Posts filed under ‘Legal Watch’

When It Comes To Merchant Liability, Sometimes the Truth Hurts

Kudos to the trades.  According to the Politico website, assertions made by NAFCU and CUNA have “hit a nerve with merchant associations.”  I’ve just been on the retail website and hitting a nerve is a bit of an understatement.  The hyperbole being used by the retailers is more analogous to a person getting root canal without anesthetic.

From a tactical standpoint, I respect what the merchants are doing.  After all, there a times when a good offense really is a good defense.  Consequently, no one should be surprised by suggestions that merchants would somehow all be using EMV technology today but for credit unions that have been reluctant to adopt the technology.  Nor should anyone be surprised by the suggestion that merchants already face more than enough liability.  No need to point fingers here, we’re victims, too, they argue.

Now for reality.  The HomeDepot data breach is the latest example of merchants investing less in consumer protection than they could have to prevent foreseeable harm.  According to press reports, employees within the company put their supervisors on notice that the company was vulnerable to cyber attacks, but precious little was done in response to these concerns.  The reality is that given the current state of the law, liability for card issuing credit unions and banks is clear cut.  Under Regulation E, credit unions have long been strictly liable for any unauthorized consumer debit transactions. In addition, financial institutions have long made consumers whole for unauthorized credit card transactions.  When it comes to the maintenance of business accounts, the UCC has been interpreted as imposing an obligation on the part of financial institutions to exercise reasonable care to protect against data breaches caused by electronic transfers.

in contrast, courts have been reluctant to impose liability on merchants for the negligent protection of consumer data.  Although there are some recent cases suggesting that this may be changing (See Lone Star Nat. Bank, N.A. v. Heartland Payment Sys., Inc., 729 F.3d 421 (5th Cir. 2013), the reality is that if I’m HomeDepot or a small merchant down the street, when I do the cost-benefit analysis of investing in greater technology to protect consumer privacy or putting that money toward the bottom-line, the arithmetic still says to put it toward the latter. 

To be clear, no merchant wants to see their consumer’s data stolen.  And it is impossible to say how many data breaches would be prevented if merchants faced greater liability for their lack of due diligence.  What is clear is that is that our legal system works best when it places the cost of accidents on the party best positioned to prevent losses from occurring.  Right now there is no balance between merchant and bank liability and this has to change.

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Does New York need a state level export/import bank?  Governor Cuomo thinks so.  In a speech yesterday, he proposed creating a state level bank modeled after its controversial federal counterpart.  It would provide credit and grants to foreign corporations that want to move to New York and New York companies looking for assistance to increase their exports to foreign markets.  Assuming the Governor is re-elected, this proposal will be featured prominently in next year’s Executive Budget proposal.

October 8, 2014 at 8:27 am Leave a comment

4 Cases This Term That Will Impact Your Credit Union Operations

Well, it’s opening day for legal junkies.  The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June.  With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.

Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).

This case is important to credit unions for two reasons.  First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act.  Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week.  However, there are several exceptions to this requirement.  In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement.  In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.

In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period.  As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.

For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.

EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).

Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business.  This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code.  However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation?  This is the question that the Court will grapple with in this case.  It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people.  What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons.  Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.

Jesinoski v. Countrywide Home Loans, 13-604.

We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions.  Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage.  This case deals with a narrow but important question:  does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction?  This may not seem like a big deal, but the Circuit courts have been all over the map on this one.

Young v. United Parcel Service, 12-1226.

Federal law prohibits discrimination against employees because they are pregnant.  But, are you discriminating against a pregnant employee by refusing to provide her an accommodation?  In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages.  This case isn’t as clear cut as it sounds.  Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.

I will, of course, be keeping an eye on this and other cases in the coming months.  In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.

October 6, 2014 at 8:49 am Leave a comment

Court Rules NY Can Regulate Internet Payday Lending

The Court of Appeals for the Second Circuit held yesterday that New York’s Department of Financial Services has the authority to regulate Internet payday lenders based on Indian Reservations.  The decision is a major victory for the Department and its logic paves the way for the further regulation of out-of-state payday lenders that use the Internet to facilitate their loans.

In 2013, DFS ordered payday lending operations, most of which were based on Indian Reservations, to stop making payday loans in New York State.  Since New York State caps interest rates at 16% for unlicensed lenders, it effectively bans payday loans.  In addition to ordering these businesses to stop making loans that exceeded New York’s usury cap, the State strongly urged lenders, including several credit unions, to stop facilitating ACH payments to the payday loan providers.

Faced with a dramatic decline in their business, two tribes sued New York State in federal court, seeking to prevent it from blocking their Internet payday lending activities,  They argued that under the federal Constitution’s Indian Commerce Clause, the State had no authority to regulate lending activity taking place on New York State Indian Reservations.  They argued that the loans in question were processed through websites owned and controlled by Indian tribes, that the loans were granted based on underwriting criteria developed by the tribes, and that the lending contracts specified that tribal law would control any disputes.  In addition, they complained that by sending letters to banks and credit unions urging them to stop working with Indian lenders, the State was singling out Indian tribes for retribution.

A district court rejected the argument of the tribes and refused to grant an injunction against the DFS.  Yesterday’s decision by the Court of Appeals for the Second Circuit upheld that decision.  Most importantly, the Court agreed that the tribes had not presented sufficient evidence that the loans in question were, in fact, loans made on the Reservations.  It concluded that even though the tribes argued that the loans were “processed through websites owned and controlled by the tribes” they “never identified the citizenship of the personnel who managed the websites, where they worked, or where the servers hosting the websites were located.  Loans were approved by a tribal loan underwriting system, a vague description that could refer to the efforts of Native American actuaries working on the Reservation but could also refer to a myriad of other systems” located anywhere in the world.

Jurisdiction over Internet-based lending has implications that go far beyond questions of tribal law.  For instance, the rationale articulated by the Court yesterday strengthens New York’s ability to block Internet loans offered by banks located in states that authorize payday lending.  However, the decision is by no means a total victory for the State and underscores just how unsettled this area of the law is.  For instance, the Court stressed that even though it would not impose an injunction against the DFS at this time, the tribes could ultimately win their lawsuit if they provide additional evidence demonstrating that most of the lending activity took place on tribal lands.  Such a claim could take years to prove, and in the meantime the tribal business model is frozen.

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JP Morgan had personal information of 76 million customers stolen off its website this summer.  The announcement is the latest example of hackers targeting bank websites and online services not simply to gain access to member funds but to gain access to information such as names, addresses and phone numbers that can be used to facilitate other data breaches in the future.

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I know you all are dying to get this information:  my bet the mortgage World Series Champion prediction is that the California Angels will defeat the St Louis Cardinals in six games.  Just how trustworthy are my predictions?  NCUA is considering making them acceptable investments when it comes out with its updated Risk-Based Capital proposal.

October 3, 2014 at 8:21 am Leave a comment

What a new comment period means for RBC reform

Yesterday’s announcement by NCUA Chairman Debbie Matz that NCUA would Issue an amended Risk Based Capital Proposal and that credit unions would be given an additional comment period to respond to it has several important implications .

– The most important statement yesterday was not Chairman Matz’s but Vice Chairman Rick Metsger’s “As I have often said, I believe interest rate risk is important and must be addressed in the risk-based capital rule, but it should be addressed separately from credit risk. Weighting credit risk and interest rate risk with a single numerical value created conflicts that ultimately made it difficult to accurately weigh the risk of either.”

This is absolutely crucial news since many of the most onerous risk weightings, most notably dealing with mortgage concentrations, were designed to avoid interest rate risk by deterring credit union’s from holding otherwise sound financial products. NCUA tried to accomplish with a hatchet a goal for which it needed a surgeon’s knife. Hopefully its proposed revisions will provide a more nuanced approach to interest rate risk and risk-based capital.

– Chairman Matz has been about as reluctant to extend the comment period for risk-based capital regulations as the Patriots are to show up for practice this morning after getting destroyed by the Kansas City Chiefs last night. I thought it was telling that Chairman Matz said she made the decision in consultation with NCUA’s lawyer’s (Whenever you have to do something you don’t want to do it’s always convenient to blame the lawyers).

Under the Administrative Procedures Act, an agency may promulgate a final rule that differs from the rule it has proposed without first soliciting further comments if the final rule is a “logical outgrowth” of the proposal (Louisiana Fed. Land Bank Ass’n, FLCA v. Farm Credit Admin., 336 F.3d 1075, 1081 (D.C. Cir. 2003).   It’s safe to assume that NCUA’s proposal will contain some really big changes.

– Chairman Matz is no longer driving the bus when it comes to RBC reform. Not only did Board member Metzger apparently already secure changes he wanted to the RBC proposal but the newest Board member c J. Mark McWatters  has some serious doubts about the regulation. He issued a separate statement yesterday in which he explained that “the previously proposed risk-based capital rules are deeply flawed and merit substantial revision. The devil is in the details, and I await the details before I can pass judgment on the next draft of the proposed rules.”

– I’ve consistently said that one of the major problems with NCUA’s proposal is that it inadequately explained the rationale behind many of its individual provisions. NCUA should use this new round of proposed rule making to explain in greater detail why it decided on the weightings that it ultimately is proposing. There are times that regulations should be long and complicated because they deal with long and complicated issues: this is one of those times. The initial proposal was presented in such a cursory manner that a review of the proposal and its preamble, and nothing else, leads to the conclusion, rightly or wrongly, that NCUA didn’t know what it was doing.

– The process is by no means over.  Depending on how the second proposal Is drafted there are still legitimate legal questions as to whether NCUA is overstepping its authority and whether credit unions should do something about this.

– Comment letters matter. As someone whose job is dedicated in part to getting credit unions to respond to proposed regulations and not simply complain about implementing them once they are promulgated, NCUA’s decision provides the best example yet of how responding to regulations with a large volume of thoughtful critiques can and does influence the regulatory process. NCUA would not be announcing a new round of propose regulations but for the fact that credit unions showed how flawed its initial proposal was.

Lawsky comments on role of regulators

Benjamin Lawsky, the Superintendent of New York State’s Department of Financial Services, had some very provocative thoughts about regulation at a recent forum hosted by Bloomberg News. He said that what has surprised him the most about financial misconduct since he has been Superintendent is that the misconduct “doesn’t go away.” As a result, regulators have to look in the mirror and ask themselves if they are going about deterring misconduct the right way.

He suggests that instead of focusing so much on corporate misconduct greater emphasis should be placed on holding the individuals behind the misconduct responsible.

If he is right than big fines are a start but unless you couple them with sanctions against the individuals driving the misconduct than they will continue to be viewed as a cost of doing business.

Here is a link to the interview.  The portion to which I am referring starts at 2:10.

http://www.bloomberg.com/video/new-york-s-benjamin-lawsky-on-banking-regulation-XZFvgEuVRHaS5a8ooxvo8Q.html

September 30, 2014 at 9:02 am Leave a comment

Handle Electronic Repo Man With Care

Let me start this morning’s blog by announcing that I am dedicating it to Derek Jeter and formally throwing my weight behind his beatification at the earliest possible opportunity.  However, let me remind Yankee fans that Derek is not dead, life will go on, and yes, the Yankees will win championships without him.

Now for today’s blog.  One issue that got a surprising amount of attention recently was highlighted in a New York Times article about the increasing use of GPS-based technology that allows lenders to freeze vehicles in place.  According to the Times, with the growth of so-called subprime car lending, lenders have increasingly turned to technology that allows them to stall a vehicle being driven by a delinquent driver.  As one financer happily explained that without the technology, “we would be unable to extend loans because of the high risk nature of the loans.”

First, there is nothing in state or federal law that would prohibit the installation of these ignition freeze devices.  In fact, right now the field is wide open.  I say right now because it is the type of technology that state legislators, in particular, will scrutinize to ensure that it is implemented consistent with a state’s general repossession requirements.  Does this mean that anything goes when it comes to using this technology?  Absolutely not.  In fact, aspects of the way it is already being used make the hair on the back of my lawyer’s neck stand up. 

For example, if the paper is correct that lenders are disproportionately using this technology for subprime borrowers, then what we have is an Equal Credit Opportunity Act lawsuit in waiting.  Remember that under federal law, you can’t have policies that have either the intention or effect of imposing higher lending standards for applicants based on their race, sex, and other types of protected classifications.  If a lawyer can prove that a bank or credit union disproportionately conditions the granting of car loans to African-Americans, for example, on agreeing to the installation of GPS technology, then he has proven a violation of federal lending law.  One easy way to avoid this problem is to simply make GPS technology a condition of all your car loans.  Here’s some advice for you:  if you can’t justify using this technology on all of your members, then don’t ask any of them to agree to have it installed.

Another legal landmine to be avoided has to do with negligence.  In a nutshell, make sure you have common sense policies in place to protect you.  For example, the article highlights delinquent borrowers whose cars were frozen in the middle of the day.  Simply put, any money that the credit union recoups as a result of repossessing a delinquent owner’s vehicle is going to be miniscule compared to the damage award it will pay out when a jury hears that a credit union member was broadsided in the middle of the day after their vehicle was frozen in the middle of an intersection or that a member’s infant was locked inside a vehicle on 100 degree day.  Let’s use common sense here.  First, the use of the technology should be reserved only for car loans that are at least 30 days delinquent.  Secondly, members should be called and told in advance that they are in danger of having their car frozen.

Third, a tremendous amount of information can be derived about a member’s personal life from tracking their movements.  For instance, New York’s Court of Appeals examined a case in which a state employee’s extramarital affair was exposed tracking his whereabouts in a state vehicle.  Have strict policies in place about who can access the GPS technology and under what circumstances.  This is one of the few areas where there are things you are better off not knowing.

Finally, reserve your right to use this technology explicitly in your lending documents.  The use of tracking devices on someone’s personal vehicle understandably raises privacy concerns.  The more members are put on notice about the use of the technology, the better off everyone is going to be.

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A lot of people disagreed with my blog yesterday assessing the impact that Walmart’s entrance into banking will have on the credit union industry.  This article in today’s CU Times provides further arguments for those of you who mistakenly think that I have exaggerated the impact.

September 26, 2014 at 8:42 am 1 comment

When does a bank aid terrorism?

That is the question at center stage this morning in the Banking legal world thanks to two decisions in New York Federal Court yesterday. First a Brooklyn jury found the Arab Bank liable for aiding the terrorist group Hamas.  Second the Court of Appeals for the Second Circuit reinstated a lawsuit against National Westminster Bank of England claiming that the Bank violated American anti-terrorism laws by providing banking services to a not-for-profit organization that allegedly funneled money to Hamas. (Weiss v. Nat’l Westminster Bank PLC, 13-1618-CV, 2014 WL 4667348 (2d Cir. Sept. 22, 2014).

The Second Circuit ruling   won’t directly impact most credit unions but anytime a federal appellate court clarifies the obligations of financial institutions to monitor account activities the decision is one to which all institutions should pay attention.

National Westminster Bank is a British chartered Bank that maintained a bank account and performed banking services for the Palestine Relief & Development Fund, Interpal, from 1994 to 2007. In 2003  OFAC designated interpal as a terrorist organization. In response to this decision the British government froze the account but reversed its decision after it concluded that the US Government was unable to support its allegations.

Nevertheless the bank was sued under US antiterrorism laws by survivors of Hamas terrorist attacks and their relatives claiming tha, by maintaining the accounts it was providing material support and resources to a foreign terrorist organization. The plaintiffs alleged that Interpal engaged in “terrorist activity” by soliciting funds, and otherwise providing support for Hamas a recognized terrorist organization .

The bank successfully moved to dismiss the case. The trial level court concluded that NatWest could not be held liable for opening the charity’s account unless the plaintiffs could show that the bank knew that “the funds were to be used” to carry out terrorist attacks. This is an extremely high standard since it is undisputed that Interpal provides funds for humanitarian activities. In addition, the bank actively filed SARS and sought guidance from the British Government in response to concerns about the charity’s activities.

In yesterday’s decision the Court of Appeals ruled that the district Court set the bar too high for the plaintiffs, Whereas the trial court would require proof that the bank knew specific funds were being used to finance terrorism the Court of Appeals held that for plaintiffs to establish NatWest’s liability they must present evidence showing that” NatWest provided material support to Interpal while having knowledge that, or exhibiting deliberate indifference to whether, Interpal “solicit[ed] funds or other things of value” for Hamas, regardless of whether those funds were used for terrorist or non-terrorist activities”

In the Pre 9-11 days the Swiss Banker with his closed mouthed discretion was the banking gold standard. Financial institutions held money and it was widely believed that what people did with that money was their own business. That ethos has fundamentally changed. Do I think your average credit union is going to be sued for aiding terrorists? Of course not. Do I believe your average credit union is operating in a legal and regulatory environment in which institutions are expected to scrutinize their member’s activities more closely than ever before? Absolutely.

Here are links to the decision and the jury verdict.

  http://www.nytimes.com/2014/09/23/nyregion/arab-bank-found-guilty-of-supporting-terrorist.html?_r=0

http://www.ca2.uscourts.gov/decisions/isysquery/265d99e1-a2ed-48aa-9f53-36836ab8d15a/1/doc/13-1618_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/265d99e1-a2ed-48aa-9f53-36836ab8d15a/1/hilite/

September 23, 2014 at 9:49 am 1 comment

NYS: Dot I’s and cross T’s when collecting Zombie Debt

I was surprise by how much attention  news that New York’s Office Of Court Administration has finalized new debt collection requirements got in yesterday’s papers. I was also kind of embarrassed that I missed all these articles, since I try to bring you the news and information most relevant to your work day. So with an embarrassed “My bad” here is what you need to know about New York’s new debt collection procedures.

Most importantly the new requirements only apply to a narrow but important part of debt collection process. Specifically it applies to creditors seeking default judgments on delinquent open-ended consumer loans pursuant to New York’s CPLR 3215. They do not apply to medical services, student loans, auto loans or retail installment contracts. The way this regulation is drafted it’s possible that courts will expand the type of debt excluded from the new  requirements as they begin to interpret the requirements

If a debtor simply refuses to pay a debt, can’t pay a debt or has gone AWOL and the credit union sues her the first step is filing a summons and complaint putting the debtor on notice that they are being sued for the money. Often debtors don’t respond and the next step in the process is to go to court and get a “default judgment”- basically a legal ruling that the debtor owes the credit union. These new requirements are in response to concerns that default judgments are being granted based on inaccurate or incomplete information.

Starting on October 1st,  “Original creditors”-that’s you- will have to submit two affidavits when seeking default judgments.  The first must be sworn to by someone with knowledge of the facts surrounding the delinquency-i.e. that an open-ended consumer loan was entered into for “X” amount and is now in default. Credit unions should use the “original debtor” affidavit included in the link to the regulations I am providing at the end of this analysis. You will also have to file an additional affidavit attesting to the fact that the statute of limitations has not run out for collecting the debt. These affidavits can’t be combined.

If you sell your debt to third parties, or put third-party collectors in charge of delinquencies headed for court these third parties are required to fill out different affidavits and the effective date for these requirements vary.  Give your debt collector a call and make sure he knows about these requirements  and how he plans to comply with them…

Here is a link to the regulation and a previous blog I did on the proposal

http://www.nycourts.gov/RULES/Consumer-Credit-Rules-Affs-Notice-091614.pdf

   http://newyorksstateofmind.wordpress.com/2014/05/01/beware-of-zombie-debts/

No news is good news from the Fed

No big news came at of the two day meeting of the Fed’s Open Market Committee and that means that the Grand Mufti’s of the economy have concluded that, since the economy is not going gangbusters, they don’t expect the  type of surprises that could cause a sudden spike in interest rates no matter what NCUA is saying.

The Fed is reducing to $5 billion its purchases of mortgage backed securities. At the same time it led its statement on the meeting with its assessment that “economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant under utilization of labor resources.” This is Fed speak for holding the line against interest rate rises anytime soon. There are still lots of room for economic growth before inflation kicks in.

For those of you who like watching the inside baseball a fissure is officially out in the open. Recently installed Vice Chairman Stanley Fisher voted against the Board’s statement on future economic growth. He believes that “the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation.”  

Here is the statement.

http://www.federalreserve.gov/newsevents/press/monetary/20140917a.htm

 

As Long Island goes so goes the state

Former Assemblyman and longtime state political observer Jerry Kramer has a nice analysis of the outsized part Long Islanders  will play in determining if Republicans maintain  a piece of control over the Legislature’s Senate Chamber this November or are relegated to the sidelines of state Government . All nine Long Island seats are controlled by Republicans but with two open seats and other competitive races Long Island is no longer a bastion of suburban Republicans.  it’s anyone’s  guess what the Long Island delegation is going to look like when the Senate shows up in January.

Here is the article.

http://www.cityandstateny.com/2/politics/new-york-state-articles/new-york-state-senate/long-island-will-determine-balance-of-power-in-senate.html#.VBefWy5dVXI

 

http://www.nycourts.gov/RULES/Consumer-Credit-Rules-Affs-Notice-091614.pdf

 

September 18, 2014 at 9:06 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, Credit Union Association of New York

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