Posts filed under ‘Legal Watch’
Today’s blog highlights two recent decisions, one that will interest your Compliance/IT department and another that will peak the curiosity of your HR folks.
A decision by the 9th Circuit yesterday underscores yet again the broad reach of the Telephone Consumer Protection Act (TCPA). We recently did a blog on this, but I get the sense that most people, including financial institutions, are still in denial. Chances are your credit union has to comply with the TCPA.
In Flores v. Adir Int’l, LLC, No. CV1500076ABPLAX, 2015 WL 4340020, at *4 (C.D. Cal. July 15, 2015, defendant repeatedly received generic text messages from the debt collector, even after he requested that the texts no longer be sent. He sued under the TCPA, which makes it illegal to contact consumers without their permission with the use of an automatic telephone dialing system (ATDS). He argued that the unsolicited texts demonstrated that the debt collector was using an ADTS to contact him, without his permission and was therefore violating the law. In tossing this claim the Federal District Court held that “Plaintiff’s own allegations suggest direct targeting that is inconsistent with the sort of random or sequential number generation required for an ATDS.” In other words the district court assumed, as have many businesses, that the TCPA outlaws automated dialing.
Yesterday, the court of appeals for the 9th Circuit on the west coast reversed this decision. In a concise memorandum it explained why the district court got it wrong. Dialing equipment does not need to dial numbers or send text messages “randomly” in order to qualify as an ATDS under the TCPA. Rather, “the statute’s clear language mandates that the focus must be on whether the equipment has the capacity “‘to store or produce telephone numbers to be called, using a random or sequential number generator.”
By the way, this decision has nothing to do with the fact that the persistent texter was a debt collector. As explained in a previous blog, unless you use “old fashioned” roto- dialers at your credit union, chances are your system qualifies as an ATDS. Every time a member is contact the TCPA is in play.
Second Circuit Allows “ Gender Stereotyping” claim To Move Forward
This is the one that your HR person should take a look at. The court of appeals for the 2nd Circuit, which has jurisdiction over New York, yesterday ruled that an employee could bring a successful discrimination claim by proving he was victimized by “ gender stereotyping “ in the work place.
Matthew Christenson, an openly gay man sued his employer, an International Advertising Agency, alleging that his supervisor engaged in a pattern of humiliating harassment targeted at his “femininity and sexual orientation.” The harassment included graphic illustrations on an office white board.
The case has drawn attention because Christenson explicitly asked the court to rule that employers can be sued for discrimination based on sexual orientation under Title VII of the Civil Rights Act of 1964. The second circuit was unwilling to go this far, but allowed the case to go forward if the employee could prove he was the victim of gender-stereotyping.
In a splintered 1989 decision, the Supreme Court held that an employer who made an employment decision based on the belief that a woman could not be aggressive, had acted on basis of gender discrimination under Title VII. (Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S. Ct. 1775, 104 L. Ed. 2d 268 (1989).
Remember that discrimination on the basis of sexual orientation is already illegal based on New York State law.
Don Draper beware!
To foreclose on property in New York State, a lender must prove that it took physical possession of the mortgage note prior to the foreclosure, or that a valid assignment of the note to the foreclosing party has been made. This is easier said than done. Today’s blog includes citations to relevant case law in this area because for those of you who deal with mortgages, servicing and assignments, this is an area worthy of close scrutiny. So grab another cup of coffee to stay awake, and let’s get started.
First, let’s remember some basics. In order to foreclose on property, the lender or its assignee must possess both the mortgage and the note. The general rule is that once a promissory note is properly assigned, the mortgage transfers with it. Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 280, 926 N.Y.S.2d 532 (2011).
Which brings me to the inspiration for today’s blog, the case of US Bank Trust, NA v. Morales, 54 Misc. 3d 1217(A) (N.Y. Sup. Ct. 2017), which was published in yesterday’s New York Law Journal. In 2006, the homeowners purchased a house in Monroe, NY for $403,000. They took out a 30 year mortgage, which was recorded in Orange County. The original lender, Home Funds Direct, named MERS as its nominee. MERS subsequently assigned the note to US Bank Trust. This assignment was also recorded in Orange County, NY. The homeowners defaulted in June of 2013; a foreclosure was commenced in April of 2016. The homeowners argued that the bank did not have the right to foreclose on the property, because it had not sufficiently demonstrated that it was the holder of both the note and the mortgage. It is widely understood that such standing can be established with either a written assignment of the note or the physical delivery of the note to the foreclosing party prior to the commencement of a foreclosure action, but New York courts continue to grapple with what documentation establishes that such a transfer has been executed.
In this case, US Bank Trust attached an affidavit of an employee of Caliber Home Loans; the affidavit explained that Caliber was servicing the loan on behalf of US Trust and was also acting as its attorney in fact. The servicer employee complied with NYS Regulations by personally reviewing the original note and the assignment of the mortgage. The plot thickens however, because he also explained that Wells Fargo was holding the original note as custodian. This fact was fatal to the bank’s foreclosure action. Even though the servicing agent explained that the original note could be obtained from Wells Fargo, it did not have physical possession of the note prior to commencing the foreclosure. Because Wells Fargo, not Caliber, was in physical possession of the note, the evidence failed to establish that the foreclosing party had standing to bring the foreclosure.
But wait. The plaintiffs argued that note was assigned to them from MERS to US Bank. The court’s response demonstrates just how fact-sensitive these inquiries have become. The note in this case identified Home Funds Direct as the lender and the note holder. According to the court, there was no endorsement to MERS on the note—which would give MERS the authority to assign—nor any information on the allonge indicating that MERS received an assignment of the note. This meant that MERS’ assignment of the note to US Bank Trust was invalid.
As if this isn’t complicated enough, the case law I have referenced in this blog relates specifically to New York’s Second Department. The key point is that the case law in this area remains fluid and highly fact-sensitive. As it stands right now, the better you document mortgage transfers and servicing rights, the better off you will be. This is one area where detailed procedures and an eye on case law is absolutely crucial.
I have one good thing to say about hackers. They have provided us with fresh evidence of why state and federal lawmakers need to impose commonsense requirements on merchants and businesses that don’t adequately protect card information from data breaches, and also don’t bother informing consumers of their mistakes.
Three things happened yesterday that are worth telling your congressman and senators about if you are going to be at CUNA’s Governmental Affairs Conference at the end of the month. First, a Pennsylvania federal magistrate has ruled that a class action lawsuit brought by a group of credit unions and CUNA seeking damages in relation to debit and credit cards compromised by a point of sale data breach at Wendy’s franchises can go forward, First Choice Federal Credit Union, et al v.Wendy’s Co., (U.S. Western District PA). The arguments advanced by Wendy’s in this case underscore precisely why we need clear-cut legal standards making merchants responsible for protecting customer data once and for all. Wendy’s alleges that it has no duty to safeguard sensitive customer information or to provide adequate notification of a data breach.
Fortunately the courts are growing increasingly impatient with arguments such as these. But the fact still remains that, without specific laws in place, merchants will continue to deny that they are in any way responsible for the cost related to data breaches.
Also yesterday I was sitting in on CUNA’s weekly regulatory update call.(for the record I realized after the fact that I was THAT GUY, who chats away not realizing his phone was off mute: sorry about that) During the call, CUNA discussed news of yet another fast food data breach. This one has occurred at Arby’s restaurants. If you are a New York credit union and you think you may have been victimized give me a call as we would like to get a sense of the scope of the possible theft.
Last but not least, it appears that Yahoo’s data breach maybe even worse than reported. When Yahoo finally got around to disclosing that its data had been compromised, it asserted that no debit or credit card information was stolen. A merchant in Texas has recently started a class action lawsuit alleging that his card information was in fact compromised, by the breach of the embattled tech icon.
Yellen’s testimony indicates interest rate rise coming soon
In the first day of her semi- annual testimony before congress Federal Reserve chairwoman Janet Yellen, warned that waiting too long to remove interest rate accommodation would be “unwise.” The likelihood that the Federal Reserve will once again raise interest rates, perhaps as early as March, is more good news for the banks and credit unions that have struggled with narrow profit margins.
On that note, let’s be careful out there and enjoy your day.
Is it a violation of federal law to deny someone a student loan based on their status as a Dreamer? That is the central question posed by a class action lawsuit brought byCalifornia college students who claim that Wells Fargo denied them student loans in violation of both, Federal and California Law. The lawsuit has the potential of putting financial institutions front- and- center in the debate over the protections the country affords to immigrants.
In June 2012, President Obama’s Department of Homeland Security announced that it would no longer deport young immigrants who had lived in this country for most of their lives, but whose parents were here illegally, and who themselves had never obtained legal status. Under the Deferred Action for Childhood Arrivals (DACA), eligible individuals receive a renewable two year authorization granted by the federal government to stay in the country. Eligible individuals receive a work permit and obtain employment authorization documentation, which entitles them to legally look for work.
The lawsuit was brought by Mitzie Perez, she claims that in August of 2016 she applied for a student loan online. While completing the application she indicated that she was neither a US citizen or a permanent resident. She was immediately denied the loan. Curious as to why she was denied, when she completed the same application a second time, she indicated she was a permanent resident, she was told that “based on the citizenship status you provided, a US Citizen Co-signer will be required for this application”. Should would be able to obtain a co-signer.
She claims the bank violated 42USCA Section 1981. This law provides that “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens…” She also argues that because of the documentation she is able to provide the bank under DACA, Wells Fargo can provide her a loan without violating the Customer Identification Procedure requirements of the Bank Secrecy Act.
Leaving aside the emotional pull of the argument, the responsibility of financial institutions towards persons who are not permanent legal aliens is ambiguous. Regulation B, which implements the Equal Credit Opportunity Act, makes it illegal to discriminate against an applicant on a prohibited bases, including the applicants’ national origin. Here is where it gets tricky; the commentary accompanying this prohibition explains that while “A creditor may not refuse to grant credit because an applicant comes from a particular country.” A financial institution “may take the applicant’s immigration status into account. A creditor may also take into account any applicable law, regulation, or executive order restricting dealings with citizens (or the government) of a particular country or imposing limitations regarding credit extended for their use.” (12 C.F.R. § Pt. 1002, Supp. I).
Wells Fargo is in a tough spot. On the one hand, I agree with those who argue that there is something distinctly un-American about throwing DACA individuals out of the country. Many of them have spent almost their entire lives growing up as Americans. That being said, the law is the law and just as President Obama extended legal protections with an Executive order in 2012, President Trump could eliminate their legal status with the stroke of a pen. Financial institutions not only have the right but the legal obligation to consider this possibility when deciding whether or not to extend loans to students like Ms. Perez. What decisions they should make based on this information is a much tougher call. This case underscores why congress needs to craft common sense immigration reform.
On Tuesday, a Federal District Court in Virginia dismissed a lawsuit brought with much righteous indignation and fanfare by the Independent Bankers Association. (Indep. Cmty. Bankers of Am. v. Nat’l Credit Union Admin., No. 1:16CV1141 (JCC/TCB), 2017 WL 346136, (E.D. Va. Jan. 24, 2017). They worked themselves into a foam-mouthed frenzy following the promulgation of regulations by NCUA, giving credit unions greater flexibility to make MBL loans without first seeking waivers from the agency. Although the case was dismissed on technical grounds, make no mistake about it, if this was a boxing match it would have been a TKO. This was about as complete a victory as the NCUA could have gotten in the first round of what could be extensive litigation ultimately involving not only NCUA’s authority to promulgate changes to its MBL regulations, but also its authority to promulgate changes to field of membership requirements.
In 2003, NCUA amended its regulations. It allowed credit unions to purchase nonmember loan participations without counting such participations against the MBL cap, provided that they get NCUA’s approval to do so. In its 2016 revisions to the MBL rules, NCUA decided that credit unions no longer have to seek prior approval before acquiring nonmember participation interests. The clux of the IBA’s complaint was that credit unions never should have been given the authority with or without NCUA’s approval. The court ruled that the bankers could have brought their complaint more than a decade ago, and their decision not to do so meant that the six year statute of limitations to bring such action had expired long ago.
But wait there is more! In a typical lawsuit it is fairly easy to show that a plaintiff has suffered an injury. For example, if I was hit by a car this morning on my way to work no one would question my right to sue the driver if he was speeding. But in the land of Association litigation standing is a crucial issue. Too broad a view of what constitutes harm makes it easier for Associations like the IBA to sue over credit union laws and regulations. So, I was pleasantly surprised that the judge also concluded that the bankers had not shown that they were in fact harmed by NCUA’s MBL changes. This passage is worth quoting at length because it could be useful in challenging banker’s standings in subsequent lawsuits.
It is not clear at this point that Defendant’s 2016 regulation will result in increased competition against Plaintiff’s member banks. Credit unions were able to compete with banks in the commercial loan arena before the 2016 Rule. Indeed, Plaintiff represents that they have done so vigorously. The 2016 Rule on its face does not permit additional competition. All it does is dispense with the requirement that, after taking on a certain amount of member business loans, a credit union obtain permission to purchase an additional interest in a nonmember business loan.
Finally, the court noted that even if it was to rule on the merits of the case, the bankers would still loose. NCUA did not abuse its discretion in amending its MBL regulations but was instead acting within its authority to interoperate an ambiguous statue.
From the National Labor Relations Board’s (NLRB) intrusion into everything from an employer’s rights to regulate employee conduct, to the expansion of non-exempt employees, no area has had a more direct impact on your workplace. And no area may see a more radical shift under the Trump Administration.
Here are some examples:
Concerted Activity: The NLRB arbitrates disputes that involve both union activity and nonunion activity that implicates so called concerted activity. Traditionally this jurisdiction was understood as protecting the rights of nonunionized workers to ban together to address issues of concern in the work place and ultimately not be deterred from forming a union. In contrast, under the Obama Administration’s appointees, concerted activity has been used to regulate everything from punishment of an employee for Facebook postings critical of the boss, to workplace restrictions on sharing salary information. This shift has made your workplace policy manual a tripwire for litigation and made it more difficult to impose common sense restrictions on employee behavior. Let’s hope the NLRB will take a second look at these decisions.
Regulation of Mortgage Originators: For more than a decade now, the courts and the Labor Department have grappled over whether or not mortgage originators are exempt employees. Talk to any veteran of the mortgage industry and they will scoff at the notion that mortgage originators are anything other than exempt employees. After all, if a member calls at 4:55pm wanting to apply for a mortgage loan, no employee in their right mind would tell the applicant to call back tomorrow because their shift is almost over. Nevertheless, the Obama Administration’s Labor Department overruled an interpretation provided by the Bush Administration and opined that in-house mortgage originators are non-exempt employees who must receive overtime. The Supreme Court upheld the right of the Department of Labor to issue this interpretation. The good news is, what the Department of Labor giveth it can taketh away. I hope there will be quick action to reconsider this interpretation so that common sense can once again prevail in the mortgage industry.
Exempt-Employees: The most prominent Labor Department regulation increased the threshold of exempt employees to slightly more than $47,000, and indexed the threshold for inflation. Although it was supposed to take effect late last year, the regulation has been tied up in litigation and it is unlikely to survive the incoming Trump Administration without substantial revisions. Remember that even without the Federal changes, New York State has updated its own exempt-employee regulations
Obligations of Fiduciaries: Last but not least, in April, regulations imposing fiduciary obligations on financial advisors are scheduled to take effect. The outgoing Department of Labor recently issued a memorandum providing questions and answers about the new regulation. This one doesn’t have much of a direct impact on most credit unions. It does, however, on the individuals who provide investment advice to the trustees of your 401(k) plans. By tightening conflict of interest requirements and the fiduciary obligations of outside advisors, there are subtle changes to how your 401(k) plan is overseen. Expect to see changes made to this regulation.
This extensive to-do list underscores how antiquated our labor laws have become. They were created at a time when a good chunk of the workforce was unionized and it was relatively easy to distinguish the white collar worker in the executive suite from the blue collar worker on the assembly line. The most constructive thing the Trump Administration’s Labor Department can do is advocate for changes to the National Labor Relations Act and the Fair Labor Standards Act so that classifications such as exempt and non-exempt employees can reflect the modern workplace.
Good Morning folks,
I had the opportunity to attend yesterday’s Supreme Court oral arguments in the Expressions Hair Design case. For a lawyer this is kind of the legal equivalent to a trip to Mecca. Although it is impossible to tell from oral arguments what the ultimate outcome of any case will be, it is safe to say that the Supreme Court is not a big fan of New York’s bill drafting technique. Take a look at Section 518 of New York’s General Business Law and see if you share the court’s frustration that the intent of the law is far from clear.
This case involves an argument by merchants who claim that Section 518 violates their First Amendment rights by prohibiting them to explain the true cost of credit to consumers. In contrast, much of the argument was taken up, however, with a discussion of the statute’s meaning rather than the underlying constitutional issues. Three of the Justices’, Alito, Sotomayor and Kagan argued that the statute could be interpreted as mandating a single price for all goods. In fact, Justice Alito mused that this might be an “uninformed” interpretation and that he felt uncomfortable about ruling on the constitutionality of this statue without knowing how the New York’s Court of Appeals would interpret it.
The Truth in Lending Act used to use language identical to Section 518 to ban surcharges as a matter of Federal Law. Section 518 was passed by the legislature amid concerns that this national provision was going to expire. At the same time the legislature never defined what a “surcharge” is. In addition, although the attorney general has opined that the law permits merchants to offer cash discounts, this authority is similarly not to be found in the statute’s language.
This lack of clarity led a frustrated Justice Sotomayor to complain to the state “You’re asking me to take a lot of steps, which is start with the language of the statute, ignore it, and go to a Federal statute and apply its definitions. How many of them, you haven’t quite told me. How you differ, you haven’t quite told me. And –but I’m going to assume the Federal definitions apply, even though none of them are used here”. “So I’m –I’m very confused why you’re starting your answer to Justice Breyer by saying, look at the statute and see what the words of the statute are doing.”
Notwithstanding the fact that my powers of prognostication are not as sharp as they used to be-I would have taken Alabama over Clemson and the Giants over the Packers-I am going to guess based on yesterday’s arguments this case will ultimately be sent to the New York Court of Appeals with a request that it interpret the statue on behalf of the Federal Courts.
The funny thing is that Section 518 is by no means unique. In New York bill hearings are non-existent, committees are pro forma get-togethers, and all the real important stuff is done behind closed doors. This is not a system that lends itself to clarity. I have always been amazed it works as well as it does.