Posts filed under ‘New York State’

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.


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

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.


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.


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

Governor Signs Off on Prize-Linked Savings Bill

It feels nice to be able to bring you good tidings this morning,  Yesterday, Governor Cuomo signed off on legislation (A.9037A (Robinson)/S.6805B (Lanza); Chapter 370) authorizing credit unions to offer prize-linked savings lottery programs.  The legislation also permits banks to offer the same products if and when bank regulators follow NCUA’s lead and authorize savings lotteries for banks.

I’ve talked about prize-linked saving initiatives in previous blogs.  They permit credit unions to pool resources and create lotteries for credit union members who deposit money into a savings account, typically a share certificate.  For example, in Michigan, which was the first state to adopt a program in 2009, credit unions banded together to offer a single statewide prize of $100,000.  The state’s credit unions also have smaller prizes given to lottery winners at individual credit unions.

The initiative has gained attention nationally.  According to a recent article in the New York Times, close to $96 million has been put away in prize-linked savings accounts.  They appeal to policy makers across the political spectrum who see them as a free-market way of weaning people off lottery tickets by providing them with an alternative way of satisfying their gambling fix while actually increasing their savings.

The legislation signed into law yesterday takes effect on September 23, 2015.  It authorizes the Department of Financial Services, in consultation with the State Gaming Commission, to promulgate regulations governing the program.  The next step in the process is to get credit unions together to decide how exactly they want New York’s program to work.  For those of you who attended our recent Legal and Compliance Conference, you already received an overview of the way the programs are typically set up.

September 24, 2014 at 7:46 am Leave a 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.

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

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.


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.


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

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

Five Thursday Tidbits

Since I didn’t do a blog yesterday, I have too much to talk about today. So, with the caveat that you may see me expand on anyone of these subjects in the future, here are some tidbits to consider as you start your credit union day.

Greetings Congressman Nussle — I’m sure CUNA is relieved to know that I think they did a great job in hiring former Republican Congressman and Budget Director Jim Nussle. First, the political winds are blowing to the right and if the industry is to get big-ticket items done on a national level it needs a guy who can get Republicans listening. Plus, Nussle knows the budget as well as anyone, and given his bona fides as an advocate of deficit reduction he is well positioned to swat away tiresome complaints about the credit union tax exemption and keep Congress focused on issues that help credit unions help members. Welcome to the fight.

 How much should foreclosure’s cost? Earlier this week, Benjamin Lawsky, the Superintendent of the DFS, sent a letter to Melvin Watt, the head of the FHFA urging him to quash a proposal for Fannie Mae and Freddie Mac to charge more for buying NY mortgages. Specifically, the FHFA is considering increasing the guarantee fee  “g Fees” GSE  charge on New York mortgages as well as those of four other states by 25 basis points to account for increased foreclosure costs. The other impacted states would be Connecticut, Florida and New Jersey. The DFS argues that the FHFA is relying on data that negatively skew the cost of foreclosing in New York and that, by penalizing New York and others, it is penalizing states for providing enhanced protections for homeowners. Here is the thing: the GSEs have a point, as well-intentioned as some of NYs foreclosure laws are, every new procedural hurdle or mediation delay makes owning a house more expensive for everyone. There are real costs involved in keeping someone in a house they can’t afford. Conversely, is it fair to make New York homeowners, the vast majority of whom won’t default, pay an increased burden? The real solution is for the Legislature to reexamine some of the protections it has put in place and see what steps can be taken to make the foreclosure process more efficient. I’m not holding my breath. Here is a link to the letter:

The CFPB announced inflation adjusted thresholds after which Regulation Z will not apply to consumer transactions. Specifically, the Bureau that never sleeps announced, “[t]ruth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $54,600 or less in 2015 – an increase of $1,100 from 2014. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.“ Here is a link to the announcement:

Here is an earlier blog I did on the topic:

Judging by the interest generated by this topic at yesterday’s Legal and Compliance Conference, many of you are aware that even if your credit union is not unionized, your employers have a right to use social media to complain about workplace conditions where such   employees are deemed to be taking  taking concerted actions against work place conditions. Just how broadly this right can be interpreted is underscored by this blog post from Bond, Shoenick & King. It summarizes a recent administrative ruling by the NLRB in which it held that restaurant employees were wrongly terminated after complaining about sloppy paperwork by the owners that cost employees increased taxes. referring to your boss as an “Ass” on Facebook is not grounds for dismissal so long as other employees join in your complaints For more information on just how much employees can bad mouth their employers with impunity, here is the post.

Lost in all the hype about the new Apple product roll out was the tidbit that banks have agreed to pay Apple a fee for every transaction made on its Mobile Systems program. Apple’s technology may not be game changing, but its potential to change the payment system model is. The details are still sketchy. More on this in the future.





September 11, 2014 at 9:13 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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