report suspected abuse provide a framework for clamping down on elder abuse.
Lottery Bill Sent To Governor
Legislation to permit credit unions to offer lottery savings accounts (S.5145/A.7341) has been sent to the Governor. The legislation, for which the Association advocated, will allow credit unions in New York to follow the lead of those in other states to encourage savings by tying raffle prizes to the opening of savings accounts. The Governor has ten days to act on the bill.