Posts filed under ‘Legal Watch’

Independent Bankers Sue NCUA Over Pending MBL Regs.; Plus My Top-Secret Plan For CU Growth

Today was going to be a real special blog post.   I was not only going to  reveal my top-secret plan for defeating ISIS,  but, as an added bonus,  my top-secret plan guaranteeing  the credit union industry grows and prospers without a single merger for the next 50 years.  But I’ve  decided that I will only reveal these plans after you elect me President.

In the meantime, I  will content myself with  telling you that the Independent Community Bankers filed a lawsuit in Northern Virginia yesterday alleging that NCUA abused its discretion when it promulgated regulations revising Member Business Loan regulations. Strip away all of its hyperbole, and the complaint comes down to an assertion  that NCUA doesn’t  have the authority to exclude loan participation interests from the calculation of the  credit union MBL loan cap. The bankers are seeking to block the regulations from taking effect in January.

With apologies to those of you for whom  this is as basic as the arithmetic my second grader will be learning this year, since 1998 the Federal Credit Union Act has limited  the aggregate amount of member business loans   a federally insured credit union can make at any time to the lesser of 1.75 times the actual net worth of a credit union; or  1.75 times the minimum net worth required for a credit union to be well capitalized. (12 USCA 1757A).  Under existing regulations participation interests in member business loans and member business loans purchased from other lenders count against a credit union’s aggregate limit on net member business loan balances.  CUs can  purchase participation interests that put them over the MBL cap but only  with NCUA’s permission. 12 CFR 723.16(b).

So, what has our banking counterparts so fired up?  The regulations that start to take effect in January stipulate that participation interests in business loans held by credit unions will be classified as commercial loans as opposed to MBL loans and will no longer be counted against the cap.   The change only  applies to loans that a credit union does not originate.

According to the independent bankers, this regulatory change amounts to a violation of the Administrative Procedures Act which prohibits regulators from promulgating rules “not in accordance with the law.” They argue that based on NCUA’s previous interpretation a cu holding a participation interest  should be counted against the cap.

The problem is that the Supreme Court recently reaffirmed that regulators have the right to change their regulatory interpretations even without going through a formal comment and review process. Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1210, 191 L. Ed. 2d 186 (2015).  In addition, NCUA’s new regulation is consistent with the English language.  According to Merriam Webster online Making is defined as   “the action or process of producing or making something.” A cu that originates a loan is making a loan; a cu that purchases a portion of that loan isn’t producing anything.

And the Independents won’t even get  to the merits of their case unless they can show how their members have been harmed in very specific ways.  This is a tough one: There is plenty of evidence to suggest that small businesses are having a tough time finding banks willing to make them loans. Are bankers really being squeezed out of the market because some credit unions purchase participation interests? Whaat?

Pure speculation on my part but I suspectt  that the Independents are laying the groundwork for a further legal assault on the NCUA if and when it finalizes FOM regulations. Plus, even if they lose this lawsuit they will  use it as another example to Congress  of how the NCUA helps credit unions  too much.  I guess they have forgotten about the imposition of sophisticated risk based capital requirements on larger credit unions.

For credit unions  it’s important not to overreact to this latest banker provocation. It’s just the latest example of the banking industry seeking to limit the choices  of Main Street America so that it can maximize its own profits.

 

 

September 8, 2016 at 8:51 am Leave a comment

NY’s DFS “encourages” acceptance of Municipal IDs

I swear we have been through this before.

New York’s Department of Financial Services Superintendent Maria T Vullo recently sent a letter to my boss, the inimitable William Mellin,  president of the New York Credit union Association  and Michael P Smith, his counterpart with the Bankers encouraging state chartered and licensed banks and credit unions to accept New York City’s Municipal Identification Card as valid identification for purposes of satisfying the requirement that they know their customer or member when they open an account.

The Guidance explains that   “The CIP rule does not prescribe a specific type of government-issued identification card for use by institutions. Institutions that rely on documentary forms of evidence to verify a customer’s identity should have procedures in place to identify the types of documents the institution will accept for such verification. Accordingly, it is the Department’s position that institutions may accept the Municipal ID as a means of documentary verification as provided in the institutions’ CIP procedures.” It goes onto encourage state chartered and licensed financial institutions to accept the municipal IDs.

First, I’m sure the Department is pleased to know that I agree 100  percent with its legal analysis. As described in a FinCen Q&A , your credit union’s responsibility is to “verify enough information to form a reasonable belief that it knows the true identity of the customer.”

The purpose of the CIP rules is to have procedures in place so you can know who your member is and establish a baseline of expected account activity for account monitoring purposes. After all,  a twenty-something investment banker is going to have different account activity than his eighty year-old grandma.  So long as a government issued ID tells you that a member is who she says she is it satisfies your CIP requirements.

Where the Department’s Guidance makes me a little nervous is in its encouragement to use these IDs.  I hope we don’t start hearing reports of institutions that may not wish to accept  these IDs being pressured to do so.  We are dealing with federal laws and regulations that give institutions flexibility to choose appropriate identification.  Nothing the Superintendent says changes that.

There is really nothing new here, just the same old song with a different tune. Every so often the issue of bank identification flares up in tandem with debates over immigration.  More than a decade ago  Governor  George Pataki, a Republican who was smart enough to know that you won’t win many more elections in America pandering to embittered white males, pushed for the acceptance of   matricula consular  identification cards and NCUA opined that the use of such identification was acceptable.

Let’s be honest about what we are really talking about here: illegal aliens.   To those of you whose views on illegal immigration make you uncomfortable accepting non- traditional forms of Identification I say:  Get Over It.  Your  credit union doesn’t have a dog in this fight. To those of you with well-established policies that have worked well for your credit union and that you don’t feel like changing I say: stick to your guns. Your ultimate responsibility is to run a well- functioning credit union not advance political agendas coming from either  side of the political  spectrum.

September 7, 2016 at 9:05 am Leave a comment

Beware Of Catspaw Liability

My first blog in September is a fable.

Once upon a time,

There was a smart monkey and his friend the cat. They loved to eat and one day they saw chestnuts burning on an open fire.  The monkey flattered the cat into thinking that only it was quick enough to get   the chestnuts.

She took up the challenge but only by burning her paws.  Meanwhile the monkey ate the chestnuts as quickly as the cat could reach them. And who do you think got into  trouble when their Master spotted the cat’s singed paws?

What does this Aesop fable have to do with anything? For those of you who handle the HR you should remember this as the story behind catspaw liability.  As I look back on what happened over the past week during my hiatus,  a case decided by the Court of Appeals for the Second Circuit, imposing “catspaw” liability on New York employers is the development that may  have the biggest impact on your credit union.

First let’s remember some basics.  Generally, If a supervisor is sexually  harassing  a subordinate then your credit union is automatically liable for the offending conduct.  In contrast   If a worker sexually harasses a coworker by making unwanted sexual advances then you will be held liable to the extent you tolerate the offending conduct.  You need to have a procedures  for the  employee to report the misconduct,  to ensure that your credit union investigates the allegation and that it  takes appropriate action.

Vasquez v. Empress Ambulance Serv., Inc., No. 15-3239-CV, 2016 WL 4501673,  (2d Cir. Aug. 29, 2016) addressed the issue of whether or not an employer could be legally responsible for coworker  harassment where it  had all the proper procedures in place but was manipulated into firing someone based on wrong information? The Court of Appeals for the Second Circuit  held that an employer acting in good faith in response to harassment allegations could still be liable if it was negligent in carrying out its responsibilities.

Ms. Vasquez complained to a supervisor after being repeatedly harassed by a coworker. The last straw came when the harassing coworker followed in the footsteps of Bret Farve and Anthony Weiner and texted her a picture  of his anatomy.

Empress did everything right,  up to a point.  After Vasquez  put a supervisor on notice of the misconduct who told her to file a complaint.  Following a review of the complaint she was assured that this kind of conduct wasn’t tolerated and the information was sent to a committee charged with dealing with harassment claims.

Meanwhile, the harassing coworker came to the realization that he went too far. He manipulated text messages to make it look as if she welcomed his advances and even doctored a photo to make it appear that she was the one sending him sexually suggestive material.  He gave this material to the committee  investigating her claim and when they saw this evidence they fired Ms. Vasquez for lying.  They did this without letting her see the incriminating evidence.  The employer became the catspaw,  manipulated into doing something wrong on behalf of a guilty worker.

The harassed and fired Vasquez sued claiming she was retaliated against for making a sexual harassment claim  As sympathetic as the facts are in the case-no one would deny that if her allegations are true Ms.  Vasquez is a victim- it wasn’t clear that Empress did anything wrong.  In fact the trial court she brought the case to concluded  that employers who make a good faith effort to comply with the law but who make a mistake by drawing the wrong conclusion haven’t  the  law;  after all they don’t tolerate a sexually hostile workplace.

Last week the Court of Appeals reversed this ruling. It held that when,  as a result of its own negligence, an employer gives effect to the retaliatory intent of one of its—even low-level—employees. It can be held responsible for the misconduct.  

This is a holding you should discuss with our HR attorney. Based on this ruling you may very well have to do more to document not only that you have appropriate procedures in place but what steps are taken to confirm the accuracy of your HR investigation. In an age when a desperate employee  can  manipulate  digital evidence in a matter of minutes. this new standard increases the challenges for your HR and legal help.  Hopefully we won’t see the evolution of increasingly stringent investigatory requirements that increase your legal exposure.

The End

September 6, 2016 at 9:16 am Leave a comment

Can Better Training Reduce Workplace Harassment?

In a previous life,  I was working in the legislature when New York became one of the first states to mandate the schools do more to not only respond to but prevent school yard bullying.  I was skeptical that Government could do anything about bullying.  After all, some kids are just jerks.

A generation later  bullying hasn’t been eliminated but  it’s no longer acceptable for school administrators to sit idly by as students get taunted and teased. Kids are much more sensitive to the fact that other kids are being mistreated and are much more likely to tell a teacher or administrator than they would have been a generation ago.   I was wrong.  New policies and new approaches made a difference.

What’s the tie-in? In June  the chairs of a task force appointed by the EEOC   to investigate work force harassment issued a report with several recommendations.  Bond Shoeneck & King suggested in their blog yesterday that HR people should give it a read:  They have a point.  Although the report is designed to prevent harassment, and as such includes recommendations that go beyond existing legal requirements, it has been my experience that today’s recommendations   become tomorrow’s mandates.  Plus,  while you probably won’t agree with all of its conclusions and recommendations, it does have some ideas worth considering.

This brings me back to my bullying discussion. Anyone who doesn’t know for example that sexual harassment  is illegal is beyond help.  The bigger question is what is the best approach to minimizing it? We’ve all sat through those  sessions on preventing harassment replete with nervous snickers from the back of the room and awkward sideways glances.  While they are good to have from a legal perspective,  I was pleasantly surprised that the report’s authors acknowledged that “much   of the training done over the last 30 years has not worked as a prevention tool – it’s been too focused on simply avoiding legal liability. We believe effective training can reduce workplace harassment, and recognize that ineffective training can be unhelpful or even counterproductive. However, even effective training cannot occur in a vacuum – it must be part of a holistic culture of non-harassment that starts at the top.”

One of their suggested improvements intrigues me: “Workplace civility trainings focus on establishing expectations of civility and respect in the workplace, and on providing management and employees the tools they need to meet such expectations. The training usually includes an exploration of workplace norms, including a discussion of what constitutes appropriate and inappropriate behaviors in the workplace. The training also includes a heavily skills-based component; including interpersonal skills training, conflict resolution training, and training on effective supervisory techniques.”

Would this really make a difference? I don’t know but providing a mechanism for employee’s to understand and discuss workplace norms and expectations is worth a shot. Done properly,  employees would better  understand that a harassment free workplace is not simply based on obeying the law but on proactively treating those around you with a baseline of respect and professionalism, expecting the same in return, and not being afraid to intervene when these norms aren’t being followed.

Am I concerned that we may be seeing the scope of harassment claims expanding ever so slightly? You bet.   But it’s clear that there are workplaces where employees and employers just don’t get the message.  If our kids can foster create school environments where bullying is frowned upon than maybe we should expect more of ourselves to foster harassment free environments in the workplace

August 23, 2016 at 9:37 am Leave a comment

UPDATED Three Things All The Cool Kids Should Know

Another Day, Another Merchant Data Breach

In case you missed it, on Thursday, outdoor clothing retailer Eddie Bauer announced it was a victim of a data breach involving point-of-sale credit and debit card transactions between January 2 and July 17, 2016.  And here you outdoor types thought your biggest worry was the Zika virus.  Here’s the good news.

The general public has clearly caught on to the fact that merchants and not financial institutions are often the parties responsible for the data breach. Why else would Eddie Bauer explain that the security of customer information is a “top priority” and that they have been working closely with the FBI and cyber security experts to resolve the issue?

It wasn’t too many years ago when the merchant playbook was to barely acknowledge that a breach occurred let alone suggest that it bore some responsibility for mitigating its effects. I’m in an optimistic mood this morning.  Now that the public understands that merchants share in the responsibility to protect data breaches it should be easier to convince legislators that merchants should pay their fair share when it comes to the costs imposed on card issuers every time a store is breached.

Get off of my cloud.  I’m dreaming?

Uber Class Action Settlement Rejected

With apologies to those of you who hate football metaphors, the various pending lawsuits against Uber are the legal equivalent of a hurl into the end zone with time expiring. That being said, those of you hoping to derail ride sharing, or at least put it on equal footing with the traditional taxi industry, received at least a temporary stay of execution last week when a federal judge threw out a proposed settlement of a class action lawsuit alleging that ride sharing services were violating the labor law by treating drivers as independent contractors as opposed to traditional employees.

According to the Washington Post, U.S. District Judge Edward Chen concluded that the proposed $100 million settlement was only 10% of what lawyers for the drivers estimate that Uber could owe them and provided only $1 million towards state penalties that could add up to more than one billion dollars.

This lawsuit against Uber is absolutely critical.  If a precedent is established imposing traditional labor obligations on Uber then the ride sharing model crumbles quicker than a Ryan Lochte robbery allegation.  By the way, the proposed settlement is yet another great example of the class action system disproportionately benefitting lawyers, precisely when the CFPB is on the verge of institutionalizing such litigation.

Where Has U.S. Productivity Gone?

It is an article of faith among politicians, along with truth, justice and the American Way, that America has the most productive workforce in the world. This may still be true, but Federal Reserve Vice Chairman Stanley Fisher used a speech on Sunday to highlight worrying signs that something is going wrong with productivity.  For example, business productivity has declined for the last three quarters, its worst performance since 1979.  Furthermore, output per hour increased only 1-1/4 percent per year between 2006 and 2015 as opposed to gains over 2 1/2% per year between 1949 and 2005.

Why does this matter? For one thin we won’t see the economy really takeoff as long as productivity is sluggish and  your members won’t be seeing meaningful  wage.  Furthermore, a long-term decline in productivity translates into greater wage inequality.  The Vice Chairman would like to see Congress do more to stimulate the economy.  I would like to see the Yankees make the playoffs.  Both events are theoretically possible, but highly unlikely.

August 22, 2016 at 8:51 am Leave a comment

Three things All The Cool Kids Should Know To Start Their Week

Another Day, Another Merchant Data Breach

In case you missed it, on Thursday, outdoor clothing retailer Eddie Bauer announced it was a victim of a data breach involving point-of-sale credit and debit card transactions between January 2 and July 17, 2016.  And here you outdoor types thought your biggest worry was the Zika virus.  Here’s the good news.

The general public has clearly caught on to the fact that merchants and not financial institutions are often the parties responsible for the data breach. Why else would Eddie Bauer explain that the security of customer information is a “top priority” and that they have been working closely with the FBI and cyber security experts to resolve the issue?

It wasn’t too many years ago when the merchant playbook was to barely acknowledge that a breach occurred let alone suggest that it bore some responsibility for mitigating its effects. I’m in an optimistic mood this morning.  Now that the public understands that merchants share in the responsibility to protect data breaches it should be easier to convince legislators that merchants should pay their fair share when it comes to the costs imposed on card issuers every time a store is breached.

Get off of my cloud.  I’m dreaming?

Uber Class Action Settlement Rejected

With apologies to those of you who hate football metaphors, the various pending lawsuits against Uber are the legal equivalent of a hurl into the end zone with time expiring. That being said, those of you hoping to derail ride sharing, or at least put it on equal footing with the traditional taxi industry, received at least a temporary stay of execution last week when a federal judge threw out a proposed settlement of a class action lawsuit alleging that ride sharing services were violating the labor law by treating drivers as independent contractors as opposed to traditional employees.

According to the Washington Post, U.S. District Judge Edward Chen concluded that the proposed $100 million settlement was only 10% of what lawyers for the drivers estimate that Uber could owe them and provided only $1 million towards state penalties that could add up to more than one billion dollars.

This lawsuit against Uber is absolutely critical.  If a precedent is established imposing traditional labor obligations on Uber then the ride sharing model crumbles quicker than a Ryan Lochte robbery allegation.  By the way, the proposed settlement is yet another great example of the class action system disproportionately benefitting lawyers, precisely when the CFPB is on the verge of institutionalizing such litigation.

Where Has U.S. Productivity Gone?

It is an article of faith among politicians, along with truth, justice and the American Way, that America has the most productive workforce in the world. This may still be true, but Federal Reserve Vice Chairman Stanley Fisher used a speech on Sunday to highlight worrying signs that something is going wrong with productivity.  For example, business productivity has declined for the last three quarters, its worst performance since 1979.  Furthermore, output per hour increased only 1-1/4 percent per year between 2006 and 2015 as opposed to gains over 2 1/2% per year between 1949 and 2005.

Why does this matter? For one thin we won’t see the economy really takeoff as long as productivity is sluggish and  your members won’t be seeing meaningful  wage.  Furthermore, a long-term decline in productivity translates into greater wage inequality.  The Vice Chairman would like to see Congress do more to stimulate the economy.  I would like to see the Yankees make the playoffs.  Both events are theoretically possible, but highly unlikely.

 

August 22, 2016 at 8:38 am Leave a comment

Court Gives NCUA Green Light to Sue Investment Banks Over Faulty Securities

NCUA notched another important legal victory in its quest to have the investment banks which  sold  residential mortgage backed securities to the corporates prior to the Mortgage Meltdown  pay up for allegedly  not adequately warning of the risks involved in buying these securities. The NCUA announced in April that it had recovered more than $3 billion in settlements.  But remember that the lawyers have to be paid and the litigation could still drag on for many years.

To understand yesterday’s decision it’s necessary to take a not so pleasant trip down memory lane. In 2009 NCUA took over Wescorp, then the second largest corporate credit union, after the RMBS’s  it had purchased tumbled in value.  Remember that these bonds are pools of packaged mortgages and investors are paid off from the stream of mortgage payments.   When homeowners stopped paying their mortgages these securities  became almost worthless, necessitating a lifeline from the Treasury  Department and the creation of the Stabilization Fund that all credit unions had to pay into.

NCUA became the first federal agency to sue the investment banks. Its basic argument is that they failed to properly disclose the risks of buying the securities to the corporates because they knew that many of the packaged mortgages were destined to tumble faster than Donald Trump’s poll numbers.

A central issue in this litigation has been whether or not federal law gives NCUA six years to bring these lawsuits under what’s called the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) or at most  three years under the Securities Act of 1933. If the Securities Act applies  NCUA’s claims are time barred.

Yesterday,  the Court of Appeals for the Ninth Circuit reversed a lower court ruling and ruled that the longer period applied. NCUA can  continue its suit against Wachovia Trust  and Nomura Home Equity.  (NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of W. Corp. Fed. Credit Union, Plaintiff-Appellant, v. RBS SECURITIES, INC., FKA RBS Greenwich Capital Markets, Inc., Defendant, & NOMURA HOME EQUITY LOAN, INC., Defendant-Appellee., No. 13-56620, 2016 WL 4269897,  (9th Cir. Aug. 15, 2016) The decision means that two federal circuits have now upheld the right of NCUA to bring these suits which translates into more money for credit unions.  The Tenth Circuit reached a similar conclusion in Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th Cir. 2013).

Of course, everyone wants to know how this is going to impact their bottom line but  the truth is no knows yet.  This litigation could drag on for years.   For instance, the investment  firms could appeal yesterday’s decision to the Supreme Court and the core allegations still haven’t been litigated. But give NCUA credit.  It’s already had more success than many people, including this blogger, thought it would when it decided to call in the lawyers.

August 16, 2016 at 9:12 am Leave a comment

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Authored By:

Henry Meier, Esq., 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.

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