Posts filed under ‘Legal Watch’
I have a sneaking suspicion that this morning’s blog will warm the hearts of many credit union employees responsible for collecting debts. It also provides useful instruction about the dos and don’ts of collection efforts once a member has declared bankruptcy and your credit union has notice of an automatic stay.
I know many of you already know this, but in case your second cup of coffee hasn’t kicked in, section 362(a)(6) of the bankruptcy code imposes an automatic stay applicable to all entities prohibiting any act to collect, assess or recover a claim against a debtor that arose before the bankruptcy filing. A willful violation of this provision occurs anytime a creditor is put on notice of an automatic stay and continues to try to collect a debt. Violations can result in damages and payment of a debtor’s attorney fees.
The case I am talking about, which was recently highlighted in an article in the New York Law Journal, is called In Re: Beth M. Squire, 13-62070 and is currently being appealed to the district court. The facts are straight forward enough. Consumer took out an unsecured loan with Berkshire Bank, which she was paying off using automatic ACH withdrawals from her account at Citizens Bank. That money was pulled on the 30th of each month. No one denies that Berkshire received notice of the Chapter 7 bankruptcy filing on January 3, 2014 or that two weeks later, the bank reached out to the debtor’s attorney James Selbach to see if his client wanted to continue to make the ACH payments. Mr. Selbach acknowledged receiving the phone call but never called the bank back. In the meantime, Berkshire Bank never cancelled the ACH payment and on January 30th it attempted to transfer $199.53 from the debtor’s Citizens bank account. This account was empty and the debtor was charged $35 due to insufficient funds.
The case gets interesting for our purposes because on the same day that the bank made the ACH transaction, Mr. Selbach filed what the bankruptcy court described as a “boiler plate” motion claiming that Berkshire Bank violated the automatic stay and seeking not only damages but attorney fees.
Northern District Bankruptcy Judge Margaret Cangilos-Ruiz limited damages in the case to the amount of the ACH payment, $199.5, and wrote a decision critical of what she clearly feels is the excessive use of motions claiming violations of automatic stays. Most importantly, she admonished the attorney that the bankruptcy code “was not designed to encourage a debtor or her counsel to lay in wait until a violation occurs and then pounce upon the creditor. It is the opinion of the court that litigation over this violation which caused minimal damage should have ended before it started.”
The court also expressed that while a debtor’s attorney is under no obligation to return phone calls the creditor does not violate the automatic stay provisions of the bankruptcy code simply by reaching out to an attorney and seeing if a debtor wishes to continue making payment on a debt.
Mr. Selbach is appealing the court’s ruling. He unabashedly told the New York Law Journal that he has brought hundreds of motions alleging automatic stay violations. He argues that such motions are precisely what Congress intended to happen when it authorized debtors to recoup attorney fees.
Here are some interesting take-aways from this case. First, even though the court is clearly exasperated by the debtor-attorney conduct, no one disputes that the bank violated the automatic stay provision. As a result, while it is perfectly appropriate to reach out to opposing counsel, you should never do so in lieu of cancelling ACH withdrawals once you have been put on notice of an automatic stay. Second, this case dealt with an automatic stay involving an unsecured loan so the bank could have ended the ACH payment as soon as it received notice but chose not to. The court indicated that it would have expected the bank to act more quickly had it the case involved a garnishment of the debtors’ wages.
Good things come to those who wait. . .and wait. . .and wait. Nearly four years after deciding not to appeal federal court rulings holding that the IRS wrongly tried to tax certain state chartered credit union activities, the IRS has finally gotten around to issuing a memorandum to its examiners confirming that state chartered credit unions are exempt from most UBIT taxes.
It’s been a while since UBIT was a big issue, so here’s a quick refresher. The Unrelated Business Income Tax (UBIT) taxes the activities of not-for-profit tax-exempt organizations which are not substantially related to the activities for which an organzation was given tax exempt status. Federal credit unions are explicitly exempt from this tax. In two cases brought in federal district court and decided in 2009 and 2010, credit unions successfully argued that contrary to the IRS’s opinion, most of the products and services commonly offered by state chartered credit unions are exempt from the UBIT tax.including the sale of credit life and credit disability insurance, GAP auto insurance, ATM “per-transaction fees FROM MEMBERS,” interest on loans and the sale of checks from a check printing company to members.
The decisions and the recently released memorandum are not a complete victory for state-chartered credit unions. For instance, the sale of automobile warranties, accidental death and dismemberment insurance, life insurance and ATM “per-transaction fees FROM NON MEMBERS” are subject to UBIT. I’ve included a link to the IRS memorandum so you can take a look at the entire list. All in all, though, this is the biggest victory for credit unions in the last decade.
Credit unions are mainly concerned with the enormous power the CFPB has to promulgate consumer regulations. But to really get a feel for just how powerful the Bureau is, you should keep in mind that it also has the authority to take legal action against financial institutions engaging in deceptive financial practices. The latest institution to run afoul of the CFPB is Bank of America, which has agreed to pay approximately $727 million in refunds and $20 million in fines in relation to allegations that it engaged in deceptive practices when selling 1.4 customers credit cards and so-called “add-on services.” A separate agreement was reached with the OCC.
Among the sins highlighted by the Bureau were the fact that some consumers were led to wrongly believe that the first 30 days of coverage for certain add-on credit card services were free and aggressive enrollment practices which led consumers to believe that they were simply obtaining additional information about a product when in fact they were agreeing to buy it. These enforcement actions provide a pretty good signal of where the CFPB thinks additional regulation is necessary, so even though Bank of America’s misdeeds may not affect you today, they may impact the work load of your compliance officer tomorrow.
Just how bad is it for mortgage lenders out there? According to the Wall Street Journal, mortgage originations in February “fell to their lowest level in 14 years due to the months long plunge in refinancing activity and weak demand for loans to purchase new homes.” The Journal also reports that the share of mortgage applications for refinances hit their lowest level since 2009. Remember, this is all taking place as the FED is winding down its bond buying program and tougher lending regulations are taking effect. Unless we see a huge surge of consumer confidence and economic growth in the near future, this is shaping up as one heck of a depressing year for the mortgage market.
On that happy note, have a nice day!
Credit unions scored a major victory on Friday when a federal appeals court in Washington reversed the decision of a district court and upheld regulations promulgated by the Federal Reserve Board to implement the dreaded Durbin Amendment. The victory means that debit card issuing credit unions don’t have to spend this morning shopping around for additional payment networks. It also means that you don’t have to worry about even lower debit interchange fees for larger institutions indirectly impacting your bottom line.
As many of you no doubt recall, the Durbin Amendment has two major components. First, it calls on the Federal Reserve Board to limit debit interchange fees that could be collected by institutions with $10 billion or more in assets to an amount that is proportional to the cost incurred by the issuer with respect to a transaction. It also prohibited limiting the number of payment card networks on which debit cards can be processed to one network. The Federal Reserve interpreted these statutory mandates with regulations mandating that card issuers offer at least one PIN-network and one unaffiliated signature debit card network. The Board also capped debit interchange fees for larger institutions at approximately $0.24 per transaction.
In a somewhat amusing twist of fate, many of our merchant friends ended up losing money as a result of the new regulations. They went to court and in one of the most sarcastic decisions you are ever going to read, a federal district court in Washington concluded that the Federal Reserve misread the clear intention of the statute and ordered the Federal Reserve to go back to the drawing board and devise a debit card cap which included a narrower definition of transaction costs. In addition, the judge ordered issuers to provide merchants with two networks for PIN-based debit transactions and two networks for signature-based debit transactions.
I’ll spare you the gory details of the Appellate Court’s analysis, which hinged, among other things, on the difference between “which” and “that,” but the bottom line is that whereas the District Court saw the Durbin Amendment as a clearly drafted legislative mandate, the Appellate Court saw that it was a poorly drafted 11th hour amendment to Dodd-Frank. As a result, the Fed was justified in interpreting the statute more liberally than the merchants would have liked.
NCUA Board Meeting
I didn’t get to blog as often as I normally do last week, but since we’re on the topic of Legislative interpretation, I want to make one comment about last week’s NCUA monthly board meeting. At the meeting, the Board proposed joint regulations establishing a framework for the regulation of appraisal management companies. This joint regulation is mandated by Dodd-Frank.
Appraisal management companies are those that serve as intermediaries for appraisers and lenders. Interestingly, while the NCUA issued the proposal, Chairman Matz complained that NCUA is “unable to enforce it,” According to the Chairman, “NCUA remains the only financial services regulator lacking the necessary authority to examine vendors for safety and soundness in compliance with laws and regulations.”
This is an important admission on the part of NCUA since many of us have been criticizing it for seeking to exercise oversight over third party vendors without jurisdiction.
As those of you with young children no doubt appreciate, with babysitters more costly than loan sharks and a night at the movies requiring a home equity loan, this is a key time of year for my wife and I as the Oscar nominees hit the pay-per-view circuit. On Saturday night, we watched American Hustle and all I have to say is Twelve Years a Slave better be a pretty good movie because American Hustle is one of the best movies I’ve seen in years. In fact, it is the best movie of its genre since The Sting starring Robert Redford and Paul Newman.
On that note, have a pleasant day.
When it comes to the CFPB and the House Financial Services Committee, I have taken the Committee’s criticisms of the Bureau with two grains of salt: from an ideological perspective the Committee and the Bureau are cats and dogs in Washington.
But, this morning the Bureau committed to openness is facing a justifiable heap of criticism for refusing to respond to a letter from the House Financial Services Committee asking it to explain how it determines which institutions are guilty of violating the Equal Credit Opportunity Act by engaging in indirect auto lending practices that have a disparate impact on minorities. Considering that this has been a point of emphasis since the Bureau released a Guidance on the issue and has subsequently brought enforcement actions against lenders for disparate impact violations, it seems more than reasonable that the Bureau should be willing and able to share this information. It is more than a little troubling that it has not done so.
Perhaps it is using the same public relations firm retained by the Malaysian government.
Why should credit union’s care? Because every time your credit union makes a lending decision, it must comply with Regulation B and other similar laws. From both a compliance and operational standpoint, the clearer disparate impact analysis is the better off all lenders are. For example, if your credit union is losing business to a car dealership down the street that always offers to beat your credit union’s financing terms, it makes perfect sense to have a policy in which you reserve the right to match or exceed that dealership’ s terms on a case-by-case basis. Assuming that your credit union doesn’t engage in overt discrimination, the policy does not violate federal law. It is open to all persons who meet the credit union’s lending criteria.
However, let’s say a year into the policy you review your files and realize that African-Americans are less likely to get the benefit of the policy than are your white members. The burden is still on your credit union to demonstrate why the statistical anomaly reflects reasons other than racial animus. For example, the unfortunate reality may be that a disproportionate number of African-American members poorer credit than white members.
Which brings us back to the letter from Congressman Hensarling the response of which is forthcoming. The Equal Credit Opportunity Act and other anti-discrimination statutes are crucial pieces of legislation and I am not for one minute questioning the need for federal legislation banning lending discrimination or the vigorous enforcement of those laws. However, claims of discrimination should not be made lightly and lenders have the right to know the rules of the road. If the CFPB is hesitant to respond to the Congressman in part because disparate impact enforcement is as much an art as it is a science, then perhaps it’s time to have a mature public debate in this country about anti-discrimination laws and their limits.
As faithful readers of this blog know, I am not an employment law attorney but I still like to highlight emerging issues that may confront you in the workplace. One of the issues that most intrigues me is the extent to which employers should delve into an applicant’s social media postings as part of the hiring and promotion process.
I’ve come to believe that looking into someone’s Facebook postings, as tempting as it might be, does more harm than good. A good interview will get you all the information you need about an applicant, while checking someone’s Facebook page could potentially set you up for a claim that you discriminated against an applicant because of their race, religion, and, in states like New York, sexual orientation.
A good friend of mine thinks I am nuts. He points out that you can learn a lot about a person from what they post on Facebook. Do you really want a camp counselor, for instance, who brags about how much pot they smoked over the weekend?
Yesterday, the Equal Employment Opportunity Commission hosted a meeting/conference discussing the various workplace issues raised by social media and I love the compromise that one of the attorneys, Renee Jackson of Nixon Peabody, suggested as part of the dialogue. First, make sure that social media is just one of several sources you access when doing an applicant background check. Second, have a third-party or employee not involved in the hiring decision review publicly available information about the employee from social media cites. This employee can report just the facts but omit information such as an employee’s race or religion that should not be part of the hiring decision in the first place.
Speaking of religion, the EEOC recently issued guidance on accommodation of an employee or applicant’s religious beliefs in the workplace. Title VII of the Civil Rights Act of 1964 bans employers with 15 or more employees from discriminating against an employee based on, among other things, her religious beliefs. This means that employers must accommodate an employee’s sincerely held religious beliefs unless doing so would constitute an undue hardship for the employer.
The recently issued, wide ranging guidance stresses, among other things, that a customer’s unease with an employer’s religious attire doesn’t allow the employer to reassign the employee. This means, for example, that you can’t shift a teller who is a practicing Sikh to a back office position because members have complained he wears a turban. Another theme of the guidance is that employers should not delve too deeply into how strongly an employee actually holds his or her religious beliefs. For example, an employee might wear a religious symbol for only one month out of the year or be a recent convert to an obscure faith but these facts are irrelevant in determining how best to accommodate the employee.
One other theme worth noting has to do with dress codes. Employers should make exceptions to dress codes to accommodate sincerely held religious beliefs. Doing so doesn’t mean that the dress code can’t be enforced against other employees. The bottom line with all of this is to be reasonable.
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.