Why Credit Unions Should Follow The Attorney General’s Guidance

April 21, 2020 at 9:59 am Leave a comment

By warning credit unions and banks that, in her opinion, they would be violating New York Law by honoring levy and restraints, or setting off funds to pay for delinquent loans, New York’s Attorney General has put everyone on notice that she has a good faith basis for taking legal action against any institution which decides to take some or all of these steps. Nevertheless, judging by the number of emails and phone calls I received on this topic yesterday, at least some credit unions are considering going ahead and either setting off funds or capitalizing negative balance accounts.

Time to take a deep breath people. Is the amount of money you are seeking to collect worth the risk of being scrutinized by the Attorney General, not to mention the reputational harm to your credit union?

Here’s the problem: given the unique times in which we live, virtually every action you take involves an unsettled area of law. For example, Federal Credit Unions have a statutory right of setoff and there is both case law and regulatory interpretation making it clear that to the extent that state law prevents a credit union from exercising this right, the state law is preempted. Conversely, the Attorney General can argue that New York’s Exempt Income Protection Act, does not prevent financial institutions from setting off funds, but simply ensures that members have adequate resources to live on before they do so.

Another action credit unions are considering taking involves using some of the stimulus check money to address negative account balances. But how long has that account been negative? Is it possible that the member does not even know that the account is still open? Worse yet, is it possible the account is closed to the member but “open” for collection purposes? Could any of these scenarios provide a good faith basis for alleging that your credit union is engaging in an unfair and deceptive practice? Do you really want to find out the answer?

For those of you who insist on forging ahead and fund negative account balances, it’s important to keep in mind the constraints your overdraft program operates.  For one thing your overdrafts should be charged off no later than forty-five (45) days after the overdrafts are cleared.  In addition, as you can see from this opinion letter, a credit union using funds to pay off an overdraft is paying off a loan and setting off funds in order to do it.  The AG has taken the position that setoffs are illegal.

This is not the time for aggressive legal interpretation. There are no great principals at stake here. Don’t put yourself in a situation where, in a best case scenario, your credit union secures the right to government stimulus checks which cover a fraction of the legal costs it will have to pay to lawyers.

Entry filed under: Legal Watch, New York State, Regulatory. Tags: , , , .

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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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