Posts filed under ‘Legal Watch’

I Wish I Could Be Punished Like That

Nothing to do with credit unions but yesterday Tom Brady was suspended four games for having his footballs deflated prior to the AFC championship game.

Let me get this straight: He won the game and won the Super Bowl.  His punishment is to spend four extra  weeks on the couch at home watching  the games with his super model wife  Gisele Bundchen rather than being scowled out by  Bill  Belichick as he  gets  attacked by a bunch of 300 pound defensive lineman with 4-4 speed out to cripple him? Sign me up.

Target Settlement Can Go Forward

Effectively saying his hands were tied, a federal judge in Minnesota refused to block a proposed settlement between Mastercard and Target from going forward.  Under the agreement  $19 million  is being set aside for  eligible banks and credit unions to  settle their claims for operational costs and fraud-related losses on MasterCard-branded cards affected by the data breach. Upon accepting the offer, each issuer will release MasterCard, Target and its acquiring banks from all claims related to the data breach.

The settlement takes effect  if  90% of eligible issuers opt into it by May 20th . A group representing smaller banks and credit unions argued that  the court should block the settlement because it does not adequately compensate smaller issuers or explain the consequences of the settlement.

“The agreement between Target and MasterCard is nothing more than an attempt by Target to avoid fully reimbursing financial institutions for losses they suffered due to one of the largest data breaches in U.S. history,” said an email from the banks’ co-lead counsels, Charles Zimmerman of Zimmerman Reed and Karl Cambronne of Chestnut Cambronne according to today’s American Banker. The attorneys have previously argued that the settlement is a “sweetheart” deal that provides issues with paltry settlements.

The judge was by no means unsympathetic to these concerns however he decided that  the banks’ “issues with the settlement are understandable, but they are also not susceptible of a legal remedy,”  according to the paper.

The institutions seeking to block the settlement were  Umpqua Bank, Mutual Bank, Village Bank, CSE Federal Credit Union, and First Federal Savings of Lorain.

Flanagan Takes The Helm

When a Speaker is chosen for the House of Parliament in  Great Britain  he  is ceremonially  dragged to his new seat.  After all, If the Monarch was displeased with parliament the first person attacked was the speaker.

Suffolk County Republican Chairman John Flanagan was chosen as the new head of the New York State Senate replacing Dean Skelos who was recently arrested  on corruption charges.

I got to know the Senator when I worked in the Assembly Minority and he was the Ranking Member of the  Ways & Means Committee. He was by no means dragged to this position but he faces some extremely tough challenges leading a conference were Republicans hold a one seat majority and public confidence  is shaken.

That being said,  he’s a great pick.   He has been either a close observer or intimately involved with the budget process for more than two decades, having served as the ranking member of the Assembly’s Ways & Means committee and as Chairman of the Senate’s Education Committee.   If you want to know how Albany works  then you have to know education.

As for our issues,  His district is populated  some of the state’s most successful credit unions and he approaches issues with an open mind. My guess is  that those of you who get to meet him will be impressed.

May 12, 2015 at 9:40 am Leave a comment

Tuesday Morning potpourri

Court Hands Creditors An Important Win

A unanimous Supreme Court handed creditors an important victory that will help keep the time it takes to resolve Chapter 13 bankruptcies from getting longer than your typical Red Sox baseball game-which seems to last forever.  (Their starting pitchers take  five minutes between pitches.) The case is Bullard v. Blue Hills Bank, No. 14-116, 2015 WL 1959040, at *8 (U.S. May 4, 2015).

Louis Bullard filed a petition for Chapter 13 bankruptcy in Federal Bankruptcy Court in Massachusetts.  For our purposes,  the important thing to remember is that he ultimately proposed  splitting the debt into a secured claim in the amount of his house’s then-current value (which he estimated at $245,000), and an unsecured claim for the remainder (roughly $101,000).  Bullard would continue making his regular mortgage payments toward the secured claim, which he would eventually repay in full, long after the conclusion of his bankruptcy case. He would treat the unsecured claim, however, the same as any other unsecured debt, paying only as much on it as his income would allow over the course of his five-year plan. At the end of this period the remaining balance on the unsecured portion of the loan would be discharged. In total, Bullard’s plan called for him to pay only about $5,000 of the $101,000 unsecured claim. The bank objected and after a hearing the bankruptcy  court refused to accept the plan.

Here is where it gets technical but important.  Instead of submitting another plan Mr. Bullard immediately appealed the bankruptcy court’s  refusal to confirm  his plan.  The question that the Supremes  decided yesterday was whether debtors have the  right to immediately appeal a judge’s decision rejecting a repayment plan or whether they have to wait until a bankruptcy plan is agreed to or  the bankruptcy dismissed   before bringing an appeal?  The Court ruled that debtors had to wait until a bankruptcy is finally resolved.  The ruling is consistent with the Second Circuit approach to bankruptcies appeals.

The ruling  means  that debtors must either resubmit a less favorable payment plan or move to  dismiss the bankruptcy and bring an immediate appeal.  This would end the automatic stay on collection efforts. As a result,  creditors have  more leverage over debtors when it comes to repayment plans-a fact acknowledged by the Court.  “We do not doubt that in many cases these options may be, as the court below put it, “unappealing.” But our litigation system has long accepted that certain burdensome rulings will be “only imperfectly reparable” by the appellate process.”

Besides, the court’s approach is a heck of a lot better than letting debtors drag out bankruptcies for years by appealing every time they propose an inadequate bankruptcy plan.

Interstate oversight Pact Agreed To

The CU Times informs us that Michigan’s Department of Financial Services announced on Friday that it was  joining  an interstate compact for the supervision of state chartered credit unions that operate in more than one state. Why do I care? Because one of the key questions facing New York federal credit unions considering converting to the state charter is who will regulate  their out-of-state activities?   No such concerns exist for federal charters.

At last week’s State GAC conference Ruth Adams, NY’s Deputy Superintendent for Community and  Regional Banks who oversees supervision of state chartered credit unions , said that the state is interested in developing similar supervisory agreements as part of its efforts to encourage more state charters.  Michigan’s announcement is another indication that such agreements have risen on regulator  to-do lists and this  is a good thing.    To give you a sense of what these agreements do here is a link to the Southeastern cooperative agreement entered into in 2008.

http://www.nascus.org/pdf/2008-Southeast-Interstate-Agreement.pdf

It’s Deja Vu All over Again

In case you missed it,  NY’s State Senate Majority Leader Deal Skelos of long Island was arrested on federal corruption charges yesterday.  We will have to wait and see what unfolds in the coming days. Since Senate Republicans hold a one seat majority and democrats hold all of the other statewide offices the Senate Majority leader is the most powerful Republican in New York State.

 

May 5, 2015 at 9:16 am Leave a comment

Putting Teeth In Kickback Prohibitions

RESPA has always prohibited kickback schemes.  Specifically, RESPA explains that ”No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C.A. § 2607 (West).  But figuring out where the line is between legitimate salesmanship and illegal kickbacks has always been a gray area and RESPA enforcement has always been a tad lax.

Yesterday provided examples of how RESPA says what it means and means what it says.  The Bureau That Never Sleeps and the Maryland AG sued originators over an alleged referral kickback scheme         (http://www.consumerfinance.gov/newsroom/cfpb-and-state-of-maryland-take-action-against-pay-to-play-mortgage-kickback-scheme/).  Closer to home,   Governor Cuomo and New York’s Department of Financial Services proposed tough new regulations that would, among other things, prohibit title insurance companies from providing meals and entertainment expenses to loan originators (http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf).

First, let’s talk about the RESPA violation.  The CFPB and the Maryland AG are suing Genuine Title, a now defunct Maryland company that offered closing services.  It’s alleged that the company provided loan officers with marketing services “including purchasing, analyzing, and providing data on consumers, and creating letters with the loan officers’ contact information” and that in return, the loan officers would refer homebuyers to Genuine Title.

RESPA stands for the simple proposition that you can’t get something for nothing.  If an originator is getting a fee for doing nothing more than referring business, then something is wrong.

As for New York State, it is moving to clamp down hard on title insurance practices that it believes drive up the cost of title insurance and limit consumer choice.  The Governor doesn’t always get quoted in DFS press releases.  Here is an indication of how strongly the administration feels about the amount of gift giving going on in the title insurance industry.

“New Yorkers should not have to foot the bill for outrageous or improper expenses made by title companies just to refinance or close on their home,” Governor Cuomo said. “Our administration will not stand for that kind of abuse in the title insurance industry, and these new regulations will help ensure that New Yorkers are protected from unfair charges and get the most bang for their buck.”

The proposed regulations would prohibit title insurers from offering inducements to get business including:  meals and beverages; entertainment, including tickets to sporting events, concerts, shows, or artistic performances; gifts, including cash, gift cards, gift certificates, or other items with a specific monetary face value; travel and outings, including vacations, holidays, golf, ski, fishing, and other sport outings; gambling trips, shopping trips, or trips to recreational areas, including country clubs; parties, including cocktail parties and holiday parties and open houses.  THIS IS NOT THE COMPLETE LIST

Suffice it to say it’s about to get a lot less fun dealing with title insurers in NYS.

Here is a link to the proposal:  http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf

NCUA Board meeting today

Here is a quick reminder that the NCUA is having a board meeting today.  Among the issues on the agenda are a vote on a final rule amending common bond requirements for associations and  proposed regulations for IOLTA accounts.  Remember that federal law now authorizes credit unions to open up Interest on Lawyer Trust Accounts. The regulation will presumably describe what accounts are similar enough to IOLTAs that they can also be offered by credit unions.

It was nice seeing so many of you at the State GAC over the last couple of days.  Great job!

 

 

April 30, 2015 at 9:13 am Leave a comment

Moving the Onus of Data Breaches

I’m feeling lucky today. On the same day that New York credit unions are going to the Legislature to advocate for stronger data protections, among other things, news reports explain why small credit unions and banks are objecting to a proposed settlement between MasterCard and Target in relation to Target’s data breach.

To his credit, the Attorney General has made data breach legislation one of his main priorities. Recently, the Legislature introduced bills at his request (A.6866/S.4887) that would require all businesses in New York State to adhere to certain basic industry standards. For example, businesses that comply with Gramm-Leach-Bliley privacy protections would be in compliance with the AG’s standards. Since banks and credit unions have had to meet basic privacy protections for years, the main effect of the AG’s proposal would be to apply these standards to merchants. This is, of course, a good thing. But what happens when the merchants don’t live up to their end of the bargain?

Which brings us to today’s news. As explained in this article in the Wall Street Journal, small banks and credit unions are objecting to the proposed MasterCard settlement negotiated with larger banks on the grounds that it doesn’t provide adequate redress to smaller institutions. You may be aware that credit unions have joined class action law suits seeking damages against Target and other retailers for costs related to the breach. One of the main reasons why the Target lawsuit has legs is because Target is headquartered in Minnesota. In addition to being the land of 1000 lakes, it is also one of the first states in the nation to have a statute enabling financial institutions to recover for the cost of data breaches caused by merchants. These costs include the expense of reissuing new debit and credit cards.

The AG’s bill includes no similar rights for New York banks and credit unions. If the legislation ultimately includes such a right, it would be a pretty fair deal for financial institutions and consumers. Data would be better protected and the fear of litigation would put some teeth behind this bill. In contrast, unless credit unions and banks get a statutory right to recover for the costs of breaches for which they are not responsible, costs of these data breaches will not be shouldered by the parties most responsible. This is particularly important for credit unions since, as the article points out, data breaches are more costly for smaller institutions.

April 29, 2015 at 7:52 am Leave a comment

How good are your vendor contracts?

To its credit, for almost a decade now NCUA has been emphasizing the need for due diligence when entering into third party relationships. Unfortunately, based on what I have seen, the quality of credit union oversight varies widely with too many credit unions continuing to place too little emphasis on a properly drafted contract which commits vendors to upholding privacy standards and establishes a framework whereby your credit union monitors vendor performance.

So, I’m not surprised with the results of a survey released last week by New York’s Department of Financial Services. The Department surveyed 40 financial institutions about their vendor management activities. Its findings are likely to result in proposed state regulations outlining vendor relationship requirements. It concluded that:

  • Nearly 1 in 3 (approximately 30 percent) of the banks surveyed do not require their third-party vendors to notify them in the event of an information security breach or other cyber security breach.
  • Fewer than half of the banks surveyed conduct any on-site assessments of their third-party vendors.
  • Approximately 1 in 5 banks surveyed do not require third-party vendors to represent that they have established minimum information security requirements. Additionally, only one-third of the banks require those information security requirements to be extended to subcontractors of the third-party vendors.
  • Nearly half of the banks do not require a warranty of the integrity of the third-party vendor’s data or products (e.g., that the data and products are free of viruses).

http://www.dfs.ny.gov/reportpub/dfs_rpt_tpvendor_042015.pdf

As I see it, one of the biggest problems is that businesses think of the contract as one of those last second details to be addressed after a vendor has been selected.  It doesn’t have to be this way.  For your larger vendor contracts you should ask your finalists to provide you with copies of their base contracts.  You have leverage you should use if you find that one vendor has better terms than another. Furthermore, if one vendor is more committed than another to insuring data security then you can and should take this into account when making your final decision. Finally, you are being penny wise and pound foolish if you don’t pay for an attorney who has experience with vendor contracts and who is aware of pertinent regulatory requirements.  By the way, the Association is willing and able to provide these services.

Is the Fed Getting Cold Feet?

The recent spate of lack luster economic news may keep the Fed from raising interest rates when it meets in June, according to an interesting WSJ article today. If this reporting is correct, a consensus is emerging that with inflation still below its 2% target range and employment still lagging, it makes sense to wait until later in the year before deciding to pull the trigger on the first rate increase since the Fed placed short term interest rates near 0 in December 2008.

Two quick thoughts, this is another great example of the Groundhog Day economy we have been stuck in for some time now. Economists confidently predict every Fall that the economy is finally on solid footing only to back away from the predictions following tepid economic growth in the first quarter. For what it’s worth, this blogger still believes the Fed will raise rates ever so slightly in June, if only to shift the debate away from when interest rates will rise to how high they should go. Low interest rates have artificially inflated equities for several years now by making the market the only place to get an adequate return.

On that note, have a nice weekend.

April 17, 2015 at 8:40 am Leave a comment

New Credit Scoring Means New challenges For CUS

FICO), Lexis –Nexis Risk solutions and Equifax yesterday  described  the details of a pilot program currently underway to examine the creditworthiness of those who aren’t eligible for credit because there is no way of  scoring them under traditional models.  According to the press release the pilot program allows 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit. (http://www.fico.com/en/fico-lexisnexis-risk-solutions-and-equifax-joining-to-generate-trusted-alternative-data-scores-for-millions-more-americans-04-02-2015).

There is more here than meets the eye.   For one thing I didn’t realize just how many Americans are completely off the credit scoring radar. These “unscorables”  don’t engage with  the banking system and therefore can’t be scored .  Yesterday’s press release put that number at 15 million but this may be on the low side.  No matter what numbers you rely on, what everyone agrees on is that a disproportionately large segment of this group is composed of poorer minorities who are flocking to prepaid cards.

In order to assess the credit worthiness of these unbanked persons of modest means additional data has to be mined. The pilot program announced yesterday uses information such as cable and utility bill payments.  These are potential members who have so far chosen to opt out of the financial system all together.  Does the industry have an obligation to aggressively court these members? I say yes.  Alternative scoring models can help.

So why am I a little squeamish? I’ve talked about how  “Big Data” has the ability to both revolutionize lending and create a host of legal challenges that simply weren’t anticipated when  fair lending laws were passed,  For example,  let’s say that this pilot scoring system proves  to be a reliable indicator of creditworthiness.  How many years will lenders have to start using this new model without being accused of violating lending laws?  After all, FICO has now demonstrated that traditional scoring systems have the effect of reducing credit to poorer often  minority. credit worthy applicants and that an alternative system can be used.

Then there are the broader policy implications. Is extending credit to people who have so far chosen to live without it or who can’t afford it under traditional measures really a good thing?  In 2007, on the eve of the Great Recession, America had a personal savings rate of 1.7%. Today it has skyrocketed to 5.5%which still puts us well behind most developed nations.   In addition,  your average 401K barely has enough in it to pay a retiree’s bus fare for his ride to his job at Walmart.

The financial industry will be devising more and more creative and accurate ways of reviewing credit worthiness for years to come.  Used wisely and monitored by regulators within the appropriate legal framework,  much good can come of this innovation. Conversely, right now the technology is racing too far ahead of the policy. Just because an alcoholic can pay for his drink doesn’t mean he should be having one.  As a nation we are too dependent on credit and enabling the poorest among us to take on debt doesn’t seem to be the best way of encouraging thrift.

On that note,  your faithful blogger is off next week to take the family on a visit to the nation’s capital and Southern Pines, North Carolina,  to go to my niece’s wedding and finds some warm weather.  Enjoy the holiday.

April 3, 2015 at 9:57 am Leave a comment

If you have an employee handbook you have to read this…

Whether or not you work in a unionized workplace, the National Labor Relations Board has used an  expansive view of federal law to insert itself  into , and implicitly attempt to micromanage, the American workplace in a way that is directly impacting your credit union operations.

Those of you who think I’m exaggerating and\or those of you whose job it is to manage employees would be well advised to review the NLRB’s recent  guidance  outlining language that can and can’t be in workplace handbooks(http://www.nlrb.gov/reports-guidance/general-counsel-memos Report of the General Counsel Concerning Employer Rules).  On the one hand the memorandum is an attempt to provide a concise compendium of handbook dos and don’ts based on its prior rulings;  on the other hand  it  reads like an  “April  Fools” joke.   Unfortunately it isn’t.

First, the NLRB correctly reminds us that handbook language violates federal law when “employees would reasonably construe the rule’s language to prohibit” concerted activity be it in a unionized or non-unionized workplace.  The problem is that the mythical  employee the NLRB is protecting apparently  has a law degree, is utterly devoid of commonsense, behaves like an out-of-control  teenager who has just been told  she has  to be home by 11:00PM   and  works for the NLRB.  No other workplace could  function in the workplace as pictured by the Board

In the-“ You can’t make this stuff up category” the NLRB explains that  a workplace policy “that prohibits employees from engaging in. “disrespectful,” “negative,” “inappropriate,” or “rude” conduct towards the employer or management, absent sufficient clarification or context, will usually be found unlawful…  Moreover, employee criticism of an employer will not lose the Act’s protection simply because the criticism is false or defamatory.”

Apparently the NLRB doesn’t think your average employee has a rudimentary grasp of the English language or can be expected to have the etiquette  of a kindergartener.

But wait there’s more.  Did you know that a policy banning “Disrespectful conduct or insubordination, including, but not limited to, refusing to follow orders from a supervisor or a designated representative.” Or another prohibiting “Chronic resistance to proper work-related orders or discipline, even though not overt insubordination will result in discipline.” Is illegal?

I want to give the NLRB the benefit of the doubt.  Maybe it is so committed  to protecting the Norma Rae’s of the world chafing under  employer misconduct  that it wants to give   complaints about  management malfeasance   the widest possible protection. The problem is that its prohibitions also prohibit language intended to regulate employee to employee civility. For example it  found the following policy to also violate the FLSA.

“Material that is fraudulent, harassing, embarrassing, sexually explicit, profane, obscene, intimidating, defamatory, or otherwise unlawful or inappropriate may not be sent by e-mail. …”We found the above rule unlawful because several of its terms are ambiguous as to their application to [concerted] activity—”embarrassing,” “defamatory,” and” otherwise . . . inappropriate.” We further concluded that, viewed in context with such language, employees would reasonably construe even the term “intimidating” as covering Section 7 conduct”

Finally even where the NLRB tries to be reasonable the distinctions it draws between lawful and unlawful conduct is so paper-thin that a properly designed  handbook  needs more qualifiers than a  Viagra  Ad.   For example the following language is unlawful  “ Do not discuss “customer or employee information” outside of work, including “phone numbers [and] addresses.” But this policy is legal “Misuse or unauthorized disclosure of confidential information not otherwise available to persons or firms outside [Employer] is cause for disciplinary action, including termination.”

 

April 2, 2015 at 9:27 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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