Posts filed under ‘Legal Watch’

Courts Split on Legality of Surcharge

As readers of this blog know, last Fall a federal district court in Manhattan ruled that New York’s law banning merchants from imposing surcharges on credit card purchases violated the First Amendment of the Constitution. An appeal of that decision is currently pending. (In the interest of full disclosure, the Association has filed a friend of the court brief urging the Second Circuit to side with New York’s Attorney General and reverse this ruling).

New York isn’t the only state where laws prohibiting credit card surcharges are being challenged. As the Second Circuit prepares to decide whether New York law violates the Constitution, a recent decision in Florida upheld a Florida statute that also caps credit card surcharges. The decision underscores that, although surcharge litigation may have started in New York, it won’t end there. The Second Circuit decision will set precedent for other states where this issue will be litigated. In addition, the surcharge litigation deals with issues beyond the propriety of surcharges. The litigation will help delineate the boundary between the protections guaranteed by the First Amendment and the rights of regulators and legislators to place restrictions on how information is presented to consumers.

On the off chance that you haven’t been paying much attention to the issue, here is a quick recap. Section 518 of NYs General Business Law prohibits merchants from imposing surcharges on credit card purchases. At the same time, it permits merchants to offer cash discounts. In Expressions Hair Design v. Schneiderman, 975 F. Supp. 2d 430, 435-36 (S.D.N.Y. 2013), Judge Radcliff held that the distinction prohibited merchants from informing customers about the true cost of credit. In addition, he argued that the surcharge prohibition made all consumers pay for the increased cost of credit transactions by making it impossible to restrict the extra charge to customers paying with credit cards.

But, most importantly, the Judge concluded that:

Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 cash but charges $102 when the purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that the vendor is adding a 2% surcharge because the credit card companies charge the vendor a 2% ‘swipe fee.’ But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with section 518 is achieved…. this virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional.

Conversely, one could argue that there are fundamental differences between prohibiting surcharges, as New York and other states do, and allowing merchants to surcharge credit card purchases without restriction. After all, in Australia where surcharge bans were eliminated, consumers are now demanding that they be re-imposed. Furthermore, legislators and regulators place restrictions on how information is presented to consumers all the time. If restrictions such as New York’s run afoul of the Constitution then an important tool for consumer regulation is being removed.

Which brings us to the impetus for today’s blog. Recently, a Florida court upheld Florida’s surcharge ban against claims that it violated the Constitution.

This statute is no more a First Amendment violation than are the Truth-in-Lending Act, which restricts how a lender can pitch its interest rates, and the Fair Debt Collection Practices Act, which restricts how a creditor can present its claim for repayment. A whole host of statutes impose similar restrictions on the relationships between businesses and their customers, and many implicate communications.

The Florida case is Dana’s Railroad Supply, et al V. Pamela Jo Bondi (CASE NO. 4:14cv134-RH/CAS).

The fact that two courts came to such different conclusions underscores that the issues raised in these cases are going to be litigated for years to come as higher courts try to reach a consensus on if and when surcharge bans violate the Constitution.

On that note, have a great weekend, even if you, like me, feel an obligation to watch the Giants game.

September 12, 2014 at 8:56 am Leave a comment

Three Things To Ponder As You Start Your CU Day

Here are some things to ponder as you help your kids slip back into reality.

The credit union industry had real, solid growth in the second quarter. I’ve tried to find a soft underbelly to the industry’s economic performance and I can’t find one. The loan to share ratio is up to 71.66 from 70.88 last year, led by rising demand for car loans. In addition, student lending and mortgage loans have also showed marked improvement. The overall trend shows the industry lending out more of its money. There is even a slight decrease in the amount of long term investments but, of course, NCUA says that the current net long term asset ratio of 35.4% remains a “serious threat.” Never mind that interest rates remain at historically low levels, that demand in American bonds will keep yields down for the foreseeable future as Europe continues to struggle, and that there is still plenty of room for growth in the US economy. NCUA is right — someday interest rates will rise and when they do NCUA will say I told you so.

How important is fee income to your credit union? There is an extremely interesting article in the WSJ on fee income. (The very fact that I consider fee income interesting is a sure sign that I should have taken more time off this Summer). The paper is reporting that “As a percentage of total noninterest income, deposit-account fees dropped to 14.1% in 2013, the lowest level since 1942, according to the FDIC data. From 2000 through 2009, those fees accounted for an average of 17% of such income.” 

Redlining in Buffalo? Yesterday, the Attorney General accused Evans Bank, a regional bank in Western New York, of intentionally discriminating against African-Americans in Buffalo. This is not a claim based on a disparate impact analysis but a no holds barred claim that the bank had a policy of intentionally denying loans to credit worthy individuals because of their race. “Evans has redlined the predominantly African-American neighborhoods, intentionally excluding these neighborhoods from its lending area; developing mortgage products that it made unavailable to these neighborhoods, notwithstanding the creditworthiness of the applicants; and refusing to solicit customers, market mortgages, or provide banking facilities in those predominantly African-American neighborhoods.” If these allegations are true, good luck to the AG’s office. This is America, not apartheid South Africa.





September 3, 2014 at 8:27 am Leave a comment

Are CFPB’s Performance Reviews “Acceptable?”

Yesterday, the CFPB, which prides itself on being a statistics-driven, cutting edge agency of the 21st Century, announced a new rating system for its employees which deemphasizes statistics.  For several months now, the CFPB has been dogged by increasingly strident accusations that its managers engaged in discriminatory practices.  These accusations were bolstered by an internal report highlighted in yesterday’s CU Times showing statistical disparities based on race in the performance review process.  For example, 20.3 percent of white employees received the highest rating (a 5 on a 1-5 scale), while only 10.5% of African-American employees received this rating.  The CFPB is responding to this “proof” of racial disparity by implementing a pass-fail system of employee evaluations, doing away with those troublesome numbers.  Instead, employees will retroactively be classified as either solid performers or unacceptable ones. 

CFPB’s retreat speaks volumes about statistics and their limits.  Disparity impact analysis, where regulators and litigators argue that a facially neutral lending policy can be proven to discriminate against individuals based on statistical analysis, is predicated on the assumption that statistics don’t lie.  Advocates of this approach argue that at some point statistical disparities demonstrate that even facially neutral policies reflect discriminatory undertones and/or practices. 

On the other end of the spectrum, on which I would place myself, are those who take a jaundiced view of disparate impact analysis.  Statistics only tell a fraction of the story.  For instance, the CFPB’s statistical chart can’t tell you about how often an employee had to be pushed to get his work done.  Similarly, statistics alone can’t capture the full extent of negotiations that went on between a mortgage originator and a consumer who happened to be African-American.  Nevertheless, the explosion of data makes it more, not less, likely that statistics will be used to judge the effectiveness of anti-discrimination laws.  This is why I find the CFPB’s response so telling.  Rather than defend its evaluations, it implicitly assumes that its managers must be racially biased.  Remember, these are the same people who will ultimately be reviewing lending trends and using increased HMDA data to spot discrimination.   

The pre-eminence of disparate analysis is going to have real life consequences.  For instance, the reality is that as lenders heighten their underwriting standards to make sure that they can document why a borrower can repay a mortgage loan or decide to only make so-called qualified mortgages, these decisions will have a disproportionately negative impact on minority groups that, in the aggregate, have less income. 

What will be the response of legislators and regulators?  Will they look at these statistics and realize that they reflect deep-seated, complex problems that simply can’t be assumed to only reflect racial animus?  Or will they do what the CFPB has done and simply water down evaluation standards so that the difficult issues raised can be “solved” instead of addressed.   

August 28, 2014 at 8:43 am 1 comment

Don’t Forget About NY’s Homestead Exemption

NY’s Homestead Exemption has been around since1850 but wasn’t big enough to provide much of a concern to creditors until the last decade.  This exemption, like others across the country, shields equity in a principal dwelling up to a statutorily prescribed dollar amount from application of a judgment lien.  A recent decision by the Court of Appeals for the Second Circuit that retroactively applied homestead exemption increases further puts creditors on notice that they may not have as much equity to go after as they thought.

Just how much has NY’s homestead exemption increased? It was increased from $10,000 in 1977 to $50,000 in 2005 and now stands at a baseline of $75,000 in 2010 with regional differentials that make it as high  as $150,000 in certain counties.

So, you all should take note of a decision by the Court of Appeals for the Second Circuit which answered the following question: Does the 2005 Amendment’s increased homestead exemption apply to judgment liens perfected prior to the amendment’s effective date? The answer is yes.

When Tanya Calloway filed for Chapter 7 bankruptcy in 2009, her house was valued at $110,000 with $85,000 remaining on her mortgage. If the pre-2005 homestead exemption applied then there was still money the creditors could go after but if the $50,000 exemption applied then the creditors were out of luck. 1256 Hertel Ave. Associates, LLC v. Calloway, 12-1603-BK, 2014 WL 3765864.

Deciding the issue for the first time, the Court concluded that “[a]lthough the Legislature made no specific pronouncement as to the 2005 Amendment’s effect on pre-enactment debts, the statute’s legislative history reflects a clear sense of urgency that the homestead exemption limit be immediately adjusted to bring it in line with modern home values.”

This ruling just applied to the retroactively of the Legislature’s 2005 homestead exemptions; however, I would work on the assumption that if you have a judgment lien on someone’s principal dwelling, the court will apply the exemption in effect at the time you move to enforce the judgment. Given how high NY’s homestead exemption is now, your liens may not be worth the paper they are printed on.    

European News Impacts Your Search For Yield

News out of Europe this morning that Germany’s GDP shrank and that Europe’s nascent economic recovery ground to a halt will further complicate the search for yield. Here’s why.

First, the yield on the German 10-year bond has actually fallen below 1% for the first time in history. At first blush, this makes no sense.   Since interest rates and bond prices have an inverse relationship, why should the cost of buying a German bond increase? Because, like U.S. Treasuries in the dark days of 2008, when the economy is bleakest, investors ultimately want to put their money in the economy where it is safest. This is kind of interesting, Henry, you may be musing, but how does it affect me?

Because, as explained in this article, “low yields in Europe remind us that the current 2.4% yield on the 10-year [U.S.] Treasury Note is actually relatively high.” In other words, if there is no lack of demand for U.S. debt at current rates, then don’t expect that to change in the near future.

August 14, 2014 at 9:10 am Leave a comment

Who Rules The Bond Market?

There are some issues that represent such an important shift in the way the broader financial sector operates that they are important to know about even if they don’t impact credit unions directly. Besides, they are just interesting.

One of these developments comes in the form of news that Argentina is on the verge of defaulting on its government bonds. This is no run of the mill default as it could be precedent-setting by giving U.S. courts the upper hand in enforcing judgments against nations. Not only that, it underscores just how powerful those information subpoenas you receive are, provided they are valid.

There is a long history of foreign governments refusing to enforce judicial rulings by U.S. courts seeking to enforce money judgments. As far back as 1832 when Chief Justice John Marshall ruled that the federal government and not the states had authority to negotiate with tribes to purchase land owned by Indian tribes in Georgia  (Worcester v. Georgia (1832), President Jackson allegedly responded with his famous retort, Marshall made his ruling, now let him try to enforce it.

Similarly, when it comes to bonds issued by a foreign nation the conventional wisdom has been that there is only so much bondholders can do to redeem assets to pay off bond defaults. So when the Argentinian government defaulted on its bonds in the first years of this century, the vast majority of bondholders took the reduced payouts reasoning that it’s better to get half a loaf than no bread at all. However, a handful of bondholders held out for full payment.  With the aid of some of the best lawyering you are ever going to see, these holdouts have backed the Government of Argentina into a corner.

Typically, Argentina would pay the American bondholders who accepted the modified payouts independent of what it owes to the hold outs. However, Judge Gleason of the Federal Court for the Southern District of New York issued an order mandating that, as explained by the New York Law Journal,   “the next time the ‘exchange’ debt holders are paid by Argentina, and the country is expected to pay them $900 million, the country must pay one of the hold outs $1.3 billion, plus interest, or about $1.5 billion.”  Presumably, if Argentina chooses to ignore this order, the holdouts could attach any payouts to other bondholders.

In addition, the legal wrangling underscores just how powerful those third-party information subpoenas are. In a 2012 case before the Second Circuit, which has jurisdiction over New York credit unions, The holdouts argued that subpoenas against third-party banks holding assets in a foreign country are valid-even if the money sought is ultimately out of the creditors reach. Why does this matter? Because as the Court explained, “New York State’s post-judgment discovery procedures, made applicable to proceedings in aid of execution by Federal Rule 69(a)(1), have a similarly broad sweep. The New York Civil Practice Law and Rules provides that a “judgment creditor may compel disclosure of all matter relevant to the satisfaction of the judgment.” N.Y. C.P.L.R. § 5223; see David D. Siegel, New York Practice § 509 (5th ed. 2011) (describing § 5223 as “a broad criterion authorizing investigation through any person shown to have any light to shed on the subject of the judgment debtor’s [**6] assets or their whereabouts”).

But remember, an information subpoena under NY law is only valid if it is properly issued and that includes mandating that the creditor have a good faith reason for thinking that money may be stowed away in your accounts.

By the way, I would still bet that the issue will be resolved sometime today short of default, but no matter what happens the power of U.S. courts and creditor subpoenas have been given a big shot in the arm. Can you imagine if Europe had to negotiate with New York judges before restructuring Greek debt? This is the type of power we are talking about. As former Presidential Advisor James Carville once quipped, when he comes back to life he wants it to be as the bond market.


July 31, 2014 at 9:40 am Leave a comment

What Rights Does Your Pregnant Employee Have?

The way my father explained it to me, people have been getting pregnant for quite some time.  In addition, since 1978, federal law has banned discrimination in the workplace on the basis of pregnancy.  So you may find it odd that pregnancy is a hot topic in legal circles these days.  However, recent developments have brought the issue of pregnancy discrimination to the forefront of HR law.

First, the Supreme Court has decided to review a case next term, Young v. United Parcel Service, in which it will clarify what accommodations, if any, must be provided to a pregnant employee.  Not coincidentally, the EEOC recently released an updated guidance on this issue for the first time in more than two decades.

The issues involved are not as clear cut as you might think.  First, let’s start with the basics.  We all should know that you can’t discriminate against someone just because she is pregnant.  The Pregnancy Discrimination Act provides that pregnant women “shall be treated the same for all employment purposes. . .as other persons.”  It seems simple enough, but the case the Supreme Court is going to hear involved a driver whose job required her to lift up to 70 lbs.  The company’s policy excused drivers from this requirement if they were disabled or if they lost their license, but not if they were pregnant.  The company argued that it was required to treat her equally with all other employees and it would not be doing that if it excused her from the weight restrictions just because she was pregnant.

When I first read this decision I wondered why she couldn’t be treated as disabled under the ADA.  But the Fourth Circuit, which heard the case being decided by the Supreme Court, ruled that the ADA doesn’t apply to pregnant women.  As a result, the Fourth Circuit ruled that the company acted legally despite the fact that her request to lift lighter packages could have been easily accommodated.

Undoubtedly with an eye toward weighing in on the Supreme Court’s decision, the EEOC’s recently updated pregnancy guidance argues that there may be circumstances in which pregnant women are protected under the ADA.  As I like to say, this is one of those cases that are going to be worth keeping an eye on.  With my usual caveat that I am not an HR attorney but I like to play one occasionally writing this blog, this is one area where it seems a bit of common sense goes an awfully long way.  UPS has provided us a great case to consider, but had it not been so stubborn in adhering to its policy, an employee could easily have been accommodated and millions of dollars in legal fees could have been avoided.

July 22, 2014 at 8:31 am Leave a comment

UPDATED: Busy day in DC..sort of

July 16, 2014 at 8:55 am Leave a comment Edit

WARNING: The following blog is predicated on the assumption and\or delusion that Congress has both the ability and inclination to not just talk about the nation’s challenges but to do something about them

Good morning-Yesterday was a busy day in the public policy arena. Here is a quick review of some of the highlights

Credit Union Reg Relief TestimonyDouglas A Fecher, CEO of Wright-Patt Credit Union, delivered testimony on behalf of CUNA before a House Financial Services Sub Committee. The testimony highlighted an increasingly long list of needed reforms-ranging from putting the brakes on the Justice Department’s “Operation Choke Point” before it chokes off legitimate business activity, to forcing NCUA to scale back some of its proposed RBC asset weighting. CUNA estimates that, since 2008, credit unions have been subjected to 180 regulatory changes from 15 different agencies. The testimony is available here:

Warren is must see T.V. Even though I disagree with about 90 percent of what she has to say, Elizabeth Warren, the Birth-Mother of the CFPB and the current Senator from Massachusetts is good for America if only because she is one of the few politicians willing to publicly say how little is being done to prevent Too-Big-To-Fail banks from failing again at taxpayer expense. In this increasingly exasperated exchange with Fed Chairman Yellen Warren points out that so called “living wills,” which are  intended to provide for blueprints for the  orderly liquidation of the Behemoth banks, aren’t worth the paper they are printed on if the Fed doesn’t force institutions to make the changes necessary to allow for orderly liquidation. Yellen suggests that the Fed role in the process is merely advisory.

The Feds Outlook Chairman Yellen’s written testimony before Congress didn’t break much new ground. She did indicate that it remains on track to stop the “twist” bond buying program. In addition, even though the economy is improving she still sees enough slack in it to keep from raising interest rates. The WSJ is reporting that she “hedged” on interest rates but every Chairman hedges on interest rates.

Senator George D. Maziarz Calls it quitsThe long serving Western New York Republican’s departure means that there are now  four open seats in the State Senate. Republicans have to protect these seats and gain three in order to keep Senate Democrats from taking control of the Senate now that the Independent Democratic Caucus is backing the democrats to lead the chamber.

On Mortgage meltdowns and prayers NY is slated to receive $92,000,000.00 from the Justice Department’s 7 billion settlement with Citigroup over its shoddy underwriting practices for Mortgage Backed Securities but what really caught my eye was this quote from a Citi trader cited in the settlement papers : The trader stated that Citi should pray and explained that he“… would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals (CLTV would be >100), etc. It’s amazing that some of these loans were closed at all.”


July 16, 2014 at 9:23 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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