Last night I got around to reading a deceptively important decision that the US Supreme Court issued on Monday. Humor me on this one, I’ll explain why it’s important in a second.

Frank v. Gaos involved the settlement of a lawsuit in which the plaintiffs allege that Google violated the federal Stored Communications Act when it provided third-parties with information about the search terms used to get to their sites. Google settled the lawsuit because it believed that under existing law a Party that could show that Google violated the statute had automatic standing to sue.

But before the settlement was finalized, the Supreme Court decided both Spokeo, Inc. v. Robins in which the court held that someone claiming to have been harmed had to demonstrate a “concrete injury” even when the statute gave people the right to sue for violating it. On Monday, the Supreme Court once again cited Spokeo, Inc. in holding that the plaintiffs in the case against Google had to prevent more evidence that they were actually harmed by Google’s actions.

So why is this such a big deal? Because just about every federal consumer statute to which your credit union is subject creates statutory standing. Remember those lawsuits claiming plaintiffs were harmed because credit unions didn’t have proper signage on their ATM’s?

So is Spokeo’s standing a good things? Credit unions are advocating for federal data security standards being imposed on merchants. Unless the Supreme Court clarifies Spokeo, it’s quite possible that even if Congress gives credit unions the right to sue for merchant violations they won’t be able to demonstrate adequate harm to bring lawsuits.

How does all this get resolved? Sooner or later I expect state legislatures to start filling in the standing gap. The Constitution was designed to minimize the types of cases that could be brought in federal court. States, in contrast, are free to devise their own standing requirements for their own state laws.

See you Monday.

 

March 22, 2019 at 11:00 am Leave a comment

News Flash: AG’s Oppose Payday Loan Delay

It’s a given these days. Attorneys General from the party opposite of the sitting President varnish their ideological bona fidas – not to mention get press attention – by framing just about any high level policy dispute as a legal issue and threatening to sue.

The latest example of this pavlovian response comes in the form of this comment letter penned by California Attorney General Xavier Becerra and signed by 25 AG’s including New York’s Letitia James. As I’ve been blogging about a lot lately, the CFPB’s payday loan regulations, require among other things that lenders underwrite payday loans to ensure that borrowers have the ability to repay them. This provision is scheduled to take effect in August. CUNA recently issued a letter supporting the delay. In their letter, the AG’s not only criticize the proposed extension but go so far as to suggest that the Bureau might be violating the Administrative Procedures Act. Of course they conclude by explaining that if the “CFPB finalizes the Proposed Delay Rule, we will closely examine whether to take action to address any unlawful action by CFPB.” Dear God, lawyers may sue.

This is the type of Argument that appeals to lawyers but makes the rest of the world so annoyed with us. Let’s say the Attorney Generals are correct? Do they really think it is in anyone’s interest to implement regulations even as the CFPB is proposing another round of rulemaking that would gut the underwriting requirements? And remember, the same group of people who defended the creation of a benign dictator for consumer finance can’t seriously be suggesting that the CFPB lacks the ability to amend its own regulations.

There certainly are some good arguments for and  against regulating payday loans. My only point is let’s keep the policy debates where they belong. Just as I am concerned that the regulatory process needs to be scaled back so that more issues are decided by elected representatives. I also believe that the knee jerk response to frame every policy dispute is a legal issue to be decided on by unelected judges. ultimately distorts the legal system and distracts us from the hard work of reaching a consensus on difficult issues.

Is Congress Ready To Act On Cannabis Banking?

Your faithful blogger has consistently predicted that one of the few issues you would see substantial movement on during this congressional session is on cannabis banking. Since so many of my predictions have proven to be, shall we say off target, I am proud to report this morning that the House Financial Services Committee will be holding a meeting on March 26th to markup HR 1595 by Congressman Perlmutter which, “would create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers for such businesses, and for other purposes.”

Meanwhile, back at the ranch, we received word yesterday that New York Senate Banks Committee Chairman James Sanders Jr. and Senate Finance Committee Chairman Liz Krueger will be holding a public discussion of banking issues related to marijuana banking on April 9th.

Enjoy the nice weather today. See you tomorrow.

March 20, 2019 at 9:39 am Leave a comment

Will The FIS Worldpay Merger Impact Your Credit Union?

It will take time to figure out precisely how much this impacts credit unions but there is little doubt that at some point it will. On Monday, FIS announced it was acquiring payment processor Worldpay in the latest move to alter the landscape in the rapidly consolidating  payment processing industry.

In a refreshingly honest press release announcing the deal, Gary Norcoross, the President and CEO of FIS explained that “scale matters in our rapidly changing industry.” The press release explained that the combination of Worldpay with FIS will help facilitate an omni-channel technology platform which can combine both payment processing and traditional core operating capabilities.

Let’s face it, increasingly who is executing a payment is as important as the institution holding the individual’s money to begin with. For example, Apple Pay is nothing more than a payment platform but it’s a lot more important to younger people than the account they choose. In addition, prepaid debit cards are becoming such an important part of the banking landscape that regulations are finally set to take effect on April 1st, imposing consumer protection obligations on these payment devices. More on that in an upcoming blog post.

What does this mean for credit unions? Fiserv recognizes that financial institutions are going to need to have the capability to rapidly process payments and to do so over a broad range of platforms. Your credit union has to have the technology and foresight to integrate itself into the payment process not only as the account holder but as the marketer of services which promise and provide quick and easy payment solutions.

One more thought. Credit unions love to beat themselves up about how the industry is shrinking. In fact, it’s not shrinking, it’s consolidating. At the end of the day the larger you are the more cheaply you can provide services and this is as true for credit unions and banks as it is for payment processors.

 

March 19, 2019 at 8:59 am 1 comment

Are You Responsible When Your Member Dupes A Third-Party?

Let’s say you open up a business account for a new member. The account is used to hold funds invested in the account holder’s business. You start seeing some suspicious activity such as frequent transferring of funds to other accounts, but you don’t believe it rises to the level of filing a SAR. Eventually, the business goes under because your account holder was running a Ponzi scheme. The irate investors end up suing the credit union for its mismanagement of the account. Do they have a case?

This is the basic factual framework of a case recently decided by a Federal court in New York called HONGYING ZHAO, et al., Plaintiffs, v. JPMORGAN CHASE & CO. & JPMORGAN CHASE BANK, N.A., Defendants. The bank was holding funds for investors who thought they were putting money into an enterprise which involved owning and renting co-working stations across the United States. The irate investors basically argued that the bank knew or should have known that illegal activity was taking place and that by failing to act, it was aiding in the criminal deception. Interesting argument, but the court rejected it. It explained that “neither the Plaintiffs nor the Court have been able to locate a case which even suggests that New York law imposes upon banks a duty to protect non-customers from a fraud involving depository accounts.” see also Renner v. Chase Manhattan Bank, No. 98 Civ. 926 (CSH), 1999 WL 47239, at *14 (S.D.N.Y. Feb. 3, 1999).

Now just to be clear, this doesn’t mean the bank acted properly in discharging its Bank Secrecy Act obligations. Nevertheless, it’s important for credit unions to understand that simply because they are holding someone’s money, they do not automatically become a fiduciary of that account.

NCUA Clarifies Lending Maturity Limits

If that warm glass of milk isn’t doing the trick then I would suggest reading NCUA’s newest regulation reorganizing credit union lending rules to make them easier to find and understand. Don’t get me wrong, these are very practical and important provisions, they are just not that exciting to read. For my purposes, the clarification that I find most interesting is one that states when a loan qualifies as a “new loan under GAAP, the maturity limit is calculated from the new date of origination.”

Another issue deals with one of my pet peeves. Currently commercial loans to one borrower are limited to 15% of a federally insured credit union’s net worth. A waiver of this cap is available for loan participations but not for commercial loans. Instead, a credit union seeking to exceed the 15% commercial loan limit may be granted a waiver of up to 25% of the credit union’s net worth, provided that the additional 10% is collateralized with “readily marketable collateral.” (See 12 CFR 723.2). This is a standard appropriate for banks, not credit unions. There are some credit unions with a proven track record of making commercial loans in excess of the 15% cap which now find themselves unable to because of the stringent “readily marketable collateral requirement.” These credit unions should be given more flexibility and guidance from NCUA. I’m glad I got that off my chest. Enjoy your Monday.

 

March 18, 2019 at 8:11 am Leave a comment

Why You Should Read About This Case

You may have seen the news this morning that ESL Credit Union based in Rochester, New York is being sued by a consumer seeking to bring a class-action lawsuit over its returned item practices and disclosures. I just finished reading the complaint and I suggest that all of you credit union lawyers and compliance people do the same. It presents an interesting twist on the type of overdraft claims credit unions and banks have been seeing over the last five years.

My faithful blog readers are probably sick and tired of my increasingly large volumes of posts talking about lawsuits alleging that a credit union misrepresents how it determines how much money is available in an account before charging an overdraft fee for paying a check. This is not one of those cases. In Susan Roy v. ESL Federal Credit Union the plaintiff is claiming that ESL both violates its account agreement and commits an unfair and deceptive practice by failing to clearly differentiate between overdraft fees and returned item fees. In addition, the consumers allege that the credit union lacked the authority to repeatedly seek to process payments returned because of insufficient funds.

In the factual scenario highlighted in the complaint, the member Ms. Roy, attempted a $34 transfer to PayPal using an ACH transaction. The payment was rejected for insufficient funds and the credit union charged a $37 returned item fee. On two other occasions, ESL tried to process the same transaction and each time it was rejected an additional $37 fee was charged. In all, the plaintiff was charged $111.

The allegations center on the proper interpretation of ESL’s account agreement. On the one hand, ESL’s fee schedule does say it will charge $10 for returned items. On the other hand a separate section of the same agreement explains that overdraft/insufficient funds fees will be charged at a rate of $37. The plaintiffs allege that ESL’s account documents are too ambiguous and that they should be interpreted in the manner most favorable to the consumer. They also allege that ESL had no authority to charge multiple fees stemming from the same transaction.

There are arguments to be made against every one of these allegations. I’m not suggesting that ESL did anything wrong. Right now the lawsuit is nothing more than a single complaint. The reason why I’m highlighting this case is because you would be well advised to make sure someone in your credit union reads the complaint and compares its allegations to your own credit union practices. These cases really happen in isolation and account language doesn’t vary all that much between financial institutions.

 

March 15, 2019 at 9:34 am Leave a comment

Time To Update The BSA

One of the great things about going to events like CUNA GAC is that since you’re surrounded by so many people who actually find issues like regulatory compliance interesting, if you just keep your ears open you end up learning a heck of a lot.

For example, yesterday I chatted with an erstwhile colleague who told me that Congress is in the early stages of examining the Bank Secrecy Act. Sure enough, the House Financial Services Committee will be holding a hearing tomorrow on detecting corporate crime. The proposals to be discussed are in the draft stages but the issues to be examined got me thinking that it truly is time to update the Bank Secrecy Act.

For example, financial institutions were first required to report cash currency transactions of $10,000 or more pursuant to a 1970 federal law. Adjust that for inflation and it becomes clear that what was originally intended as a clear red flag of criminal activity has lost much of its meaning. After all, $10,000 doesn’t even pay for a lot of weddings these days.

And then there are the other numerical thresholds such as those triggering mandatory SAR filings. Should these be adjusted for inflation?

Incidentally, the libertarian in me gets a little nervous when I see just how integral the banking system has become to the law enforcement community. According to the committee memorandum, in the last five years alone law enforcement officials have made more than 10 million FinCen database queries. This includes 126,000 annual queries from the Internal Revenue Service. In addition, more than 21% of the FBI’s criminal investigations involved BSA data. 

I will be listening to the committee hearing at some point. It seems to me that whether you’re an apolitical compliance professional who simply has to dedicate time and energy to a multitude of reporting mandates, a civil libertarian or a law enforcement official who understands the importance of the BSA framework to protecting American citizens, the Bank Secrecy Act could use a tune up that makes it a bit more efficient and useful for everyone.

 

March 12, 2019 at 9:08 am Leave a comment

US DOL Proposes Exempt Employee Thresholds

Here we go again. Few issues have twitter-pated the credit union industry in recent years as much as the Obama Administration’s proposal to raise the salary threshold required to classify an employee as exempt. The regulations never took effect and are currently subject to an induction issued by a Federal District Court in Texas.

Late last week, the DOL issued a new notice of proposed rulemaking for exempt employee classification. Under the proposal, salary levels as a matter of federal law would increase from $455 to $679 per week. Keep in mind however that salary is just one element which must be satisfied to classify an employee as exempt. New York has its own thresholds for classifying employees as exempt as a matter of state law. In addition, those vary by region.

When the Obama Administration came out with its proposal, it forced many credit unions to reexamine how they had been classifying employees. I’m assuming that many of you won’t find this new round of regulations as challenging but you probably should sit down and take a look at what impact the proposal could have on your workforce.

Show Me the Money

In case you missed it, the NCUA has approved a $160.1 million equity distribution from the National Credit Union Share Insurance Fund which will be paid out to credit unions in the 2nd quarter. The current normal operating level is 1.38% but at the end of 2018 the fund stood out 1.39%. The distribution reflects the amount of money above the operating level. According to NCUA, credit unions have received nearly $900 million in Share Insurance Fund distributions since 2017.

March 11, 2019 at 9:25 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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