Posts filed under ‘Legal Watch’

S.C. Frustrated by Lack Of Clarity in New York Law

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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.

January 11, 2017 at 9:39 am Leave a comment

Four things you need to know about New York today

giantI have New York on my mind this morning, and it is not just because I am suffering from post-traumatic stress disorder after watching the second half of the yesterday’s Packers-Giants game. Is the second half over yet?

Instead, I am thinking about New York because there is a lot going on both regulatory and legislatively that financial institutions should be keeping an eye on.

Time to fill out your exemption claim forms

Once again, with a huge assist from Joan Lannon, in the Associations, compliance department, here is a link to the form that your credit union will to claim an exemption from the requirement to maintain abandon property. Remember you have until February 28, 2017 to apply for the exemption, but it makes no sense to wait.

Elder Abuse Legislation to be a top priority for Cuomo

Today marks the unofficial start of the 2016-2017 legislative sessions. This year the governor is foregoing the tradition of speaking before a joint legislative session in Albany. Instead, he is unveiling his State of the State priorities in regional speeches, the first of which is today. On Friday, he announced he would be proposing comprehensive elder abuse legislation.  The specifics have yet to be released, but according to the press release, the governor’s plan would include an Elder Abuse certification program for banks as well as measures to empower banks to place holds on “potentially fraudulent transactions”. Incidentally, I don’t know if the exclusive reference in the press release to banks is an oversight or an indication that credit unions won’t be covered by these measures. I strongly suspect that it is the former.

Rocky start to Legislative Session

A hallmark of the Cuomo administration has been an end to New York’s dysfunctional budget process; most importantly every budget proposed by the governor has been enacted pretty much on time. This run will be put to a test this year. As these legislative preview articles indicate, both the governor and legislature are angry at the lack of progress in negations held late last year and there isn’t quite as much money to spend as there used to be. This could be a very interesting session.

Expressions Hair Design to be argued tomorrow

Expressions Hair Design v. Schneiderman, a case challenging New York’s ban on credit card surcharges above an items headline price, is to be argued before the Supreme Court tomorrow. Both CUNA and NYCUA wrote amicus briefs in support of New York’s law. There will be no blog tomorrow, as yours truly and Michael Lieberman will be headed to D.C to watch the arguments first hand.

As for all you depressed Giant fans, remember, we still have the Knicks. WOW it’s going to be a long winter. Maybe I will start getting ready for fantasy baseball.

January 9, 2017 at 8:45 am Leave a comment

News Flash: FinCen Can’t Legalize Pot Banking

The effort to legalize marijuana on the federal level received a high level push in December when Massachusetts Senator Elizabeth Warren joined a group of senators in a letter to FinCEN. Her celebrity status has triggered another round of  media coverage;  After all, she is already being mentioned as a potential nominee for president with the next election only four years away and she likes to tweet which is  a core prerequisite for the office.

By joining the most recent letter writing campaign she has once again put the spotlight on the Alice in Wonderland world of legalized pot. It makes perfect sense for the senator to join the push for legalizing cannabis. In November, Massachusetts voters approved a referendum to legalize marijuana for recreational purposes. There are now 29 states, including New York, which legalize the possession of marijuana to some extent.

What drives me nuts is that Warren and her fellow senators once again chose to badger FinCEN to approve additional guidance clarifying that banks and credit unions can provide banking services to pot businesses in states in which they are legal. To be clear, I believe that the federal government should legalize the sale and distribution of marijuana in those states where it is legal. I also believe that banks and credit unions should be able to provide services to these legitimate businesses. The senators correctly point out that even though FinCEN issued a 2014 guidance detailing the conditions under which it would allow them to do so fewer than three percent of the nation’s banks and credit unions are willing to serve this industry.

However at the risk of being accused of banging my head against the wall, the way to get this accomplished is not to require more guidance from FinCEN. Federal law and regulation makes pot illegal and there is nothing that FinCEN can do to change that. it is not the DEA. Furthermore even if FinCEN could entice banks and credit unions to more actively engage in servicing this industry the reality is that the continued legal cloud over the industry raises a host of issues, over which FinCEN has no control,. These issues range from the enforceability of contracts to the legality of bankruptcy cases involving marijuana businesses.

It is time for all interested parties to confront the real issues once and for all.

January 5, 2017 at 10:00 am 3 comments

Time to Close The Lawyer BSA Loophole?

firm_logoI am asking this question because of an article in the WSJ last week. The article highlighted the ease with which accounts overseen by lawyers can be used to facilitate money laundering activities. Keeping in mind that credit unions can now offer Interest on Lawyer Trust Accounts (IOLTA), this is one area of compliance that could impact your credit union in the future.

First, a refresher: Lawyers often take funds from clients for short-term purposes. Refundable retainers and money for real estate closings are two good examples. IOLTAs permit lawyers to place these funds in single trust accounts. As many of you probably know, it wasn’t until 2014 that credit unions were given the same rights as banks to establish these and other similar type of accounts.

In December, the Financial Action Task Force (FATF), an independent international body tasked with assessing international efforts to combat Money Laundering, concluded that the U.S. has to do more to clamp down on supervision of funds by lawyers, accountants and real estate agents. They complained that these professions are not subject to comprehensive AML requirements and are not systematically performing due diligence over account activities. The result is that they pose a “very significant risk” of money laundering.

The FATF has a point. Under the FFIEC’s Anti-Money Laundering Examination Manual, my bible for all things BSA, financial institutions are required to do due diligence on attorneys seeking to open an IOLTA account. But since credit unions often have no direct relationship with the clients whose funds are being combined in these accounts, it is the lawyer and not the financial institution that is best positioned to prevent money laundering. The legal profession has however steadfastly resisted attempts to impose AML requirements on attorneys administering IOLTA accounts. After all, there are legitimate confidentiality issues.

How big of a loophole is this? Think of it this way. While your credit union may be facilitating the business activities of a small law firm, major law firms that are international in scope can oversee billions of dollars.

This loophole has existed for decades and it’s possible that the scrutiny it is currently receiving may not result in additional mandates. But if it does, BSA requirements tend to flow downhill. I wouldn’t be surprised to see regulations inspired by the questionable conduct of large institutional players resulting in mandates with which even the smallest credit unions must comply.

 

January 4, 2017 at 10:24 am 1 comment

Six Things To Ponder Over The Holiday

Yours truly is going on vacation starting tomorrow.  I’m preparing for my feats of strength.  so I wanted to give you a list of things to ponder in the event you need a break from all the merriment.

Your lucky number is…   With a big assist from the inimitable Joan Lannon in our compliance department, I can now tell you that tucked away on the New York DFS website is  the total number of residential real property mortgages originated in New York in 2015. The number is 212,646.  As readers of this blog know, under the zombie property regulations, credit unions will use this number to find out whether they originated or serviced less than 3/10 of 1% of the total loans in the state during the calendar year of 2015. (This equates to 636 mortgages, but please do the calculations for your credit union).   If your credit union did less than 636 in 2015, you are exempt from the property maintenance requirements of the regulation. You are not exempt from the obligation to report abandoned property to the state.

Are you ready for global warming? One of the goals of the Biggert-Waters Act was to introduce more private sector involvement into the federal flood insurance system.  Comments are due on January 6 on a joint agency proposal which explains when “private flood insurance,’’ will satisfy federal flood insurance requirements.  Since it is the lender who will be responsible for deciding if the borrower’s insurance is adequate, this is one to take a look at.

Cyber Security Regulations: A work in progress? Speaking of regulations, New York’s Department of Financial Services is still considering how best to implement its “first in the nation” cybersecurity regulations.  Even if you are not from New York or you are a federal charter these are important to you.  They will provide a template for other states that decide they can’t wait for the federal government to get its act together on this issue.  We may seem some changes proposed, perhaps as early as next week.

UPDATE A friend, neighbor and blog reader just passed along this article indicating that the implementation of the regulation will be delayed.

How much is a pay raise worth? The last time the Legislature got a pay raise Governor Pataki got the legislature to approve charter schools. Everybody wants a pay raise before the end of the 2015-16 legislative Session. So with a week left in the year there is plenty of speculation about what, if anything, will be agreed to that would get legislators back in town next week. Stay tuned.

Eight is enough:  Yesterday, both the Association and CUNA filed briefs with the U.S. Supreme Court in the Expressions Hair Design case.  The case involves an appeal of a ruling by the Court of Appeals for the Second Circuit upholding Section 518 of the General Business Law.  This law makes it illegal for merchants to charge more than the headline price for credit card purchases.  Arguments are scheduled for January 10th.

Mama mia! Although some of us apparently believe in the fantasy of Fortress America, reality has a nasty way of intruding. International events impact your credit union’s bottom line. One of the biggest potential obstacles to growth in 2017 could be the Italian banking system, in particular, and the European banking industry, in general.  Just a few hours ago the Italian Government approved a bailout of its oldest bank.  In a worse-case scenario, Italy’s banking problems spread over Europe as politicians, spooked by the rise of nationalist parties, are unable to agree on a continent-wide response.

I will be back next year with my batteries recharged and one of the most fascinating periods of American history about to start. Until then, I’m signing off. Happy holidays and thanks for reading.

 

December 22, 2016 at 9:48 am 1 comment

Ben Carson Could Reshape Mortgage Lending Laws

bencarsonThe selection of Ben Carson as the Trump Administration’s nominee to be the Secretary of Housing and Urban Development (HUD) puts the former Johns Hopkins neurosurgeon turned conservative presidential candidate in a position to decisively and quickly reshape the fair lending landscape in a way that will make it easier for your credit union to deny mortgage loans without fearing a lawsuit.

HUD is responsible for enforcing the Fair Housing Act. As I’ve written in previous blogs, it interprets this law in its regulations as prohibiting lending practices that are intentionally discriminatory as well as those that have the effect of discriminating on the basis of someone’s protected status.

HUD has been steadfast in holding to this interpretation even as it has faced challenges questioning the propriety of its interpretation. For example, in 2013 it issued an updated interpretation of its analysis. At the time, it was assumed that the Supreme Court would be taking a look at how the FHA should be interpreted. HUD also refused to exempt lenders who make Qualified Mortgages that comply with CFPB’s regulations from possible enforcement actions if their Qualified Mortgages had a discriminatory effect on mortgage lending to minorities.

It’s always dangerous to speculate about what will happen in a Trump Administration and perhaps even foolhardy to speculate about the policy predilections of Dr. Carson, who has no formal background in this area, but I’m feeling lucky. I expect him to reexamine and narrow HUD’s interpretation of the Fair Housing Act. Conservatives believe that intent matters. Criminalizing lawful conduct because of its incidental impact is a recipe for regulatory overreach that deters lenders from making reasonable judgements about who can and can’t afford a home.

December 7, 2016 at 9:10 am Leave a comment

NCUA ‘s Billion Dollar Legal Investment Was Worth The Price

gavelIn mid-October, NCUA announced that it had made over $1 billion  in contingency fee payments to compensate the law firms that it retained to recover losses incurred by the failed corporates as a result of their purchases of mortgage-backed securities.  The large sum of the payout, representing approximately 25% of the $4.3 billion in settlements that the agency has reached has understandably raised some eyebrows and provided ammunition to the agency’s critics. Credit Union gadfly and frequent reader of this blog  Keith Leggett posted  that  South Carolina Congressman Mick Mulvaney has asked  NCUA  to answer these three questions:

  • Why did the agency pursue these cases under contingency fee arrangements?
  • What was the original analysis of why this was the better approach? And,
  • Has there been a post-settlement analysis to see if this was actually the best approach, financially, given the outcome?

These are all very legitimate questions given the amount of money involved. But at the end of the day, let’s not demagogue NCUA’s actions. It has made a worthwhile investment that has already helped the credit union industry recoup billions of dollars.

Let’s look at the facts.

Most importantly, there was absolutely no guarantee that NCUA was going to win any money as a result of taking on the largest financial institutions in the world. The litigation was risky, both because there were novel legal issues involving statutes of limitations and the disclosure obligations of investment banks that bundle and sell complicated mortgage securities.  NCUA not only had to prove that the securities tumbled in value, but that the companies that sold these products knowingly failed to disclose material information.  Both of these were aggressive legal arguments. Without a contingency fee arrangement, NCUA would have had to choose between risking hundreds of millions of dollars of credit union money, or forgoing the litigation all together.  Had it chosen the later course, your credit union would most likely still  be paying special assessments.

You don’t bring a knife to a gun fight. Given the complexity of the litigation and the reputational and financial risk to the institutions that NCUA was suing, it was going to go up against the best lawyers.  It needed to do the same thing.  The best lawyers cost a lot of money.  A first year Associate at a top New York law firm – typically, a bright 25 year old right out of law school – is making a base salary in excess of $170,000 a year before her bonus.  In addition, top partners are now demanding in excess of $ 1,000 an hour.  Is this an excessive amount of money?  Perhaps, but this is the marketplace with which NCUA had to deal.  Look at the quality of the work NCUA got in return for its contingency fee arrangements:  both on the trial and appellate level, it won important decisions that put NCUA in the position to demand substantial settlements.

Finally, when people question the cost of this litigation, such concern should be weighed against its benefits, not only to the bottom line of  credit unions but to the public at large. NCUA’s litigation has an established precedent that will make it easier for financial institutions that engage in similar conduct in the future. Credit unions and the public got their money’s worth.

December 1, 2016 at 10:01 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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