Posts filed under ‘Legal Watch’
I understand why some of you can’t stand compliance. After all, a successful compliance program often depends on strict adherence to mind-numbing regulations, which can seem divorced from reality, let alone common sense. Well, like it or not, the better your compliance program the less you’ll have to deal with something you probably dislike even more, which is a lawsuit.
A great case in point was highlighted by a recent blog posted by Bond, Schoeneck and King highlighting a recent employment litigation trend that could ensnare your credit union if you are not careful. I haven’t seen any cases on this issue popping up yet in New York, but I am sure we will see them in the near future. In it’s labor report blog, BSK reports on a case in California in which the plaintiffs are seeking to bring a class-action lawsuit against an employer for an alleged violation of the Fair Credit Reporting Act (15 USC 1681). This statute is doubly important to credit unions because it not only regulates the use of credit reports in making lending decisions, but also impacts the way they go about making employment decisions.
I’m sure many of you already know that the Act requires employers to give job applicants notice whenever a credit report is going to be accessed as part of the employment process. The statute requires a written ”clear and conspicuous” disclosure, The tricky part is that the statute mandates that this disclosure be “in a document that consist solely of the disclosure that a consumer report may be obtained for employment purposes.”
Employment litigators are beginning to go after employers who provide the necessary pre-employment disclosures, but couple the notice requirement with language in which the applicant agrees to waive any legal action against the employer for accessing the credit reports. For instance, earlier this year, a federal district court in Pennsylvania ruled that an employer violated the Act by not putting the pre-employment disclosure on a separate document without liability waivers. See Reardon v. Closetmaid Corp.
Equally troubling for employers was that the court ruled that the law was clear enough to put the employer on notice that they could be sued for monetary damages for the illegal disclosure. This ruling is important because an employer would otherwise be able to argue that even if it made a mistake, it was a reasonable mistake based on its interpretation of the law.
The bottom line is that if you access credit reports as part of the employment process you have been put of notice. I would make sure that your credit union puts their Fair Credit Reporting Act disclosure on a single piece of paper that contains nothing but the FCRA Notice.
One of the trickiest questions facing businesses of all sizes, regulators, lawyers and policy makers is how to draw a line between encouraging the disclosure of information in an age when a smart phone gives an employee access to more information than imaginable just five years ago but the need for confidentiality is as important as ever.
Example 1: credit unions are justifiably concerned over NCUA’s decision to give the public access to a risk-based net worth calculator designed to give credit unions a snapshot of how they would fare under the agency’s proposed RBNW framework. NCUA justifies its decision to make the calculator publicly available by stressing the need to have an informed public debate on this important issue.
Given the agency’s steadfast commitment to public discourse, I find it odd that it takes the agency two weeks to make an online video of its monthly board meetings available. If you want to take a look at NCUA’s February 20th board meeting, it is available now. There are people like myself for whom real time access to NCUA’s decisions and explanations as to why they are making the proposals they are making would be invaluable.
NCUA should take its commitment to openness to the next logical level and start offering real time broadcasts of its monthly meetings. If the NCUA truly believes that the public deserves real time access to an individual credit union’s potential net worth then surely that same public deserves timely information about NCUA’s latest regulatory initiatives.
Example 2: We’ve all been there. You’re sitting around the dinner table talking to your wife about the day’s events when you realize that your kids are listening to your every word. You explain to them that there is some stuff that just stays within the family. Do you really think this warning works? I once talked to a pre-school teacher who told me that she knows more intimate details about her school kids’ parents than she would ever want.
Many of you have probably already heard about a recent case in Florida in which a father successfully sued his ex-employer claiming age discrimination. As is common in these cases, $80,000 of the settlement was contingent on the father neither “directly or indirectly” disclosing the terms of the agreement to third parties. No one bothered explaining this to the ex-employee’s 20-year old daugter, who proudly reported her father’s victory to her 1,200 Facebook friends, replete with the admonition that the ex-employer should “SUCK IT.” What I didn’t realize until I read the case was that the court’s ruling ostensibly had nothing to do with the Facebook post. The father violated the agreement as soon as he talked about the settlement with his daughter. However, on a practical level it is doubtful that the father’s indiscretion would have cost him $80,000 in the pre-Facebook era. As for the 20-year old daughter with 1,200 friends, perhaps they can offer her some extra summer jobs as she may very well be paying for her own college education from here on in.
Many of you have to sign off on confidentiality agreements either as part of your employment contracts or legal settlements. This case underscores the importance of well-drafted confidentiality clauses in the age of social media. Whereas contracts typically use somewhat generic language prohibiting both direct and indirect disclosures, I wouldn’t be surprised if lawyers start seeking greater flexibility on behalf of executives entering into contracts.
Example 3: Merchants in Texas, Florida and California recently filed lawsuits to invalidate state level laws banning surcharges on credit card purchases. A group of merchants already won a similar lawsuit invalidating New York’s credit card surcharge prohibition (518 NY General Business Law). That case is currently being appealed.
In the New York case, the plaintiffs successfully argued that the credit card surcharge prohibition violated their first amendment rights.
The great Boston Celtic Center Bill Russell once commented that fans don’t think they react. All too often I think the same can be said of our elected representatives.
If you make mortgages in New Jersey, you should take a look at .A347, which overwhelmingly passed that state’s assembly late last week. The bill is the latest attempt to deal with the serious problem of so-called zombie property. This is property which has been abandoned following the commencement of a foreclosure but for which no foreclosure has been completed. Localities not only in New Jersey but New York have been advocating for the authority to make the foreclosing lender maintain the property during the foreclosure process. Attorney General Eric Schneiderman is seeking a similar approach for New York.
The legislation passed by New Jersey’s Assembly mandates that a creditor that files a notice to foreclose on residential property that subsequently becomes vacant may force the lender to cure any violations regarding state or local housing codes. Keep in mind the views I express are mine and do not necessarily reflect those of the Association, let alone the good credit unions of New Jersey. The most troubling aspect of this approach is that the lender is being asked to take responsibility for property it does not own. Secondly, by mandating that the abandoned property be brought up to code the lender is not being required to simply maintain property but improve it. Finally, what is the NJ Legislature going to do in those situations where a home owner seeks to reclaim property for which the foreclosure process is yet to be completed.
According to the National Association of Realtors, as of 2013, there were 300,000 zombie properties across the U.S. I would bet you that those properties are disproportionately in states with drawn out foreclosure processes. Rather than make lenders responsible for property they do not own, housing advocates should take a look in the mirror and realize that so-call foreclosure protections needlessly delay the transfer of property to lenders and indirectly drive up the cost of homeownership for everyone.
My compromise position for the good people of New Jersey is to couple any requirement for lender foreclosure maintenance with an expedited foreclosure process for the affected property.
It’s an exciting day at the Meier homestead. The bad news is that there is a swamp soon to be an ice rink in front of my driveway and my wife just looked out the upstairs window to see Town employees tearing up the front lawn of my new house.
The good news is that because the pipe broke under the street, the expense of this demolition is on the Town. (Sorry fellow taxpayers) However, with the water in my house about to be turned off any second a whole bunch of great news will have to wait until Monday.
I did want to highlight one Supreme Court argument that took place earlier this week involving the standard to be used by courts in determining when to make Patent Troll Attorneys pay a defendant’s legal bills when they bring unsuccessful legal claims based on — euphemistically speaking — aggressive interpretations of a patent’s scope. See Octane Fitness, Inc. v. Icon Health and Fitness, Inc. (2014).
Right now, a defendant in a patent case is only entitled to attorney fees in exceptional cases. The patent defendant in this case argued that fees should be shifting any time a lawsuit is objectively unreasonable.” Many credit unions feel they have been shaken down by attorneys who threaten lawsuits if the credit union doesn’t agree to start paying a license for the continued use of its ATMs, for example. That’s why this case offers the potential of a modicum of relief from patent trolls.
In fact, the conundrum caused by these fellas was captured nicely by Justice Breyer in Wednesday’s argument. Referring to a hypothetical in which a company gets a letter from a law firm accusing it of violating a broad-based patent claim, he said:
. . ., all they did was say:
We don’t want to go to court and cost you $2 million.
Please sen[d] us a check for a thousand, we’ll license it
for you. They do that to 40,000 people, and when
someone challenges it and goes to court, it costs them
about 2 million because every discovery in sight. Okay?
You see where I’m going?
litigation. What you’ve described. . .
MR. PHILLIPS: Yes.
JUSTICE BREYER: And so I do not see why you
couldn’t have an exceptional case where attorneys’ fees
should be shifted. But if I’m honest about it, I cannot
say it’s objectively baseless. I can just say it’s
pretty close to whatever that line is, which I can’t
describe and look at all this other stuff. Are you
going to say that I can’t shift?
MR. PHILLIPS: I think the problem with the
approach you propose there, Justice Breyer, is you’re
trying to deal with a very small slice of the problem of
JUSTICE BREYER: I know, but I of course
it may be a small slice of litigation, but it is a slice
that costs a lot of people a lot of money.
The Justice is right. Currently, there simply is no downside to casting a patent net as far and wide as possible. In fact, an attorney representing a patent holder isn’t doing her job properly if she doesn’t take this approach.
The ultimate solution is for Congress to mandate that patents be more narrowly and clearly drawn in the first place but that would require Congress to tackle complicated, controversial issues and that is asking way too much of our elected representatives.
Even though I can understand why few Americans are shedding a tear for the sharp decrease in law school admissions, sometimes I think that America’s excessive hatred of lawyers has real world consequences beyond bruising the ego of the relatively small handful of lawyers I have met who are thin-skinned. I am bringing this up because Congress soon will begin holding hearings on the Target data breach. While any legislation imposing obligations on retailers to start taking the protection of consumer data more seriously would be a welcomed step in the right direction, it should not come at the expense of limiting liability for merchants whose negligence leads to data breaches. In fact, this is one area where we need more litigation, not less.
As I have discussed in previous blogs, the legal obligation of retailers to card-issuing financial institutions and consumers victimized by data breaches is entirely too narrow. First, the existing credit card network agreements place contractual limitations on the liability that retailers can face when they are sued by a card-issuer. And courts are reluctant to say that a third party processor of debit and credit transactions, based in Atlanta, for example, has a legal obligation to a card issuers in New York. The result is that even if federal legislation helps prevent data theft by making retailers more thoroughly guard against hacker activity, the true costs of such breaches, at least under existing law, will never truly be borne by the parties responsible.
Which brings us to the upcoming Congressional hearings. My concern is that advocates of data theft reform are willing to trade increased merchant monitoring to protect against data breaches for even greater merchant protection against lawsuits. For instance, Senate Judiciary Chairman Patrick Leahy’s “Personal Data Privacy and Security Act” (S.1897) includes a provision that prohibits data breach lawsuits from being based solely on “a violation of a contractual obligation or agreement such as an acceptable use policy or terms of service agreement.” (sec. 107)
Does this mean that any time a company can show that a data breach violates company policy or a third party vendor contract that the retailer is off the hook? At the very least, if and when we ever do get federal legislation, it should not preempt the right of states to impose greater liability on merchants if they choose.
The extent to which states can block payday lending activities and the role financial institutions, including credit unions, should play in this effort continues to be an issue that is vexing regulators, law enforcement and the judiciary.
An article in this morning’s New York Times demonstrates why the issue is so confusing. On the one hand, it highlights how the Justice Department is targeting financial institutions as the choke point of payday lending activities. However, the same article shows that legislators, such as Darrell Issa of California, are critical of such efforts complaining that the Justice Department is trying to deter perfectly lawful lending activities. Who’s right and who’s wrong? The truth is that there is no definitive answer to either one of these questions and that how you answer it depends on where you live.
First, some basics. The Internet has made it incredibly easy to export financial products across state lines. New York, with its usury limits, has always effectively banned payday loans. However, federal law contains no such prohibitions as applied to banks. It has always been possible for a federal bank located in a state with no usury limit to offer payday lending options to New York State residents. However, the growth of the Internet has greatly expanded the marketplace for such offers.
There are two separate paths that have been taken to deter payday lending. One approach is to make financial institutions utilizing the ACH system more closely scrutinize payment requests coming from payday lenders. The other is to have the Court issue injunctions against payday lending activity.
Under the first approach, when a member enters into a payday lending agreement, these agreements typically include authorization for the lender to electronically pull money from the borrower’s account. Generally speaking, when an originator such as a payday lender originates such a payment request, the primary obligation to assess whether the payment is in fact authorized is on the institution with which the business has a banking relationship (the Originating Depository Financial Institution). Rules being proposed by NACHA would generally lower the threshold after which originators are obligated to further scrutinize such payment requests. On Friday, the FTC weighed in favoring NACHA’s approach.
But according to New York State’s Department of Financial Services, which has also commented on the proposal, NACHA’s proposal is a step in the right direction but does not go far enough. According to the Department evidence “that illegal payday lenders continue to use the ACH system to effectuate illegal transactions demonstrates that there are insufficient consequences for exceeding the return rate threshold. More effective enforcement of NACHA rules is necessary to prevent originators from engaging in illegal conduct through the ACH network.”
The problem is that what might be illegal to New York State’s Department of Financial Services is a perfectly legitimate business activity when viewed from the perspective of a Californian congressman. A federal district court judge in New York has ruled that the state has the authority to regulate payday lending activity when conducted over the Internet even when such activity is originated by a financial institution on an Indian Reservation. In contrast, California state courts have reached the exact opposite conclusion. A recent decision ruled that California’s financial regulator did not have the authority to impose fines on payday lenders controlled by Indian tribes. See People v. Miami Station Enterprises, 2d District, CA Court of Appeals (January 24, 2014).
If all this sounds confusing, it’s because it is. Ultimately, Congress or the Supreme Court, will have to decide if states have the ability to regulate payday lending and if so, under what conditions. The use of NACHA rules to regulate unseemly but arguably legal activity is destined to be an ineffective way of dealing with payday lending.
This was the question decided recently by the Court of Appeals for the Ninth Circuit, the federal court that has jurisdiction over much of the West Coast, including California. Although the Court’s answer was a very reluctant no, sometimes in law you can lose the battle but win the war. The rationale laid out by the Court, particularly in a concurring opinion written by Judge Reinhardt, includes a legal road map for courts and legislatures that may want to take a fresh look at limiting what consumers feel, rightly or wrongly, are excessive fees for late payments and other such charges.
In In re: Late Fees and Overlimit Fee Litigation (2014 WL 211729), the Court heard the appeal of plaintiffs representing consumers who had been charged fees for paying their credit card bills late or going over the prescribed limit. They argued that the fees amounted to unjustified punishments that should be outlawed as unconstitutional under the Due Process Clause.
This might sound like West Coast wackiness, but it’s not. I’ll bet you right now that you will see this argument made in other courts. You see, the plaintiffs point out correctly that the Supreme Court has recognized, particularly over the past two decades, that punitive damages imposed in lawsuits can be so excessive that they violate the Due Process Clause. The plaintiffs argued in this case that just as civil damages imposed by juries can be excessive and modified by appellate courts, the same rationale should be applied to the imposition of late fees and overdraft charges which often bear little, if any, relationship to the actual cost incurred by the financial institution imposing the charges in the first place.
Of course there is a key distinction between civil damages in a lawsuit and late fees imposed on tardy bill payers: the latter have been put on notice in their contracts when they signed up for their credit cards that such fees could and would be imposed. In contrast, corporations suddenly having to pay damages so disproportionate to the actual harm caused by their misdeeds can’t be said to have adequate notice of the potential legal consequences, or so the argument goes.
This distinction ultimately won the day with the Ninth Circuit, but only because the judges had to follow the Supreme Court’s rulings. As argued in a concurring opinion, the proposition put forward by the plaintiffs “deserves further exploration and analysis.” If the Supreme Court continues to hold that the Constitution protects companies from excessive punitive damages “the extension of [this] doctrine, as requested by the card holders, should eventually become the law under the Due Process Clause.”
Even if the courts are not willing to go so far as to effectively cap late fees and other charges, the language used in the concurring opinion captures the zeitgeist of a political system increasingly energized over questions of economic inequality. At the very least, the judge provides an awfully good argument for a legislator wishing to pass legislation capping fees when he argues “consumers must frequently enter into. . .one-sided contracts if they are to obtain many of the necessities of modern life such as credit cards, cellular phones, utilities and other vital consumer goods.” The Court’s current interpretation of the law has “served primarily to protect wealthy corporations from liability for repeated wrong-doing.” The same reasoning “would also protect ordinary consumers from paying excessive court enforced damages for minimal breaches of contract.”
Now don’t get me wrong, my point is not that you should agree or disagree with the Court’s logic, but simply to point out that such logic is likely to become more and more prominent in debates about the proper regulation of financial institutions. It is perfectly legitimate to ask whether there is a point at which consumers are penalized too much for the services they receive and if the courts have a proper role in regulating these charges.
The annual Kabuki Dance between regulators and the regulated, during which credit unions complained that they are being smothered to death by tone-deaf examiners and examiners complained that they are being vilified by credit unions for doing their job, kicked off on Friday with NCUA outlining its regulatory points of emphasis for the 2014 examination cycle.
I often think much of the posturing and angst is overblown but inevitable given the fact that no one likes to be told what to do and regulators have a tremendous amount of power, some of which will be used to excess or be put in the hands of examiners, a small percentage of whom are not competent to exercise it. That being said, given some of the issues highlighted by NCUA, this could be a particularly contentious year — especially for smaller credit unions. Two issues in particular exemplify why friction is inevitable between examiners and the examined: cyber security and qualified mortgages (QM).
Cyber security is the number two risk identified by NCUA right after interest rate risk. NCUA correctly notes that smaller institutions have been identified as “vulnerable entry points” for cyber terrorist to infiltrate larger networks. Against this backdrop, the NCUA informs us in bold that “credit unions of all sizes will be expected to implement appropriate risk mitigation controls.” We’ll have to keep a really close eye on how this point of emphasis is actually translated into examiner oversight.
On the one hand, NCUA is absolutely correct in suggesting that, for cyber security purposes, the distinction isn’t so much between big and smaller institutions as it is between vulnerable and not as vulnerable institutions. On the other hand, it will never be realistic to expect smaller institutions to dedicate the same resources to deterring cyber crime as JP Morgan, for example. After all, there are many credit unions for which even hiring an IT person is cost prohibitive.
My suggestion, specifically for smaller credit unions, is to show that you’re exercising appropriate oversight over your third-party vendors, that you have password protections in place for your online services, and that your staff is appropriately trained on minimizing cybersecurity vulnerabilities. This is, of course, also good advice for larger credit unions. But as your size and sophistication increase, so should the amount of resources committed to an appropriately protected IT network.
There is also going to be some inevitable give and take over the new qualified mortgage regulations. On the one hand, NCUA reiterated that “it will not subject a mortgage to safety-and-soundness criticism solely because of a loan’s status as a QM or non-QM. However (there is always a however when NCUA talks about this subject and there shouldn’t be), credit unions choosing to make non-QMs will need to take into account the potential new market and legal risks.”
This last phrase gets me more fired up than San Francisco 49er coach Jim Harbaugh yelling for an instant replay after the referees don’t see that his team scored a touchdown. Trust me, that’s pretty fired up. What potential new market is NCUA talking about? After all, if you underwrote non-QM mortgages on January 9, they are identical to mortgages you write this week using the same criteria. There is nothing new about them. As for new legal risks, it is at best premature to conclude that a credit union will face increased mortgage expenses simply because it is making non-QM loans. After all, so long as a credit union can document why a member had the ability to repay a loan, the risk of making non-QM loans is outweighed by the real danger that credit unions will forgo needed revenue and qualified home owners won’t get the home they’re looking for out of fear that regulators will react too swiftly to the new mortgage environment.
Well, it’s the morning of the Blessed Event.
Any moment now your credit union is expecting the arrival of its first Dodd-Frank mortgage and frankly you are a little nervous. Sure you and a couple of your mates have gone through training classes, created new policies and procedures and even put aside space for increased record keeping and hired energetic staff to look after these new creations and still, you are nervous. Are you really ready for all of these acronyms to come to life, for all that documentation and the possibility that the mortgage holder won’t like you and may take you to court?
At times like these it’s good to remember the basics. You have been doing mortgage lending for a fair amount of time and you are good at it. There have been thousands of pages of regulations used to promulgate these new servicing/underwriting mandates. While there is no doubt you will have to change some of your old ways, if you take time to step back to look at the forest you will see you are more than prepared for these new mortgage arrivals.
When that mortgage applicant comes calling, the most basic thing you need to figure out is her Repayment ability. The regulation mandates that “A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.”
Something tells me you already know this. If you document that you follow this rule and have always made solid loans then you can continue to make the same loans you always have. While the regulation specifies eight basic underwriting criteria – things like income and debt-to-income – that must be considered when determining a member’s Ability to Repay a mortgage loan, chances are you have always taken these criteria into account. So long as you are documenting what you are doing, you are complying with the law.
Weeks, months, and years are going to go by (they grow up so fast, don’t they) and our borrower will undoubtedly have questions about the mortgage as it matures. Do you have policies and procedures in place so that when a member calls you can provide accurate information and respond appropriately to investigate potential mistakes related to the mortgage? My guess is you do. After all, your credit union can’t survive without good customer service and helping people with questions about loans is good customer service.
Unfortunately, our mortgage may hit some growing pains along the way. Maybe its owner will get sick or lose a job and be unable to make the mortgage payments. Do you work with delinquent members by putting them on notice when their mortgages are in default? Do you make a good faith effort to modify these mortgages so that members can repay them if possible? Do you tell the member what information she has to provide for a loan modification to be considered or do you instead repeatedly ask your member to resubmit the same information after your staff misplaces pertinent files?
This is not a joke but precisely the type of stuff some of the nation’s largest servicers have been doing as they tried to protect the interest of investors in Mortgage Backed Securities. Credit unions work with their members because they know their members. It isn’t in our interest to see a neighbor lose a house or to be nonresponsive to basic requests. Again the policies documenting what we do are new, but the efforts most credit unions make to help their members already puts us in compliance with this new Dodd-Frank world.
Despite our best efforts, not all relationships work out and we have to foreclose on property and take it back under our care. There will undoubtedly be smiling mortgage applicants who come in today only looking to sue you tomorrow because you had the temerity to think to think that they could afford their house. People change.
Perhaps you are thinking the credit union should only make Qualified Mortgages. After all, with their Safe Harbors these are the closest thing to a prenuptial agreement between borrowers and lenders. But have you ever used anything but sound underwriting in the past? Do you work in good faith at settlement conferences if and when the delinquent member shows up? In short, do you have the procedures in place to demonstrate to a court that the credit union consistently applies sound criteria when deciding who gets a loan? If you do, then you should not let the threat of increased litigation keep you from doing what your credit union has always done: provide mortgage loans to people who repay them.
None of this is to minimize the scope and weight of the compliance burden being hoisted on credit unions today. Nor am I trying to suggest that issues won’t arise in interpreting thousands of pages of interacting and overlapping legalese. I’m simply pointing out that, at its core, Dodd-Frank is about implementing baseline underwriting and servicing practices with which most credit unions already comply. Keep the goals of the regulations in mind and you will find that your credit union’s mortgage practices don’t have to change as much as you think they do.
This country’s ability and/or willingness to properly regulate the financial institutions that own it hit a new low point yesterday, and once again it is credit unions and true community banks that are left holding the bag.
Yesterday, the United States Attorney for the Southern District of New York settled charges against JP Morgan Chase for its systematic and decades long violation of the Bank Secrecy Act, violations that were crucial to the Bernard Madoff Ponzi scheme, by imposing a $1.7 billion fine and entering into a “deferred prosecution” agreement against the corporation. Ostensibly, these are tough penalties, but there is much less here than meets the eye.
First, let’s not kid ourselves. If any credit union did what JP Morgan did to facilitate the Madoff Ponzi scheme since 1994 it would be out of business, we’d all be reviewing a scathing report from the NCUA’s inspector General, and preparing testimony for appearances before Congress. In contrast, for a company that generates a little more than $20 billion a quarter with a healthy stock valuation, the penalty amounts to little more than the nettlesome cost of doing business.
Won’t a penalty like this embarrass the corporation to clean up its own house? I’m joking, of course. I used to be a big Jaime Dimon fan but the fact that he still has a job this morning speaks volumes about his character and the deterioration of corporate board rooms that are willing to excuse any conduct no matter how shameful and incompetent so long as the money keeps rolling in. These guys make A-Rod look like a good corporate citizen.
The only thing that would really change JP Morgan’s conduct is the spectre of huge class action lawsuits and specific individuals going to jail for choosing to violate the law. The bank, of course, knows this, which is why one of the most comical quotes I read this morning from a JP Morgan spokesman was that “Our senior people were trying to do the right thing and acted in good faith at all times.” The spokesman went on to acknowledge in an example of classic understatement: “We recognize we could have done a better job of pulling together various pieces of information. . .” (NYT article linked above). In other words, our valued employees may be incompetent, but my god they’re not knowingly incompetent.
Why is the distinction so important to JP Morgan? Because by admitting violations of the Bank Secrecy Act, the bank does not expose itself to increased liability. The courts have consistently held that the BSA wasn’t designed to give individuals the right to sue for its violation. This means that for the individual who lost his or her life savings after investing money in the Madoff Ponzi scheme, JP Morgan’s acknowledgement yesterday amounts to little more than a “my bad.”
What it’s really concerned about are civil fraud suits which would open it up to third party liability. But fraud against banks related to the actions of an individual who opens up an account is and should be extremely difficult to prove. Very generally speaking, a Madoff victim seeking to sue JP Morgan will not only have to show that the bank knew that a fraud was being perpetrated, but that the bank was actively engaged in carrying it out.
This is why most suits against banks involved in previous Ponzi schemes have been dismissed. For example, in one case brought against Bank of America in federal court in New York by victims of a Ponzi scheme alleging fraud by the bank, the case was dismissed even though the bank opened up a one-peson branch office to accomodate the Ponzi scheme operator. See In Re Agape litigation, 681 F. Supp. 2d 352 (2010). Can anything be done about this and should credit unions really care?
I think the answer to both questions is a resounding yes, if only because we want our kids to grow up in a world where they play to win but play within the rules. I’ll have more on this in a future blog.
. . . . .
CFPB Director Richard Cordray gave a great speech stressing that credit unions should not change their underwriting practices as a result of the new qualified mortgage rules. I would seriously suggest printing out a copy of it to save for the renegade examiner, you know he’s out there, who doesn’t get this point.