Posts filed under ‘Legal Watch’

Accountants gone Wild? Just What Are You Getting From Your Auditor?

afleckDoes the accounting firm retained to do your audit  owe your credit union a fiduciary obligation? That was the question pondered by the Supreme Court of North Carolina. In a decision released in late September that state’s highest court said the answer is No. (CommScope Credit Union v. Butler & Burke, LLP, No. 5PA15, 2016 WL 5335250 (N.C. Sept. 23, 2016)

CommScope Credit Union sued  Butler & Burke, LLP, the certified public accounting firm that  the CU  hired to conduct annual independent audits of its financial statements for its failure to find  that the credit union’s manager had not filed an IRS Form 990  from 2001-09. The oversight resulted in  IRS penalties of $374,000 and the credit union wanted the firm to pay.  One of the arguments it made was that, in failing to inform the credit union about the missing forms the firm breached its fiduciary duty to the credit union.  Hold on, said the accounting firm, auditors typically don’t owe a fiduciary obligation to the businesses they audit and credit unions are no exception.

(Although this argument involved an interpretation of North Carolina law the credit union’s argument resonated across the country as can be seen by the fact that the US Chamber of Commerce and the National Association of State Boards of Accountancy filed briefs).

What’s the big deal? As the court explained “All fiduciary relationships are characterized by “a heightened level of trust and the duty of the fiduciary to act in the best interests of the other party” The higher the duty the firm owed to the credit union the more responsible it becomes for the 990 mishap.

The credit union won at the appellate level and the firm appealed to North Carolina’s highest court. It successfully argued that audits are conducted in part for the benefit of the public to insure investors that they can trust the financial disclosures being made by businesses. This obligation to the public as well as the credit union means that an auditor doesn’t have the obligation of undivided loyalty that typifies fiduciary relationships.

The credit union could have created a fiduciary relationship with the auditor as part of its engagement agreement but did not do so. By agreeing to perform the audit consistent with accepted audit standards the firm “agreed to find internal control deficiencies only to the extent necessary to perform its audits. Because defendant did not agree to affirmatively search for deficiencies outside of the performance of its audits, it did not agree to do anything beyond what an independent auditor normally does.”

The case isn’t over yet. The credit union can still argue that the firm’s failure to spot the missing 990’s amounted to negligence.  But no matter what the ultimate outcome the accounting industry notched an important victory.

Before your supervisory committee sends out its next engagement letter it might be worth it to review what you expect to get out of your audit and the language that you have been relying on to get you there. If you thought your auditor was a fiduciary responsible for noticing that basic forms haven’t been filed think again. Put your expectations in writing.  At the very least, you will start a discussion with your auditor about precisely what you are getting when you pay for its services.


October 18, 2016 at 8:56 am Leave a comment

Is A Fintech Charter On the Horizon?

The most interesting statistic I heard last week at the Association’s annual Northeast Economic Forum was that 48% of new mortgages last year were originated by nonbanks. Technology has come to mortgage lending and the companies that emphasize electronic mortgage applications and processing are beating the pants off lenders that rely on having people apply at their brick-and-mortar branches.

I was thinking about this factoid this morning as I read an interview with the OCC’s General Counsel, Amy Friend, in the American Banker.  The OCC is rolling out plans for creating a special charter for fintech companies. Now here is a regulator that sees the writing on the wall and wants to remain relevant.

Why would companies want to be regulated by the OCC? The OCC says that the idea has appeal to a lot of  companies that don’t want to be regulated by fifty different state regulators.  Anyone who has taken a look at New York’s proposed cybersecurity regulations can understand why.

She explains that “We can provide a single charter with some uniformity, and that makes it very appealing. But, we also take that authority very seriously, and understand its implications. The comptroller has made it clear that if we decide to grant a national charter in this area, the institution that receives the charter will be held to the same high standards of safety, soundness and fairness that other federally chartered institutions must meet.” She further explains that institutions might want to get both a traditional bank charter and take deposits in which case they will also need to be regulated by the FDIC. Why not the NCUA as well?

The plan is still in the conceptual stages but in March the OCC released a white paper on supporting financial innovation in the banking system  and last month it proposed regulations clarifying its  authority to wind-down bankrupt  non-depository financial institutions  that are not insured by the Federal Deposit Insurance Corporation . The regulation is seen as a first step in explaining how the OCC could oversee bankrupt Fintech charters.

More on Navy

In Thursday’s blog I highlighted the CFPB’s consent order against Navy Federal and the impact it could have on credit unions who suspend services to members who have caused them a loss. Judging by the number of readers I really hit a nerve.

According to the Bureau, it was an unfair and deceptive practice for Navy to freeze electronic account services to members who were delinquent on loan payments. That simply isn’t true-at least according to the NCUA.  To add a little fuel to the fire here is a 1997 opinion from the NCUA in which it explains that credit unions may restrict services to members who are delinquent:

“In the past, we have allowed for suspension of services when the member caused a loss as a result of bankruptcy, an NSF check or a charged-off loan, but we have never addressed the issue of a delinquent loan. You advise that a delinquent loan increases the FCU’s collection costs resulting in a loss to the credit union. As long as the FCU has a rational basis for limiting services, we would have no legal objection.”

So how can Navy be fined, in part, for adopting practices explicitly authorized by its primary regulator for almost thirty years? Is this another example of CFPB overreach? Inquiring minds want to know.

October 17, 2016 at 9:06 am 2 comments

Why Ruling Against The Bureau Helps Your Credit Union

king-cordrayYou can be forgiven if, upon seeing the initial headlines yesterday morning  that the CFPB was ruled unconstitutional, you allowed yourself to drift into a world of no TRID, no HMDA amendments and  no short-term loan restrictions, and  you  are a  little disappointed  this morning with the news that, even with yesterday’s ruling  in PHH CORPORATION, ET AL., PETITIONERS v. CONSUMER FINANCIAL PROTECTION BUREAU, RESPONDENT, No. 15-1177, 2016 WL 5898801,(D.C. Cir. Oct. 11, 2016), the Bureau that never sleeps  is alive and well.  In the short- term this decision, if it is upheld by the Supreme Court, will have no impact on your compliance burden.

But don’t be too depressed. The Court’s ruling is a significant victory for those of us who believe that Congress gave too much power to one person. It makes the Bureau more accountable to the political process and, by implication, potentially more receptive to the concerns of the credit union industry.  It also clarifies some important RESPA issues that I will address in a future blog

The case dealt with the legality of a $109 million fine imposed on PHH by an administrative law judge after the CFPB alleged it was violating the anti-kickback provisions of RESPA. Originally PHH just wanted the fine vacated but in appealing the ruling it broadened its argument to challenge the constitutionality of the Bureau itself.  It argued that the separation of powers mandated by the  constitution was violated because the CFPB’s Director could only be removed by the President “for  cause.”  Congress has created, and the Courts have approved , independent agencies but these agencies have been overseen by boards of individuals;  not a single director empowered to promulgate whatever rules and take whatever enforcement actions he or she deems appropriate.

The Court agreed. “The single-Director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.” It  ruled that the CFPB as structured was unconstitutional.

But its remedy was as simple as its application of precedent was straightforward: Rather than disband the Bureau it simply invalidated that portion of Dodd Frank which stipulated that the Director could only be removed “for cause.” This means that the President could give Director Cordray  his walking papers today, no questions asked.

Does this matter to you? In the long-term I think it does. I am fond of calling the Director the Benign Dictator of Consumer Protection. From now on credit unions can blame the president for not doing enough to distinguish between the Big Banks and credit unions.  And it’s probable that an agency no longer insulated from politics will be more willing than the Bureau has been  recently to listen to  legitimate  industry concerns before promulgating regulations in the first place.

Frankly, the Bureau has grown more arrogant and intrusive with each passing month. Anything that constrains the actions it can take is a step in the right direction.

NY Issues Incentive Based Compensation Guidance

The only regulator pumping out mandates quicker than the CFPB lately is New York State’s Department of Financial Services. That’s not a good thing for those of us who want to maintain a viable state charter.

Reacting to the Wells Fargo Account Opening Scandal, the DFS released a guidance yesterday on Incentive Compensation Arrangements applicable to state chartered banks and credit unions.  Here is one of its highlights:

“The Department advises all regulated banking institutions that no incentive compensation may be tied to employee performance indicators, such as the number of accounts opened, or the number of products sold per customer without effective risk management oversight and control.”

On that note get busy implementing all those Bureau regulations. I hope I see you this week at the Economic Forum.


October 12, 2016 at 8:56 am Leave a comment

Eight is Enough? My Vote For the Most Important Case Of The Year


Today is the first Monday in October; which means it is the first day of the new Supreme Court term; which means you get  deluged with  articles describing the year’s most important cases; which means that your faithful blogger doesn’t want to miss out on the fun.

Here is my sleeper pick for a case that could have a profound impact on the way the credit card system works and the way associations operate:  Osborn v. Visa Inc., 797 F.3d 1057, 1061 (D.C. Cir. 2015), cert. granted, 136 S. Ct. 2543 (2016) .

Visa and MasterCard rules stipulate that no ATM operator may charge customers whose transactions are processed on Visa or MasterCard networks a greater access fee than that charged to any customer whose transaction is processed on an alternative ATM network. Thus as the appellate court noted, under the Access Fee Rules, operators cannot say to cardholders: “We will charge you $2.00 for a MasterCard or Visa transaction, but if your card has a Star or Credit Union 24 bug on it, we will charge you only $1.75.”  A group of independent nonbank ATM operators and a consumer who paid debit card fees assert that these rules illegally restrain the efficient pricing of ATM services.  They characterize the Access Fee Rules as constituting an “anti-steering” regime that prevents independent ATM operators from incentivizing cardholders to choose and use cards “that are more efficient and less costly than either Visa or MasterCard’s.”

On appeal, the court made two rulings that will be reviewed: (1) that the economic harm caused by consumers who had to pay higher ATM fees was sufficient harm to challenge the legality of the ATM fees and (2) whether card issuers have violated antitrust laws by merely agreeing to the Visa and MasterCard rules.

In other words, depending on how this case is decided the ability of card issuers to be on a level playing field with each other when it comes to honoring all card requirements could be in jeopardy. In addition, card issuers could face litigation over Visa and Mastercard rules not just from merchants and ATM operators  but from disgruntled consumers,  Finally,  just how much can Association’s do in coordinating industrywide activity without running afoul of the antitrust laws? It may not be the type of case that gets the family arguing with each other over the dinner table but it could  impact the way everyone reading this post does business.

What Would You Do If You knew You Had Five Minutes To Live?

That was the question posed by Rabbi Kenneth Berger in a Yom Kippur sermon he delivered in the aftermath of the Challenger shuttle tragedy in which the astronauts are believed not to have died until  the shuttle crashed into the sea. The sermon was highlighted in this  article over the weekend and I’ve been thinking about it ever since. Here is my favorite quote:

“The explosion and then five minutes. If only I… If only I… And then the capsule hits the water, it’s all over. Then you realize it’s all the same — five minutes, five days, 50 years. It’s all the same, for it’s over before we realize. “‘If only I knew’ — yes, my friends, it may be the last time. ‘If only I realized’ — yes, stop, appreciate the blessings you have. ‘If only I could’ — you still can, you’ve got today.”




October 3, 2016 at 8:12 am Leave a comment

NY’s Credit Card Surcharge Ban To Get Supreme Court Review

imagesThe Supreme Court has decided to hear an appeal of a case challenging   NY’s ban on credit card surcharges on the grounds that it violates the First Amendment.  The Association submitted an amicus in the case in support of the surcharge ban when it was before the Second Circuit, pointing out that in Australia a decision to authorize credit card surcharges simply resulted in higher consumer costs.

New York General Business Law §518 bans merchants from surcharging credit card purchases but allows merchants to offer cash discounts. The law hasn’t gotten that much attention over the years because surcharging was also banned under credit card  network rules.  When the  network ban  was eliminated  as part of a deal settling antitrust claims, attention turned to the ten states, including NY, that impose  surcharge bans.

In Expressions Hair Design v. Schneiderman, 808 F.3d 118 (2d Cir. 2015), five retailers argued that the law prevented them from accurately explaining their pricing policies to their members. The Second Circuit upheld the ban, reversing a lower court ruling that it violated the First Amendment rights of the merchants.

In their appeal the merchants asked the Court to decide “whether these state no-surcharge laws unconstitutionally restrict speech conveying price information (as the Eleventh Circuit has held), or do they regulate economic conduct (as the Second and Fifth Circuits have held)?”

We will know the answer to this question by the end of this term. If the Court were to split 4-4, the Second Circuit’s ruling is upheld.

Red Sox Awakening

Congratulations to the Red Sox  and their fans  for backing into the American League playoffs despite losing to the Yankees on a walk off grand slam Wednesday night.  Wait till next year.

Life was  a lot more fun when you knew the Red sox were going to fall just short. It was a real life version of the football being pulled away from Charlie Brown with the added benefit of always being able to win any argument against Boston fans just by motioning the Red Sox.

By the way, as much as I don’t like the Red Sox how great would a Cubs Red Sox series be? It would be like watching  Theo Epstein, the former GM of the Sox  and current GM of the Cubs playing himself in Fantasy baseball but with live players.

September 30, 2016 at 8:59 am Leave a comment

Two Things To Ponder On A Thursday Morning



Do You Pay Your Employee’s Properly?

First, the NYS Department of Labor has finalized long anticipated and haggled over regulations regarding permissible employer payment methods in  New York State.  The regulations just don’t touch on the use of payroll debit cards.  They also deal with salary payments in cash, check, and direct deposits. In other words, these are regulations with which your HR person should be familiar, irrespective of how you pay your employees. It takes effect March 7, 2017.

For example, reading the regulation will remind you that you can’t require employees to receive wages through direct deposit. Furthermore, an employer that uses a  payment  method other than  cash or check is required to provide his employee  with a description of his or her payment options, a statement that he or she is not required to accept wages by payroll debit card or by direct deposit, and a statement that the employer may not be charged any fee for services that are necessary for the employee to access his or her wages.

By the way, is it just me or are new employees in NYS getting about as many disclosures as new homeowners at closing? This State truly is a bureaucratic mess.

The part of the regulation detailing the use of debit payroll cards goes into the category of better-late- than- never. I remember monitoring legislation on this issue while working  in the state legislature approximately 15 years ago.


The NCUA announced Tuesday that it will receive $1.1 billion  to settle claims again Royal Bank of Scotland relating to its role in peddling and selling mortgage-backed  securities to Western Corporate FCU and US Central Federal FCU that blew up quicker than a Galaxy 7.  The bounty  means that NCUA has now claw-backed $ 4.3 billion dollars from   lawsuits alleging that RBS and others  sold  or underwrote mortgage back securities without fully disclosing the risks associated with these products.

The net proceeds from these settlements will be used to pay claims against the failed corporates and could ultimately lead to reimbursements of some  credit union payments into the Temporary Corporate Credit Union Stabilization Fund. Remember, however,  that we won’t know precisely how much money is available for credit unions until we find out how big a chunk of these  settlements will go toward legal fees.

No matter what the ultimate amount is,  NCUA deserves a tremendous about of credit. It brought this litigation when few, if any Financial Regulators were willing to take similar steps and skeptics  like your faithful blogger questioned whether the litigation would succeed.

September 29, 2016 at 9:05 am 1 comment

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

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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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