Posts filed under ‘Legal Watch’

BS(A) Strikes Again

 

What would happen to your credit union if federal regulators and prosecutors determined that over a five year period you processed over 30 million remittances to Mexico, assigned two employees to monitor these transactions, filed a total of 9 SARS, ignored employee concerns that you were violating federal law, and then admitted to “willfully violating” The Bank Secrecy Act? I’ll tell you what would happen: Your credit union would be out of business, your top executives would be banned from the industry, and you might even find yourself on the front page of the Wall Street Journal. After all, Bethex Federal Credit Union no longer exists.

Unfortunately evidence suggests that the same rules don’t apply to the largest institutions. Yesterday the justice department announced that it was entering into a non-prosecution agreement with Banamex USA, a subsidiary of Citigroup, to settle claims that it violated the Bank Secrecy Act from 2007-2012 by facilitating remittance transfers to Mexico without complying with some of the most basic requirements of the Bank Secrecy Act. The price of its “get-out-of-jail free” card is $97.4 million. This is in addition to the earlier fines paid to the FDIC. Citgroup has also announced that it was shutting down the offending bank’s operations- better late then never, I guess.

The bank’s intentional oversight had real live consequences as the Non Prosecution agreement explains. “As a result of these compliance program failures, BUSA failed to file suspicious activity reports (“SARs”) on suspicious remittance transactions to Mexico that fit typologies consistent with illegal activity, such as human smuggling, fraud, and drug trafficking.”

It is hard not to be cynical when reading this news. Over the decade I have been working with credit unions, I have been impressed by the earnestness with which most of them strive to comply with regulations even as some of these mandates are clearly not designed for institutions of their size and sophistication. Not all regulations make sense but they are the price we pay for participating in a well-functioning financial system.

But if the institutions for which BSA regulations were primarily intended can get by with a slap on the wrist for knowingly ignoring the law and making a big profit along the way it is kind of hard to tell credit unions with a straight face that they should take their obligations seriously.

One final thing, the big losers here are of course not the credit unions, but the American citizens. We have heard a lot about building walls and bad hombres, but when it comes to prosecuting banks engaging in reckless activities that help facilitate actual crimes the Justice Department goes silent under both democratic and republican administrations. Too big to fail, jail, and regulate is alive and well.

 

 

May 23, 2017 at 9:11 am 1 comment

Does NY’s Cybersecurity Regulation Apply To Your Credit Union?

With the recent ransomware attack demonstrating how vulnerable the world is to cyberattacks, I spent part of my weekend looking back over NY’s regulations and to whom they apply to. These regulations took effect in March, but there is a six month transition period, with some requirements being phased in over the next year.

What follows is one man’s opinion and not a substitute for consultation with your own counsel and compliance team.

NY’s regulations apply to “any person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.” This definition clearly applies to state chartered credit unions and CUSO incorporated or licensed in New York State, such as a mortgage banking or title insurance business.

What if you have a federally chartered credit union that makes mortgage loans? Here is where people part ways with my analysis. Even though originators working for banks and credit unions are exempt from state licensing requirements under Section 12C of the banking law, they still must be registered with NYS as loan originators. (N.Y. Banking Law § 599-c(3)(a) (McKinney). On its face the regulation is broad enough to be triggered by this requirement.

Persons within the industry, which whom I have discussed the regulations reach, argue that even if my interpretation is correct it is hard to see how NYS could actually enforce the regulations against a federal chartered institution. To me this argument overlooks the fact that this regulation’s requirements will impact more than your compliance system. If it works the way I think it will, it will become an integral part of your most basic business relationships.

For example the regulation will impact your third party relationships. Entities covered by the regulations must identify and perform a risk assessment on all third party vendor relationships. They also must explain the minimum cybersecurity protocols for which they expect third party vendors to comply. This requirement is broadly consistent with third party vendor guidelines. If I was drafting a contract for your credit union, reference to NY’s cybersecurity requirements could provide a useful and precise baseline for the expectations that you expect vendors to meet. This is particularly true given the increasing importance that adequate encryption plays in your cybersecurity program.

Even if NYS’s regulation doesn’t apply to you today, you don’t have to be Nostradamus to figure out that similar regulations will soon be imposed on your credit union. The ransomware attack demonstrated just how vulnerable our county is. Like it or not, NY’s regulation provides a template upon which regulators can quickly build, and my guess is they will do so.

May 22, 2017 at 9:52 am Leave a comment

Mortgage Lending Mishap You Can Easily Avoid

Yours truly is in a particularly good mood today.

Not only is it Friday, it is a sunny and warm Friday, and as someone who would gladly go the rest of his life without seeing another snowflake, it doesn’t get better than this. Thirdly, and most important for our purposes, a settlement announced yesterday between JPMorgan Chase and homeowners provides a great example of why—whether you are a federal or state charted credit union—it can get awfully expensive to disregard state mortgage law.

Under NYS law (N.Y. Real Prop. Acts. § 1921(1); N.Y.Real Prop. § 275(1)) a lender/mortgagee must present a satisfaction of mortgage for recording within thirty (30) days of a mortgage being paid off. If the mortgagee does not, it is liable for statutory damages between $500-$1500 per violation. I was around when the Legislature imposed these fines. At the time, legislators were fed up with getting calls from frustrated constituents, desperate to locate their mortgage satisfactions, which they assumed were recorded years ago.

In Bellino v. JPMorgan Chase Bank (U.S. District Court, Southern District of New York, No. 14-cv-3139), a homeowner paid off her mortgage loan on May 14, 2012. Chase sent the satisfaction of mortgage to the Westchester County clerk by Fed Ex on June 13, 2012, but the payoff was not received by the county clerk until June 15. The homeowner brought a class action law suit against the bank, seeking damages on behalf of herself and all others who took out a mortgage with Chase between 2011-2016, for whom a certificate of discharge or satisfaction was not presented to the appropriate county officer within 30 days. Yesterday Chase agreed to settle this case for more than $8 million.

A few quick takeaways as there is more going on here than meets the eye: First, Chase never denied that it was tardy with its filing, but argued that the case should be dismissed because the homeowners suffered no real harm. The court flatly rejected this argument, underscoring that those pesky little penalties that legislators like to add at the end of consumer protection laws have created a cottage industry of lawyers making a pretty good living out of nickel-and-diming financial institutions.

Second, it all comes down to process. Chase easily could have avoided this lawsuit had it just had tighter processes.

Third, just to be clear, you are not obligated to make sure that the satisfaction is recorded in thirty days, just that it is received in thirty days.

I have always thought that the credit union industry is a bit obsessed with the distinction between federal and state intuitions, at least when it comes to mortgage lending. At the end of the day you will be impacted by the laws of the state in which you are located. There are of course numerous exceptions to this statement, but a healthy understanding of your states laws and how they impact your operations is a critical part of any compliance program.

On that note, yours truly is done blogging for the week! Enjoy your weekend. Peace Out.

 

May 19, 2017 at 10:14 am 1 comment

Household Debt Hits New Record

Far be it from me to tell anyone how to do their job, but if I was involved in lending for a living I would certainly take a close look at the New York Fed’s quarterly snapshot of household debt released yesterday. Its either (a) an infliction point signaling that sustained higher growth has taken hold; (b) a high point which masks some disturbing trends; or (c) something in-between.

First, the “good” news. The American consumer is back baby! The New York Fed tells us that household debt achieved a new peak in the first quarter of 2017, rising by $149 billion to $12.73 trillion—$50 billion above the previous peak reached in the third quarter of 2008. Balances climbed in several areas: mortgages (1.7 percent); auto loans (0.9 percent); and student loans (2.6 percent). Considering that consumer spending accounts for at least 70% of the nation’s economic growth all this spending is good news. Despite the growth, credit card balances fell 1.9 percent this quarter.

Secondly, there is evidence that we have learned our lesson According to this accompanying research the country still has less mortgage debt than it did a decade ago and lenders have actually followed the credit union lead in lending to more credit worthy borrowers.

So why am I a little skeptical? It doesn’t feel like it but by historical standards we are at the back end of the growth cycle. As none other than Ben Bernanke pointed out in a speech yesterday that from a historical standpoint a recession is due in the next two to four years.   In addition much of the current economic hype is predicated on a “Trump bump” but don’t expect major Reg Relief let alone tax reform until Robert Mueller completes his Russia investigation.

Supreme Court Makes Important Bankruptcy Rule

One of the CFPB’s real pet peeves has to do with debt collectors who continue to seek repayment of debts even after the statute of limitation for their collection has expired. In addition, inquiring minds want to know if it is legal for debt collectors to submit proofs of claim in Chapter 13 bankruptcy proceedings for the repayment of such debts. Earlier this week the Supreme Court provided guidance on this issue. It ruled that debt collectors do not engage in an unfair and deceptive practice, under the Fair Debt Collections Practices Act, by submitting claims for stale debts.

MIDLAND FUNDING, LLC v. JOHNSON dealt with a creditor who submitted a proof of claim for repayment of a 10 year old credit card debt. The debtor argued that this was an unfair and deceptive practice since the debt was not collectible. Alabama has a six year statute of limitations. The Court explained that the parties to a Chapter 13 bankruptcy are sophisticated. Most importantly the bankruptcy is responsible for reviewing the validity of all claims. The court effectively held that, while a trustee has every right to reject a stale loan there is nothing to keep the debt collector from seeing if he can slip one by the goalie.

Baseball Hot Dogs, Apple Pie and Uber

Nothing says summer like hailing a ride from Uber or Lyft, or at least that is what some New York lawmakers think. They recently proposed legislation to push up the effective date of New York’s law authorizing ride hailing services from July 9th to July 3rd, just in time to get a cheap ride home from the beer infused family Fourth of July party.

May 18, 2017 at 9:18 am Leave a comment

Reports of CFPB’s Demise have been greatly exaggerated

Last Thursday, Congressional efforts to kill regulations set by the CFPB extending certain protections currently given to debit cards to pre-paid card holders quietly died; the regulations take affect April 2018. Even if you don’t offer pre-paid cards this speaks volumes about the regulatory environment in which we will find ourselves for years to come.

First, a slight digression since I really enjoy this subject. In 1996 Congress passed and Hillary Clinton’s husband signed into law the Congressional Review Act (5 U.S.C. § 801-808). Under this legislation final regulations must be submitted to congress and it has 60 days – excluding certain breaks- to pass a resolution blocking them from taking effect. Since regulators have way too much power, this statue sounds great, but its bark is much worse than its bite. After all, in order for a regulation to be blocked both houses of congress would have to vote to repeal it, and there is always the possibility of a veto.

With Congress and the presidency in Republican hands, the act has become a potent weapon with which to undue many regulations promulgated in the final days of the Obama administration. Since Donald Trump took office in January (yes it has only been 4 months) Reuter’s reports that congress has used the Congressional Review Act to kill 14 pending regulations.

This brings me back to the CFPB’s prepaid card regulation. In early February, Senator Perdue of Georgia introduced a joint resolution to block the regulation. He complained in a press release that “If the CFPB wants to continue to impose rules and regulations that impact every American’s financial well-being, it must answer to the American people.” In the same press release Senator Cotton of Arkansas called the rule “a disaster for consumers attempting to access prepaid cards,” In short, the regulation seemed like precisely the type of CFPB mandate that the free market, anti-regulation congress would quickly make go away. But on Thursday the deadline for repealing this bill came and went.

Consumer groups are right to point to this failure as a strong indication that the CFPB, or at least the regulations it has promulgated to date, are alive and well. After all, if congress doesn’t have the appetite to repeal an esoteric regulation dealing with a specific segment of the consumer finance market, then hopes of forging a bi-partisan consensus on changes to the CFPB seem doomed.

I have a sneaking suspicion we are seeing a reemergence of the same pattern that has made it so difficult for Republicans to “Repeal and Replace” Obamacare. Republicans were unified in their opposition to Obamacare until they had to explain to their constituents that they would lose coverage under the Republican alternative. Now Republicans might be growing skittish over taking on the CFPB if that means repealing consumer protection regulations that consumers like.

Don’t get me wrong. The pre-paid card rule has its defects. And, with or without changes to the CFPB’s structure, we will eventually have a CFPB director appointed by President Trump. Unfortunately however, needed regulatory changes may not be as a dramatic or come as quickly as we would like to see.

May 17, 2017 at 10:19 am Leave a comment

Two Cases You Need To Know About

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!

March 29, 2017 at 9:32 am Leave a comment

Are You Sure You Really Own That Mortgage?

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.

 

March 9, 2017 at 9:58 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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