Posts filed under ‘Legal Watch’

Who’s Going To Gamble on Fantasy Sports?

Quick cultural point. I like Adele but I think she could sing this blog and turn it into a hit. But alas, I digress.

What’s gotten my attention this morning is the brewing battle between New York’s AG, Eric Schneiderman and fantasy sports Internet providers FanDuel and DraftKings. While it may not directly impact your credit unions, I wouldn’t be surprised if you find out precisely how many gambling members you have if all the sudden their ability to access these fantasy providers with their credit cards is blocked.

You might remember that the issue of gambling over the Internet was dealt with on the federal level when Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (31 USCA Sec. 5301). The statute banned using the Internet to make a bet or wager, but it stipulated that betting does not include participation in any fantasy or simulated sports games. (31 USCA Sec. 5362).

I am sure it’s just a coincidence that two of the highest profile owners in the NFL, Jerry Jones of the Cowboys and Robert Kraft of the New England Patriots, reportedly have invested in fantasy sports companies.

So why do the Attorney Generals of Nevada and New York feel they have the right to block these companies from operating? Because the statute also stipulated that its purpose was not to preempt “any state law prohibiting gambling.” As a result, the Attorney General’s argument centers on his interpretation that fantasy sports are games of chance prohibited under both the state constitution and state law.

Here’s where it gets a little closer to home for your credit union. Actually coming up with a system for enforcing the Internet better bans was left to the regulators. When the pertinent regulations were eventually finalized, they largely left credit unions and banks off the hook provided they have policies and procedures in place for determining if any if their business accounts are involved with gambling. The entities that really have to make a tough call this morning are the credit card networks and third party processors. They are responsible for coding illegal gambling transactions. If they agree with the AG then a member using a credit card to access a fantasy site should be blocked, if they don’t then they should continue processing the transactions as if nothing has changed. FanDuel has suspended New York Business but I don’t believe DraftKings has followed suit

Put this in context. DraftKings and FanDuel are each valued at more than $1 billion. According to Bloomberg business, New York accounts for over 5% of FanDuel’s customers and over 7% of DraftKings. Losing New York would cost then at least $35 million and more importantly put their entire business model at risk.

November 16, 2015 at 9:07 am Leave a comment

Just Who Is The Borrower Anyway?

Life used to be a lot simpler for mortgage lenders.

Now, things are even more complicated than they appear to be. Exhibit 1 is Sec. 1304 of NY’s Real Property Actions and Proceedings Law. On the face of it Sec. 1304 is straight forward. It provides that a pre-foreclosure notice must be provided to “the borrower” at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the delinquent borrower. Judging by the number of cases in which lenders have had foreclosures dismissed for violating this requirement, it is not as simple as it looks.

For example, just who is the “borrower” for purposes of this notice and are there steps your credit union can take to avoid any confusion over this issue? A clearly exasperated Richmond County judge provided some useful answers to both of these questions in OneWest Bank FSB v. Prestano, 49 Misc. 3d 1209(A) (N.Y. Sup. Ct. 2015), a case that was decided last week.

When Giuseppe and Caterina Prestano originally brought their home they both signed the note and the mortgage. Things get interesting because, when the house was subsequently refinanced, only Giuseppe Prestano signed the note. The mortgage, with its two riders (1-4 Family and Adjustable Rate), was signed by both Prestanos.

Mr. Prestano committed suicide; but, before he died he received a Sec. 1304 notice. Caterina did not. In the subsequent foreclosure action she argued that this invalidated the whole foreclosure. The bank argued that she was not a borrower because her name was not on the note. Here is the problem with that argument as the court saw it: if she was not a “borrower” then her signature on the Mortgage and Riders is there merely to consent to Giuseppe Prestano mortgaging his interests in the property and her ownership interest in the real property cannot be foreclosed upon. In other words the bank put itself in the corner in which it could either argue that it had complied with Sec. 1304 and lose the right to foreclose on the entire property or concede that it had violated Sec. 1304 and have to start the foreclosure from scratch.

Here is the real helpful part of the case: The judge pointed out that this dilemma could have been avoided had Giuseppe left her off the mortgage document entirely and been instead asked to execute a “consent to mortgage.” By such a document she would declare she was not obligating herself either on the Note or Mortgage, but would acknowledge that should her spouse default on his obligations, the lender could institute a foreclosure proceeding against the entire premises.

Consent to mortgage documents are a great device that have historically been used more frequently in commercial real estate transactions rather than residential ones. With so many different disclosures and notices being required now at so many different stages of the lending process, the more clearly you delineate who the borrower is, the better off you are. Now, don’t get me wrong, obviously the ideal situation is to have all borrowers sign both the mortgage and the underlying note. But increasingly, couples are doing their own thing. For example, one spouse might be starting their own business while the other continues to work at a 9-5 job. As a result, clearly delineating the right to foreclose on property is becoming that much more important.

November 9, 2015 at 10:09 am Leave a comment

Florida and New York Clash

I knew that would get your attention. The clash to which I am referring has to do with the legality of statutes banning credit card surcharges. Earlier this week, the Court of Appeals for the 11th Circuit, which has jurisdiction over Florida, invalidated a state statute that made it a misdemeanor to impose a surcharge on credit card purchases. As readers of this blog will know, the Court of Appeals for the Second Circuit, which has jurisdiction over New York, recently upheld a similar New York statute.

The split between the circuits raises the profile of the issue even more and increases the possibility that the Supreme Court will step in and decide if it is legal for states to impose such bans. The New York Credit Union Association submitted an amicus brief in the New York case arguing that the statute should be upheld.

In Dana’s Railroad Supply v. Attorney General, State of Florida, the 11th Circuit had to decide whether the Florida surcharge ban violated the First Amendment right of merchants to engage in free speech. The statute in question (Florida statute Sec. 501.0117) makes it a crime for a seller to impose a surcharge on a buyer for electing to use a credit card. However, it also allows “the offering of a discount for the purpose of inducing payment by cash.”

In its majority opinion, the Court noted that under Florida’s statutory scheme a merchant who offers the same product at two prices “a lower price for customers paying cash and a higher price for those using credit cards is allowed to offer a discount for cash while a simple slip of the tongue calling the same price difference a surcharge runs the risk of being fined and imprisoned.” Against this backdrop, the Court concluded that the statute violated the Constitution by penalizing merchants based on what they say and how they say it.

In a demonstration of how reasonable people can come to vastly different conclusions, in Expressions Hair Design v. Schneiderman, the Court of Appeals for the Second Circuit reviewed New York’s surcharge ban and concluded that statute does not implicate the First Amendment at all. The way this issue is ultimately decided will have important implications for credit card issuers. Since merchants are no longer barred from imposing credit surcharges in their contracts with Visa and MasterCard, the remaining state level bans are the only way to prevent these increases consumer costs.

Enjoy your weekend. Stay tuned.

November 6, 2015 at 8:53 am Leave a comment

When Should Your Member Be Allowed To Sue You?

Should credit unions, banks and businesses face lawsuits from consumers for technical violations of laws and regulations that don’t  harm anybody?

Does Congress have the power to allow people to bring these lawsuits simply by authorizing statutory damages for violations?

Why did Terry Collins wait so long to pull Matt Harvey in the Ninth inning of a World Series game? Just making sure you are paying attention.

A case in which these question are being grappled with is Spokeo, Inc. v. Robins, 135 S. Ct. 1892, 191 L. Ed. 2d 762 (2015). Oral arguments were heard by the Supreme Court yesterday.  Spokeo is a website which   provides users with information about other individuals, including contact data, marital status, age, occupation, economic health, and wealth level.   Robins claims that the website violated the Fair Credit Reporting Act by publishing false information about him. The Court of appeals for the Ninth Circuit concluded that even though his “allegations of injury were sparse” since the FCRA authorizes statutory damages for violations all the plaintiff had to prove was that a violation of the FCRA with his information had occurred in order to sue the company.

Not so, says the company. Article III of the Constitution requires the plaintiff to demonstrate not only that a law was violated but that he was” actually injured” by the misconduct. Technical violations, it argues,  don’t meet this standard.

To put this in concrete terms many credit unions faced threats of lawsuits by consumers who argued that they were in violation of the EFTA by not adequately posting fee disclosures alongside their ATMS. Should these plaintiffs have had to show not only that a credit union made a mistake,  but that they were actually harmed by these oversights?

The outcome of this case has potentially huge implications for anyone responsible for compliance which is why businesses ranging from Facebook to the American Bankers Association submitted briefs to the Court explaining how it’s decision could impact them . What the ABA said of banks is certainly true of credit unions: They are already subject to a broad range of government enforced laws and regulations.  Notwithstanding this broad and pervasive government oversight banks are constantly faced with the threat of lawsuits that amount to “technical nitpicking.” (Love that line).

The Scotus blog reported that reaction to yesterday’s arguments broke into three distinct camps among the justices: Two justices who  suggested that a technical violation of the FCRA is all that has to be proven for the lawsuit to proceed;  a group of more conservative justices who argued that the  plaintiff must demonstrate not only a  technical violation of the law but also how he was harmed by it;  and a third faction which  suggested that the dissemination of inaccurate information was an actual injury.

As the Blog explained the third option “would allow Robins’s lawsuit to go forward, without forcing the Court to choose between opening the federal courts to frivolous but possibly massive class-action lawsuits (Spokeo’s prediction if Robins were to prevail) and closing the courthouse doors to potentially important privacy, civil rights, environmental, and patent lawsuits (Robins’s prediction if Spokeo were to prevail. “

I hope the court doesn’t decide on these narrow grounds. We live in a world of regulation and all businesses need and deserve bright line rules putting them on notice of what happens when they make hyper technical mistake implementing o voluminous regulatory mandates.  Here is a link to more information about the case.



November 3, 2015 at 9:36 am Leave a comment

Legal Haze Thickens for Pot Businesses

Anyone in a credit union considering offering banking services to marijuana businesses should take the time to make sure that their attorney is paying close attention to litigation between the Federal Reserve Bank of Kansas and the Fourth Corner Credit Union of Colorado. (See Fourth Corner Credit Union v. Federal Reserve Bank of Kansas, U.S. Dist Ct, CO, 15-cv-01644). This case has national implications. It may well clarify the legality of state efforts to legalize pot businesses.

As I explained in a previous blog, Colorado has one of the most liberal marijuana laws in the Country. Its policy makers grew so frustrated with the inability of marijuana businesses to access basic banking services that the state approved a state charter for the Fourth Corner Credit Union. Remember that even though marijuana businesses are still illegal as a matter of federal law, the Justice Department has issued guidance – the Cole Memorandum – detailing the circumstances under which federal prosecutors will forgo enforcement of these laws.

The credit union adopted a detailed BSA policy to conform with the memorandum’s mandates. It also applied for Share Insurance Coverage and a Master Account at the Federal Reserve Bank of Kansas City. The credit union might be able to get private insurance, but without a Master Account it cannot effectively provide banking services.

So, when the NCUA declined to provide Share Insurance, it was a big deal. But it was an even bigger deal when the Federal Reserve quickly followed suit and rejected the credit union’s application. These rejections set the stage for a lawsuit that will clarify the state of federal law in the absence of much needed Congressional intervention. I just finished reading the Federal Reserve’s motion to dismiss the lawsuit. The Federal Reserve argues that irrespective of any actions taken by the State of Colorado, marijuana remains illegal as a matter of federal law. For instance, in notes that “of course the manufacture and distribution of marijuana is prohibited by federal criminal law. . .so is aiding in the manufacture, distribution and dispensing of marijuana. . .even transporting or transmitting funds known to have been derived from the distribution of marijuana is illegal.”

As for arguments that the Cole Memorandum sanctions state laws legalizing marijuana, the bank argues that neither finCEN nor the DOJ can or has legalized marijuana businesses. Whether you agree or disagree with the government’s position in this case, the fact that it is making these arguments underscores just how unsettled this area of the law is. To be clear, New York’s law is vastly more restrictive than Colorado’s as it is designed to make sure that marijuana is used only for medical purposes. Nevertheless, the Federal Reserve certainly has a good faith basis for arguing that with or without state laws and DOJ guidance, marijuana businesses remain illegal unless and until Congress votes for change.

October 23, 2015 at 9:00 am 3 comments

GSEs Will Be Here For Years To Come

Show Me The Money!

The NCUA chalked up two more settlements in its lawsuits against investment banks involved in the sale and underwriting of the mortgage-backed securities purchased by the failed corporates. NCUA announced that it reached settlements with Barclays Capital ($325 million) and Wachovia ($53 million) to settle claims about their underwriting activity.  NCUA says it has now obtained over $3 billon in settlements.

Housing Reform is Dead

The Obama administration virtually assured yesterday that housing reform is going to be the next President’s problem.  For credit unions, this is a good thing, at least in the short to medium term.  It also speaks volumes about just how messed up – dysfunctional is too kind at this point – our political system has become.

Since it’s been a while since I talked about housing reform, let me get you up to speed. When Fannie and Freddie were taken over in 2008, causing the first tremor of the mortgage meltdown, they were placed in conservatorship under the supervision of the newly created Federal Housing Finance Administration.  They were nationalized.  The government brought slightly less than 80 percent  of their common shares.

Seven years ago, it was unthinkable that Congress would not act to restructure a housing system that had to be bailed out by the American taxpayer, but some funny things have happened since then:

(1)  Housing reform requires compromise of the type proposed by a group of level-headed Senators who actually want to get things done in Washington.  But posturing is so much easier than legislating these days and a lot more fun.  Their legislation couldn’t make it to the floor.(

(2)  The GSEs started making sizeable profits and the government claimed the profits.

(3)  The American public is as dependent on the secondary market provided by the GSEs than ever before.  Estimates vary, but approximately half of the new mortgages entered into in this country are brought by these behemoths which package them into mortgage-backed securities.  Credit unions and smaller banks are concerned that a world without virtually guaranteed secondary market access would drive up the cost of their mortgages and force them to provide fewer mortgages to their members and consumers. That is why it’s a good thing that the status quo will be in place, at least for now.

Recently there have been whispers about a possible Whitehouse plan to recapitalize the GSEs and put them back in private hands. Earlier this week Bloomberg news reported that “Fannie Mae and Freddie Mac shares both jumped more than 8 percent Oct. 6 after a Washington political intelligence firm published a report that said the White House was in the ‘very early stages’ of weighing its options to end federal control, known as conservatorship.”

Yesterday’s White house statements slammed the door on this speculation. In an Opinion piece, Antonio Weis, an aid to Treasury Secretary Jacob J. Lew, argued that “ Recap and release could raise the cost of mortgages for Americans, and potentially expose taxpayers to another painful bailout.”  And in a speech before the Mortgage Bankers, Michael Stegman, a top adviser to President Barack Obama on housing, warned against what he called  the increasingly noisy chorus of the advocates of recap and release, many of whom have placed big bets against reform so they can make a profit, and are doing everything they can to make sure that those bets pay off.”

What’s next? There is a slim chance that things will change whether Washington wants them to or not.  A lawsuit has been brought in Federal District Court in Iowa in which GSE shareholders are contending that since 2012 the Treasury has illegally claimed GSE profits that belong to the remaining private shareholders.

A second thing to keep in mind is that under Dodd-Frank any mortgage purchased by a GSE is a Qualified Mortgage. This is important because the GSE’s have less stringent underwriting requirements than does the CFPB.  But this “GSE eligible flexibility” ends in 2021.


October 20, 2015 at 10:16 am Leave a comment

Corrected-RBC And HMDA Finalized: Now What?

(I’m blaming it on a lack of coffee.A previous Version of this blog references HAMDA. I Know its HMDA)

Yesterday was the type of day I love, because it means that there will be a need for bank attorneys for years to come. Not only did the NCUA finalize its risk-based capital regulations, but the CFPB finalized regulations that greatly increase the amount of data that credit unions subject to HMDA requirements must collect. In full disclosure, I have not yet gotten through the hundreds of pages of either proposal, and even if I had there is a year’s worth of material worth talking about. Nevertheless, here is my first attempt at highlighting which aspects of these new regulations are most important.

Let’s start with the risk-based capital regulations. It largely tracks the changes that NCUA proposed when it reissued these proposed regulations. Most importantly, it applies to credit unions with $100 million or more in assets. NCUA will be periodically examining this threshold. The regulation takes effect January 1, 2019. NCUA estimates that 16 credit unions will have to make balance sheet adjustments or get more capital to comply with RBC requirements.

Some of the more troubling asset risk weightings were further reduced. For example, credit unions complained that NCUA was unfairly penalizing credit unions for investing in CUSOs. Its initial proposal weighted a CUSO investment at 250%. The final regulation reduced it to 100% for complex credit unions with non-significant equity exposures. Credit union investments in Corporate Perpetual Capital have been similarly reduced.

RBC reform may have its greatest impact on those credit unions heavily involved with mortgage lending. The final regulation imposes higher risk weightings on credit unions for which first lien mortgages represent greater than 35% of their assets or for whom junior lien mortgages represent 20% or more of their assets. In addition, mortgage servicing assets are given a risk weighting of 250%.

All in all, the final product is a great improvement over NCUA’s initial proposal. Fewer credit unions are subjected to its mandates, the industry now has a much better explanation for why assets were given their specific ratings, and the risk ratings are less severe. It remains to be seen how effective this framework will be in mitigating risk. I have my doubts, but now it’s time to start positioning yourself to comply with this regulation.

As for HMDA, the good news is that the CFPB has decided to finalize its proposal to adopt a loan volume threshold under which institutions that originate less than 25 closed-end mortgages or less than 100 open-end mortgages in each of the two preceding calendar years will not be subject to HMDA reporting requirements. In other words, credit unions won’t be subject to HMDA just because of their asset size.

The bad news is that for those credit unions subject to HMDA, the amount of information you have to report is going to increase greatly. In addition, the data collected will be much more granular. For example, institutions will now be required to report a property’s address.

One of the primary goals of the CFPB in finalizing these regulations is to enable both regulators and members of the general public to better monitor and assess fair lending compliance and access to credit. I don’t think it’s an exaggeration to say that you should have lending criteria and credit files that you wouldn’t mind explaining to a stranger.

Have a great weekend.

October 16, 2015 at 9:01 am Leave a comment

Older Posts

Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 376 other followers



Get every new post delivered to your Inbox.

Join 376 other followers