Posts filed under ‘Legal Watch’

How Divorce Complicates Your Mortgage Disclosures

Divorce increases the number of pitfalls for lenders who have the audacity to attempt to collect delinquent debt. Nowhere is this more true than in the great state of New York,  where a series of legal landmines masquerading  as consumer protection statutes  are waiting to attack the unaware lender.  Consistently applied and well drafted policies and procedures are crucial when it comes to loss mitigation and foreclosures .

The latest example of the dangers posed by New York’s foreclosure defense laws comes from M&T Bank v. Farrell, 2014-1913 decided July 12 in which the bank moved to foreclose on property  that a separated  Binghamton Dr. and his wife had jointly purchased in 1994.

I’ve talked about NY’s Real Property Actions and Proceedings Law Section 1304 before but it’s worth talking about again. It requires that mortgage lenders “ give notice to the borrower” at least 90 days before commencing a foreclosure. It’s  also important to keep in mind that the notice must be sent “by registered or certified mail and also by first-class mail to the last known address of the borrower, and if different, to the residence that is the subject of the mortgage. Such notice shall be sent by the lender, assignee or mortgage loan servicer in a separate envelope from any other mailing or notice “(N.Y. Real Prop. Acts. Law § 1304 (McKinney).

Remember the pre-foreclosure notice is in addition to the traditional summons and complaint required to start a foreclosure action. Courts have demanded strict compliance with 1304 and as more attorneys get involved in foreclosure defense 1304 defenses are  becoming more frequent.

In this case, at the time the pre-foreclosure notice was sent to the mortgaged property  Dr. Farrell no longer lived at the family  home and a separate  pre-foreclosure. notice was not  sent to his new address.  This invalidated the foreclosure.   M&T argued that it complied with the statute by sending the notice to the mortgage address. But the prevailing view of New York’s courts is that, as explained by the judge in this case,  the 1304  notice must be sent to the borrower’s last known address which may or may not be the mortgaged property. M & T had to start from scratch without passing Go and collecting $200

The case also underscores why it’s crucial to properly coordinate between your staff and your foreclosure attorney.  In this case M & T’s attorney submitted an affidavit stating that the 1304 notice was sent by personal and first class mail.  But this statement was inadequate to demonstrate compliance with the law since the attorney had no “first hand” knowledge of the mailing.

Cases like this demonstrate why your credit union should  have the person who prepares and sends out the 1304 notice on behalf of your credit union to swear out an affidavit the day the notice is sent to the delinquent members demonstrating compliance with 1304 based on her personal knowledge.

 

July 12, 2016 at 9:30 am Leave a comment

Anti-Trust Settlement Thrown Out

 

For those of us in the financial industry, three things are certain: Death, taxes and merchant antitrust litigation.

Yesterday, the Court of Appeals for the Second Circuit threw out  the $7.5 billion 2012 settlement between merchants and Visa and MasterCard intended to put an end to a decade of antitrust litigation and brihttps://fred.stlouisfed.orgng about peace in our time.  Considering how long it dragged on and that the settlement was the largest antitrust payout in history, perhaps it is only fitting that the decision came down the day before the 100th Anniversary of the Battle of the Somme, the bloodiest battle in World War I that resulted in over a million deaths and casualties.

What happens now? The case goes back to the trial court and merchants are likely to push for even more money and a narrower ban on future litigation.  The National Association of Convenience Stores  cheered the court’s decision to scuttle the settlement because “the relief it offered was inadequate and the release [from future litigation] was overbroad.”  The National Retail Federation predicted that the Card firms could face even more pressure from retailers to change their fee structures.

Among the defects cited by the court was that there were too many competing merchant interests represented by the same attorneys. The court explained that “Unitary representation of separate classes that claim distinct, competing, and conflicting relief create unacceptable incentives for counsel to trade benefits to one class for benefits to the other in order somehow to reach a settlement.”  The court was also concerned that the settlement barred all future claims against Visa and MasterCard but only placed temporary restrictions on the card companies.

The merchants were divided into two classes: one class consisting of merchants that accepted Visa and/or MasterCard from January 1, 2004 to November 28, 2012, which was eligible to receive part of the $7.25 billion; the other consisting of merchants who joined the networks after that late, who were only entitled to injunctive relief in the form of changes to Visa’s and MasterCard’s network rules. For example, Visa and MasterCard agreed to change their network rule to allow merchants to surcharge credit card purchases.  But the court noted that in States such as New York surcharge bans are still illegal under state law.

Brexit Fallout

fredgraph

 

This chart highlights what’s happened to the yield on 10-year Treasuries in the aftermath of the decision of Great Britain to leave the Eurozone.(Tap it for a better view).  Needless to say, with yields tumbling, it’s hard to see why the Feds would want to raise interest rates any time soon.

On the bright side, this continues to be the Golden Age to buy a home, assuming you can qualify for a mortgage.

By the way, I made this chart after visiting the Fred Website, a phenomenal resource of which all you number junkies out there should be aware.  On that note, have a nice Fourth!

July 1, 2016 at 9:02 am Leave a comment

ATM Case to be Reviewed by Supreme Court

The Supreme Court decided to review a case next term that could directly impact the amount of money non-members pay for using your ATMs.  It also could impact the type of rules that Associations can impose on their members.

Visa and MasterCard both have rules that provide that no ATM operator may charge customers whose transactions are processed over their networks a greater access fee than that charged to any customers whose transaction is processed on an alternative network.  In other words, your credit union can’t charge a non-member processing a debit card transaction a lower fee for using a network other than Visa or MasterCard.

In the case to be reviewed by the Supreme Court, Osborn et al v. Visa, Inc., consumers and independent ATM network operators brought a suit claiming that this prohibition violated anti-trust law.  They argued, as the Court explained, that the prohibition constitutes an “anti-steering” regime that prevents ATM operators from incentivizing card holders to choose and use cards that offer cheaper fees.  The plaintiffs argue that if Visa and MasterCard’s prohibition was not in place, consumers would seek out credit unions and banks that offer access to networks that charge lower fees for processing non-member transactions.  Remember this case just deals with non-members using your ATMs and not interchange fees  

Aside from the anti-trust issue, the case has attracted the attention of the legal community for two other reasons.  First, Associations are concerned that the lawsuit may pave the way for other types of anti-trust litigation to be brought against them simply because they impose rules of conduct on their members.  Secondly, if consumers can sue over anti-trust violations based on the potential impact that allegedly anti-competitive behavior may be having on them, then the Court may be opening the door for a whole new round of card-related anti-trust litigation. 

For those of you who want more information about the case, here is a link to the SCOTUS blog, which for my money is the best source of information about the Supreme Court.  

June 29, 2016 at 8:55 am Leave a comment

The Supreme Court’s Most Important Banking Decision

The most important banking decision the Supreme Court made in this year’s term, which ended yesterday,  may well be its decision not to take up a case decided by the Court of Appeals for the Second Circuit which oversees New York, Connecticut and Vermont.

First, as a general rule of thumb,  The National Bank Act authorizes a nationally chartered bank to export across the country the  interest rate it is permitted to charge in its home state. While the NBA doesn’t apply to credit unions, NCUA has taken a similar but  narrower approach to regulating federally chartered credit unions.  It has opined that  “ State law may not prohibit an otherwise permissible activity authorized by federal law.”

MADDEN V. MIDLAND FUNDING, LLC  involved  a consumer (Madden)  who opened up a credit card with Bank Of America  which is based  in NY which  caps interest rates at 25%.  (N.Y. Gen. Bus. Law § 349; N.Y. Gen. Oblig. Law § 5–501; N.Y. Penal Law § 190.4).   The account was brought by FIA which is incorporated in Delaware. FIA changed the credit card agreement to stipulate that Delaware law, which has no cap, applied.  Ms. Madden eventually became delinquent. FIA wrote off the debt and sold it to Midland Funding, a third-party buyer of debt. Keep in mind that whereas BOA and FIA are nationally chartered banks, Midland Funding is not FIA’a agent

When Midland tried to collect on her $5,000 credit card debt charging 27% interest Ms. Madden responded with a class action lawsuit claiming that Midland was violating both the federal Fair Debt Collections Practices Act and, most intriguingly for our purposes, New York’s usury law.

Nonsense said Midland. It made the traditional arguments that state-law usury claims and FDCPA claims predicated on state-law violations against a national bank’s assignees, , are preempted by the National Bank Act (“NBA”), and that the agreement governing Madden’s debt requires the application of Delaware law, under which the interest charged is permissible (Madden v. Midland Funding, LLC, 786 F.3d 246, 247 (2d Cir. 2015). The district court agreed and dismissed the lawsuit but the Second Circuit sided with Madden and revived the class action lawsuit.

According to the court “Because neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which Madden’s claims rely would not significantly interfere with any national bank’s ability to exercise its powers under the NBA, state law applied. 786 F.3d 246, 249 (2d Cir. 2015),

But what state law applies? Midland might still win the case. It now goes back to the trial court to rule on whether or not Delaware law applies.  But the outcome of that debate is far from clear and no matter who wins he decision still has the effect of making NY debt more expensive and has sent shivers down the spine of the banking industry which was hoping that the SC would reverse the Second Circuit.

As this morning’s American Banker points out the Court’s decision to take a pass on reviewing Midland leaves several questions unanswered such as    “Can marketplace lenders convince investors that loans in excess of state rate caps are safe to buy? Will continued uncertainty impact the market for certain bonds that are backed by consumer loans? And should banks be worried about a potential erosion of their longstanding pre-emption authority?”

Will Dory find her parents?-Just wanted to see if you were still awake.

June 28, 2016 at 9:48 am Leave a comment

Home Depot’s Sideshow Bob Moment

In the lead-up to the liability shift for merchants that can’t process EMV chip card transactions, we heard a lot from merchants about the costly burden of upgrading equipment.  Now that the deadline has passed, we are hearing a lot of merchants say they love EMV, they just hate the fact that Visa and MasterCard transaction standards mandate that chip transactions be completed with a member’s signature and not a PIN.  Interchange fees transacted over PIN networks are cheaper than interchange fees executed over signature networks.

The latest front in this stage of the battle was opened earlier this week when Home Depot filed a lawsuit in Federal District Court in Atlanta claiming that Visa and MasterCard have colluded for yeas to deny access to chip and pin networks, which Home Depot argues would be safer for consumers and cheaper for merchants (THE HOME DEPOT, INC. and HOME DEPOT U.S.A., INC., v. VISA INC., VISA U.S.A. INC. et al 1:16-cv-01947).  By the way, this is the same Home Depot being sued for costs related to a data breach.     It reminds me of this classic scene from the Simpsons in which Sideshow Bob gets released from prison and runs for office claiming that Mayor Quimby is soft on crime.

According to the plaintiffs:  “Visa and MasterCard have acted to keep a defective product in place — signature-authenticated cards — in order to maintain their supra-competitive profits that are tethered to this faulty technology.  Visa’s and MasterCard’s success in forcing merchants and consumers to accept and use technologically-inferior, and in fact defective, products — including products that Visa and MasterCard knew would increase fraud — is further evidence of their substantial market power.”

Another criticism of the network rules is that they require merchants “to honor the cards of all card issuers.” This is, of course, is a great example of why lawsuits like this are so dangerous for smaller institutions.  Imagine a world in which the Home Depots and Walmarts could enter into exclusive deals with banks of their choosing? That doesn’t sound all that consumer friendly to our members.

See you in Saratoga!

 

June 16, 2016 at 7:16 am 1 comment

Thinking of Merging? Read this Blog.

One of the issues of which financial institutions have to be particularly mindful in this increasingly litigious world is how much they say to their attorney is privileged (i.e. shielded from disclosure to third parties).  I have previously talked about in a previous blog how federal law makes it almost impossible for credit unions to shield an attorney’s work product from examiners.  Now, a decision released yesterday by New York’s Court of Appeals, its highest court, underscores just how narrow that privilege is, especially for those of you involved in credit unions that are thinking about merging.

As a general rule of thumb, you can call up your attorney to get legal advice and that communication will be privileged.  Furthermore, if not only you but another credit union face pending litigation or reasonably anticipate a lawsuit, the privilege is extended so that you may work on a common defense.  But if that same conversation takes place with a third party that is not involved in your litigation, the privilege is waived.

In Ambac Assurance Corporation v.  Countrywide Home Loans, Inc. Bank of America was sued and the plaintiffs wanted access to 400 communications that took place between BoA and Countrywide between the time that the two companies had decided to merge but before the merger was finalized.  Plaintiffs argued that while BoA didn’t have to hand over communications between it and its attorneys, any communications between BoA and Countrywide were third party communications for which there is no privilege.

BoA argued to the Court of Appeals that even though it was not facing any litigation involving Countrywide at the time, it shared a “common legal interest” in facilitating their merger.  The plaintiffs argued, and the Court of Appeals agreed, that merger discussions aren’t protected by privilege.  It concluded that when two parties are engaged in or reasonably anticipate litigation in which they share a common legal interest, the threat of disclosure may chill the exchange of information necessary to coordinate a legal strategy. In contrast, “the same cannot be said of clients who share a common legal interest in a commercial transaction or other common problem but do not reasonably anticipate litigation.”  In other words, don’t assume all the information you are sharing to facilitate merger discussions is free from discovery if someone decides to sue you in the future.

Legislative Update

If any of you are involved in funding gift cards, or like your faithful blogger, finds gift certificates tucked away in the top draw  about a year and a half  after they are given to him, then the Legislature passed a bill earlier this week (S. 4771-e  Funke\ A. 7610 Ewith) with which you should familiarize yourself.  The bill increases to 25 months from 13 the amount of time a gift certificate must be dormant before a service fee can be assessed on the balance.  It also stipulates that these fees must be replenished when a member redeems a certificate within three years.  Finally, all gift certificates have to be valid for a period of at least five years.

By the way, in NY a gift certificate is defined as ”a written promise or electronic payment device that: (i) is usable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo, or is usable at multiple, unaffiliated merchants or service providers; and (ii) is issued in a specified amount; and (iii) may or may not be increased in value or reloaded; and (iv) is purchased and/or loaded on a prepaid basis for the future purchase or delivery of any goods or services; and (v) is honored upon presentation.”  N.Y. Gen. Bus. Law § 396-i (McKinney).  The bill now goes to the Governor.

McWatters Nomination to Export Import Bank Blocked Again

The Export Import Bank and the NCUA have about as much in common as Kim Kardashian and Mother Teresa but yet their fates are strangely intertwined. Without J. Mark McWatters, the Ex-Im bank doesn’t have a quorum to operate; and so long as McWatters stays NCUA has a quorum.  Considering that there are proposals like FOM reform still waiting to be finalized, this is a big deal.

Senator Richard Shelby, Chairman of the Senate Banking Committee, a steadfast opponent of the Bank, refuses to take up the  nomination.  Supporters of the Export Import Bank tried to do an end run around Shelby yesterday.  North Dakota Senator Heidi Heitkamp (D-ND) asked the Senate to take up the nomination with unanimous consent. To the surprise of no one, Shelby objected but the maneuver gave Democrats an excuse to voice their increasing frustrations over the stalemate.

 

 

June 10, 2016 at 8:44 am Leave a comment

The Best Republican Idea

There is a lot of Red-Meat election year nonsense in The Financial CHOICE Act unveiled by Representative Hensarling on Tuesday; This is, after all, an election year, and the proposal has as  much to do with laying out a contrasting vision of financial regulation than it does about getting anything done before this Congressional session is over.

That being said, one of the proposals that intrigues me the most is to “Repeal the so-called Chevron deference doctrine.” This may sound esoteric compared to proposals to neuter the CFPB director, extend the exam cycle and allow banks to opt out of Basel III capital requirements, but it could put the brakes on a regulatory process that many of us believe has gone haywire. Here’s why.

An agency’s power to regulate comes from a legislative Act. For example,  the Durbin Amendment was a law from Congress directing the Federal Reserve to cap debit card interchange fees. And Congress empowered the CFPB to regulate consumer protection laws in the Dodd frank Act.   That’s why a regulated entity like a credit union can sue to block a promulgated regulation which goes beyond a regulator’s authority and why the NCUA got an opinion letter on its ability to impose risk based capital requirements on Well Capitalized credit unions.

Now this may come as a shock but much legislation is vaguely written. So what is a court to do when it is faced with a challenge to a  regulation implementing a statute that is capable of more than one interpretation? This is what the Supreme Court told the Courts to do:    “ First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute. Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43, (1984).

Critics of this framework argue that  it has evolved into a rule of law that  gives regulators too much flexibility to make de facto laws called regulations. Many statutes are capable of being interpreted in more than one way and, when they are, the Courts must generally defer to an agency’s interpretation.  Combine this power with the wide-ranging power of regulators to issue Guidance interpreting their regulations and you end up with a system In which the Executive Branch can impose mandates without getting laws passed and in which  the Director of the CFPB has more power than any elected official besides the President.

To all of you out there who think I am shilling for The Man I will tell you what I told A WSJ reporter the other day: How much executive power do supporters of government by regulation want to hand to a President Trump?

Doing away with Chevron deference would return the power to interpret statues to the place where it ultimately belongs under the constitution: The courts. It would also encourage better drafting by Congress.  Parts of Dodd Frank read like a regulatory to-do list.  Perhaps if Congress knew that their  work  was going to be reviewed by judges without deference to the views of a  regulator with whom  they have dealt  with for years legislation would actually read like legislation.

One more thing. As a judicially created doctrine the Supreme Court could eliminate Chevron in a future case.  Before the Death of Justice Scalia I would have said it was headed in that direction.  For  those who want the Court to reexamine the framework it uses to evaluate regulations this makes the views of the next justice all the more important.

 

 

June 9, 2016 at 9:35 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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