Posts filed under ‘Legal Watch’

The Day of the Legal Dud

The big news this morning is that there really is no big news this morning.

Yesterday the Supreme Court upheld the use of “disparate impact analysis” in housing discrimination cases. So, lending criteria that has the effect of discriminating against minorities continues to be illegal regardless of your credit union’s intentions. The State legislature left town without addressing what to do about Uber and other transportation companies. And, of course, the Court upheld a key provision of Obamacare.

To understand why no news is big news today, let me describe what could have happened. Everyone agrees that the Fair Housing Act outlaws intentional discrimination on the basis of a protected characteristic. But does it outlaw practices that have a disparate impact on minorities even when such practices are not motivated by a discriminatory intent? You won’t find any disparate impact language in the Fair Housing Act statute. Nevertheless, nine federal circuit courts have interpreted the statute as authorizing disparate impact lawsuits. Yesterday, a 5-4 majority of the Supreme Court sided with those circuits and held that plaintiffs who can demonstrate a disparate impact can bring anti-discrimination lawsuits. In a decision written by Justice Kennedy, the Court concluded that the precedent established by lower courts, as well as the similarity between the FHA and other anti-discrimination statutes that outlaw disparate impact policies demonstrated that Congressional intent was to authorize these lawsuits. As many commentators have pointed out this morning, the ruling will embolden the CFPB and HUD to continue to bring enforcement actions.

As for the State Legislature, there are many issues left to be taken up another day. For example, the Legislature is sure to continue to consider insurance requirements that should be imposed on transportation network companies like Uber and Lyft seeking to operate statewide. In addition, although progress was made this year, we will continue to push for legislation permitting the Comptroller to deposit state funds in credit unions. Finally, Senator Savino did a great job this year in highlighting subprime auto lending practices at dealerships and I expect that this issue will continue to be scrutinized.

As for Obamacare, if you are a credit union planning to cover your employees through a state exchange, yesterday’s decision by the Court gives you the green light to go ahead and do so. A decision against Obamacare would have ended the provision of subsidies in states where health care exchanges were set up by the federal government. I’m with the President on this one, it’s time to move on.

June 26, 2015 at 8:38 am Leave a comment

Why Ride-Sharing Impacts Your Credit Union

Ride sharing is about to have a bigger impact on your credit union than you may have thought possible.

Yesterday, the Attorney General and the Department of Financial Services reached an agreement with the Lyft Ridesharing Service that will allow it to start plying its trade in Buffalo and Rochester. Since July 2014, the AG and the DFS blocked the company from operating in Buffalo contending that it was violating the Insurance Law by not requiring people who signed up as drivers on the service to comply with basic insurance requirements. The agreement announced yesterday addresses some of the insurance concerns but could still leave credit unions holding the bag in the event one of your members gets into an accident while providing a Lyft ride.

Lyft is a ride sharing service that competes against Uber. The service matches people who need a ride with willing drivers using an App. The two parties negotiate the fare. Here’s where it gets interesting. Your typical car insurance has a livery exception, meaning that if one of your members gets into an accident providing ride-sharing services they won’t get coverage. Needless to say, this makes your collateral worthless.

The agreement reached yesterday specifies coverage for three distinct periods: the time during which the Lyft driver is waiting for pick-up requests; the period between when a driver has accepted a request and the driver is going to pick up the passenger; and the period running from when the driver begins transporting the passenger to when he drops them off. While this is a step in the right direction, drivers are still not required to obtain comprehensive collision insurance that would protect the vehicle against property damage. In other words, the agreement doesn’t go far enough to protect lenders.

The Legislature had been considering passing legislation to address the issue, but with time running out on an already past deadline Legislative session, movement in this area is unlikely. The agreement raises several questions for credit unions to consider. Most importantly, while the agreement just applies to Buffalo, it may provide a template for ride sharing services to start operating in other parts of the state. Uber is already in operation in New York City under an agreement with that city’s Taxi and Limousine Commission.

Is there a way for credit unions to protect themselves? You may be able to mandate that members get special comprehensive collision insurance if they decide to become a ride sharing driver. The problem is, that you won’t know if they have honored this requirement until they get into an accident.

June 19, 2015 at 8:49 am 1 comment

Are You Underpaying Your Tellers?

That is the question that popped into my mind this morning after spotting an article reporting that TD Bank was slapped with a lawsuit yesterday alleging that it violated the Fair Labor Standards Act (FLSA) by misclassifying a “teller services manager” as an exempt employee. The lawsuit is by no means unique, but the simple fact that employees continue to bring these claims indicates that financial institutions are continuing to ignore the impact that the FLSA is having on their operations. In addition, with major regulations on employee classifications to be released within weeks by the Department of Labor, this and similar cases demonstrates why I feel that the Department of Labor will introduce the most potentially impactful regulations for credit unions this summer.

Remember that under the FLSA, employees are presumptively entitled to overtime if they work more than 40 hours a week. Very generally speaking, the law creates an exemption for employees who exercise managerial control. As I have previously explained, fueled by the Department of Labor, suits alleging the misclassification of non-exempt and exempt employees have become more common and more expensive. This trend was highlighted earlier this year when the Supreme Court upheld the right of the Department of Labor to classify mortgage originators as non-exempt employees.

The TD Bank case (Reinaldo Kuri v. TD Bank N.A ) is fairly typical. The employee in question alleges that even though he was given the title of manager, his duties included “spending the overwhelming majority of his time” engaged in the duties of non-exempt bank tellers and customer service representatives. In addition, he alleges that he “did not exercise any meaningful degree of independent judgment,” but instead had to rely on the policies, practices and procedures set by the Bank.

This argument shows why employers increasingly find themselves in a Catch-22 when it comes to classifying their employees. A typical credit union is too small to cleanly delineate exempt and non-exempt duties. Your typical manager chips in by helping out with teller duties and anything else that needs to be done around the credit union. In addition, any credit union that doesn’t have policies and procedures in place detailing how it expects its employees to carry out their duties is committing operational negligence.

Under existing regulations (29 CFR 541.700), you judge whether an employee is classified as exempt or non-exempt based on her primary duties. The good news is that under existing regulations, the amount of time an employee spends performing exempt work is not the sole criterion used to determine whether or not an employee is exempt. This means, for example, that the branch manager, whose primary duty is managing the branch but on any given week may spent the majority of his or her time performing non-exempt duties, can still be classified as an exempt employee. The bad news is that the Department of Labor is expected to propose narrowing this exception so that any employee who spends the majority of her time doing non-exempt work will be considered a non-exempt employee. Think of how much this could cost you in overtime.

But even without these proposed changes, financial institutions continue to ignore the changing employment landscape at their own risk. For instance, if TD Bank loses this lawsuit, it could be required to pay cumulative damages and reimburse employees for their unpaid overtime.

June 17, 2015 at 8:36 am Leave a comment

Can You Trust Your Tellers?

That is the implicit question raised by NY”s Attorney General  Eric T. Schneiderman.  The WSJ is reporting this morning that the man who holds the position known for  its unofficial title,” Aspiring Governor”, sent a  letter to large banks on Friday  warning them that their customers are at  risk from insider identity theft and urging them to be more alert to  employee conduct.. (http://www.wsj.com/articles/bank-tellers-draw-scrutiny-1433720000).

The AG’s letter is the latest in a series of steps taken  by his office highlighting the access tellers have to personal information.  For example, earlier this year his office secured a guilty plea from  a teller at a JP Morgan Chase branch in White Plains.  According to a press release,   she would target customers with common names and over $50,000 in their accounts. She would copy this customer data and smuggle it out to  co-conspirators who used it to create fraudulent checks and identification documents. These fake documents were then used to impersonate account holders and to withdraw money at bank branches in Westchester County, New York City and Long Island, as well as Connecticut and Massachusetts.

The AG’s letter is a reminder that, even as the financial industry gets swamped by increasingly sophisticated and well-funded cyber  thieves,  the core of your data security still must be based on knowledgeable employees who not only know the rules but are willing to follow them.

SC Rules on Underwater Mortgages

Last week was a surprisingly fertile one for blog topics and one of my more astute readers pointed out that I haven’t yet mentioned an important bankruptcy case decided by the last Monday.

The case to which he was referring is Bank of America. V Caulkett in which the Supremes upheld the   rights of creditors holding junior mortgages. ( http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf).

Section 11 USC506 (d) of the Bankruptcy Code provides that  “ To the extent that a lien secures a claim against the debtor that is not an allowed se­cured claim, such lien is void.”  In Caulkett, the court had to decide how to apply this provision in the case of underwater junior lien mortgages. The houses securing the mortgages in question  had fallen so much in value that if they were sold immediately the second mortgages were worthless.

Two lower courts voided the liens, concluding that an underwater mortgages were  not “secured” claims.  The Supreme Court reached a different result.  It defined  a secured claim under Section 506  “ to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”

Given the length of time that can pass in NY between when a homeowner becomes delinquent, files for bankruptcy, his  house is foreclosed on and eventually sold this case is  important in a narrow  set of increasingly common circumstances.  The case affirms existing practice in New York.

The case  is also  a good example of why you should never just read a statute when you have an important question to answer.  This is the third time I’ve read  this case and every time I read the statute I’m more convinced the debtors have a pretty good argument.  But the Supreme Court is bond not only by the words of a statute but how it has been previously interpreted.

Besides, the Supreme Court gets the final word and  as former Justice Jackson once quipped “We are not final because we are infallible, but we are infallible only because we are final.”
 

June 8, 2015 at 8:56 am Leave a comment

SC Rules On Religious Accommodation

Does your credit union have an obligation to accommodate a job applicant’s   religious practices if she doesn’t put you on notice that she needs an accommodation?     That was the question answered by the Supreme Court yesterday.

Its response was straightforward and underscores just how careful you have to be when dealing with issues of religious practice. “An employer may not make an applicant’s religious practice, confirmed or otherwise, a factor in employment decisions.”  Furthermore, federal law  “ does not demand mere neutrality with regard to religious practices Rather it gives them favored treatment, affirmatively obligating employers not to fail or refuse to hire or discharge any individual . . . because of such individual’s’ religious observance and practice.”

Samantha Elauf was a practicing Muslim who wore a headscarf.   She applied for a job as a sales person at Abercrombie and Finch.  The employee who interviewed her thought she was a good fit for the job but suspected correctly that she wore the hijab for religious reasons.  After the interview,  the employee  talked to her   supervisor who told her  not to hire Samantha because her attire would violate the store’s “look policy.”  That policy wanted employees who exemplified “a classic East Coast collegiate style of clothing.”  (Meaning that I should stop trying to moonlight there.)

Joined by the EEOC Samantha  sued the store claiming it violated  federal law by refusing to hire her because of a religious practice   She won a $20,000 against the company but the Court of Appeals for the Tenth Circuit reversed.  It ruled that, since Samantha didn’t put the store on notice that she needed a religious  accommodation it was under no obligation to give her one.

In yesterday’s decision, E.E.O.C. v. Abercrombie & Fitch Stores, Inc, the Supreme Court rejected this logic.   Eight justices agreed that Title VII of the Civil Rights Act “prohibits actions taken with the motive of avoiding the need for accommodating a religious practice. A request for accommodation, or the employer’s certainty that the practice exists, may make it easier to infer motive, but is not a necessary condition of liability.”

How could the store be discriminating against an employee’s religious beliefs if it was simply imposing a company wide dress policy? Here is the part of the decision that I find most interesting.  Justice Scalia points out that” [a]n employer may not make an applicant’s religious practice, confirmed or otherwise, a factor in employment decisions. For example, suppose that an employer thinks (though he does not know for certain) that a job applicant may be an orthodox Jew who will observe the Sabbath, and thus be unable to work on Saturdays. If the applicant actually requires accommodation of that religious practice, and the employer’s desire to avoid the prospective accommodation is a motivating factor in his decision, the employer violates Title VII.”

A head scarf is a well known religious garb but what if Samantha had a small cross around her neck that the employee didn’t notice? This is the part of the decision that is most disappointing.  The Court essentially said it will decide in the future whether it is a condition of liability that the employer knows or suspects that the practice it refuses to accommodate is a religious practice.

Please run this by your HR professional but to me it is clear where the Court is headed. If you know or should know that an employee or applicant needs a religious accommodation than you should talk with the employee and provide the accommodation unless you can clearly show that doing so would cause an undue hardship.  Selective ignorance is not a defense and an employer has an affirmative obligation to accommodate religious practice.

June 2, 2015 at 9:29 am Leave a comment

Score One For The Trolls

The Supreme Court feels your pain when it comes to those increasingly ubiquitous demand letters sent to your credit union by Patent Trolls out to shakedown your credit union for using technology which allegedly  violates an obscure paten but there is not much it  can do about it.  That’s the takeaway from a case decided yesterday by the Supreme Court.  The Court is clearly frustrated with the state of patent law.  Hopefully Congress shares its frustration.

Let’s say you buy a cutting edge ATM.  If a patent holder feels that the ATM maker is using technology for which they have a patent your ATM maker could be sued not only for using the patented technology without permission but also  for inducing third party’s-like your credit union-to violate the patent  by buying the ATM.

The Issue  debated in Commil USA, LLC v. Cisco Sys., Inc., No. 13-896, 2015 WL 2456617,  (U.S. May 26, 2015)( http://www.supremecourt.gov/opinions/14pdf/13-896_l53m.pdf)  was whether a company could defend itself against inducement claims by proving that it had a good faith belief that it was not violating a patent.  The Court said no.  This means that, so long as my fictitious  ATM maker was using technology that violated a patent,  it  violated the law by inducing your credit union to buy its ATM regardless of how earnestly it believed it  was doing nothing wrong.

This clearly is a nice win for patent Trolls, those companies that specialize in buying up patents and then shaking down companies with threats of lawsuits unless they pay them. Credit unions have seen their Demand Letters.   A victory for Cisco would have made the patent trolls business model less cost effective.

In the closing paragraphs of his majority opinion Justice Kennedy almost apologetically explained that    “{S}ome companies may use patents as a sword to go after defendants for money, even when their claims are frivolous. This tactic is often pursued through demand letters, which may be sent very broadly and without prior investigation, may assert vague claims of infringement, and may be designed to obtain payments that are based more on the costs of defending litigation than on the merit of the patent claims.” He reminded the district courts that hear these cases that “If frivolous cases are filed in federal court, it is within the power of the court to sanction attorneys for bringing such suits “and award attorney’s fees to prevailing parties in “exceptional cases. ”

When a justice really disagrees with a decision they signal their displeasure by reading their dissent from the bench.  The majority’s decision drew the ire of Justice Scalia, who complained that it “increases the in terrorem power of patent trolls” That is a bad thing.

The need to protect patents was considered so important by our Founders that they put it in the constitution.  They undoubtedly thought they were fostering innovation.  Today the law is being used to stifle innovation via the threat of lawsuits.  The system is a serious mess that is beginning to hurt our economy. It’s time for Congress to step in so that paten law furthers innovation instead of legal careers

Freddie to offer Free Underwriting

On June 1st it’s going to get a little cheaper to underwrite loans to secondary market standards.  Freddie Mac has announced that it will no longer charge $20 to run applications through its Loan Prospector automated underwriting system.

Will Fannie Mae be following suit? Not if it can help it.  This morning’s American Banker quotes a Fannie Mae spokesperson explaining that its automated underwriting service is a valuable tool whose “value to lenders is clear.” Translation: Don’t expect Fannie to follow suit unless it loses market share.  The paper points out that the price reduction is a sign of renewed competition between the Government-supported housing behemoths.

So the Alice In Wonderland World that is the post Mortgage Meltdown housing market gets even stranger.  The bailed out and bankrupt GSEs are not only continuing to act as the backbone of the secondary housing market but they are back to competing against each other.  I’m happy for those of you who are going to save money but this is an awfully strange way to make housing policy.

 

May 28, 2015 at 9:22 am Leave a comment

The Mouse That Roared?

The news that the proposed $19 million settlement between MasterCard and Target has been rejected, in no small part because of the vocal opposition of credit unions that complained that the proposed deal didn’t adequately compensate smaller issuers for the costs of the breach that impacted as many as 40 million cards and 110 million people, is an important victory for the industry.  It demonstrates that the concerns of smaller institutions have to be a major focus of any efforts by the courts and policymakers trying to apportion the costs of data breaches.  This may have been the moment when the little financial institutions came together and announced that, when it comes to data breaches, “they’re mad as Hell and they are not going to take it anymore.”

Under an agreement announced between MasterCard and major issuers in March, issuers would have gotten $19 million to settle claims related to the breach provided that at least 90 percent of card issuers signed off on the deal by  May 20th.  If you, like your faithful blogger, were already in long-weekend mode on Friday, you may have missed the news.  As NAFCU’s Carrie Hunt said in this morning’s American Banker, “[t]he failure to opt in to the settlement by financial institutions sends a strong signal to card companies that the current reimbursement system does not work and financial institutions need to be made whole.”

Opposition to the settlement was led by a group of small banks and CSE Federal Credit Union in Lake Charles, La.  They sued Target last year and are seeking to bring a class action lawsuit.  They complained that the settlement amounted to “pennies on the dollar” compared to the actual costs of the data breach.  They filed a motion seeking to block the settlement.  Even though that attempt failed, they lost the battle but won the war.  Their failed attempt provided a platform from which they could argue that the settlement was a bad deal.

Now what? Good question.  When you begin to parse through the legal issues and try to determine not only the cost of breaches but how they should be apportioned we get into murky water here with both sides having incentives to negotiate.  Target wants to move on and it would take years of litigation before credit unions or banks ever get a dime for the breach.

That is why, as good as the lawsuit feels, Congress and legislatures are best suited to apportion the costs of data breaches and prevent further instances.  The litigation comes at a great time for the industry.  Congress is starting to pay attention to data breach issues . . . finally.  The lawsuit shows that the existing system doesn’t adequately protect credit unions for data breach costs.

For your largest issuers, they are just another cost to be absorbed but for smaller institutions data breaches result in direct and indirect costs that, if left unabated, will push even more credit unions to merge or close their doors.

May 26, 2015 at 9:18 am 1 comment

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Authored By:

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

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