Posts filed under ‘Legal Watch’
If you look at your mortgage notes, chances are they include an acceleration clause stating that in the event a mortgage payment is overdue, a borrower is in default and the entire mortgage becomes payable. These so-called acceleration clauses still exist, even though the courts continue to chip away at their efficacy.
(Another clause you might see is one stipulating that an unauthorized transfer of residential property also accelerates payment of the mortgage. Interpreted literally, a child who receives mortgaged property upon the death of his parents would immediately have to pay the entire mortgage. Federal law has, however, long since invalidated these clauses as applied to successors in interest. 12 U.S.C.A. § 1701j-3)
The latest example of this trend is a case recently decided in Queens (B & H Caleb 14 LLC v. Mabry). The facts in the case are fairly straightforward. Karen C. Mabry took out a mortgage to buy property in Queens from Greenpoint Mortgage. Under the terms of the mortgage, all payments had to be made by the first of each month. The mortgage notes stated that in the event payment is late by at least ten days, a late fee of 5% of the total monthly payment due could be charged. It further stipulated that the failure to make this payment constituted a default for which the entire remaining mortgage could become payable. Karen Mabry did not send her April 1 payment until April 8 and it was not received by the Bank’s attorney until April 14. The amount she sent did not include a late fee of $118.
B & H, which assumed the mortgage from Greenpoint, brought a lawsuit seeking to accelerate the entire mortgage and foreclose on the property. Interestingly, the Court noted that there is little case law in New York analyzing the validity of mortgage acceleration clauses. In 1991, the Third Department, which has jurisdiction over much of Eastern New York, stated that the law is clear that when a mortgagor defaults on loan payments, even if only for a day, the mortgagee may accelerate the loan, require that the loan balance be rendered, or commence foreclosure proceedings.
Conversely, the Court cited with approval cases in which a “mortgagee’s opportunistic bad-faith in accepting payment of a check and subsequently seeking to foreclose on the property was considered unconscionable conduct.”
As a result, the Court concluded that in the event Ms. Mabry could show that her late payment was the result of an inadvertent mistake that she intended to cure as soon as she realized what she had done, she could prevent foreclosure notwithstanding the plain language of the mortgage. The case underscores just how radically foreclosure law has evolved in the last decade.
As I mentioned in a previous blog, a veteran attorney once told me that the only question in foreclosure cases used to be whether or not a homeowner had made his payment on time. As this case demonstrates, the law is now a lot more complicated.
Have a nice weekend folks, I’m taking tomorrow off.
Like a bad horror movie where the Villain seemingly reaches from beyond the grave-I’m thinking Glen Close in Fatal Attraction-the antitrust litigation between merchants and Visa and Master Card could be coming back to life. Merchants have filed a motion in federal district court in New York seeking to vacate the $7 billion settlement that was reached between merchants and the card payment networks in 2012 that was supposed to put an end to litigation claiming that interchange fees violated the law.
A motion by the merchants alleges that Gary Friedman, an attorney who represented merchants in a suit against American Express at the same time the Visa/ MasterCard litigation was taking place, passed on confidential information without authorization to an attorney and friend who was representing Visa and MasterCard. The motion contends that by “illegally” passing on this information Friedman was “helping the enemy.” In doing so merchants claim they were denied adequate representation, they argue that the attorney’s conduct amounts to a conflict of interest that necessitates vacating the settlement. They are also seeking to keep him from collecting the $32 million he earned representing them. Attorneys representing Visa and MasterCard have until August 18th to respond to the motion.
This allegation is serious. Clients are entitled to the undivided loyalty of their attorney and if that right is denied them it can lead to lawsuits being reopened.
This litigation has been dragging on since 2005. In addition to the record settlement, Visa and MasterCard agreed to changes to their merchant agreements, For example merchant contracts no longer prohibit merchants charging more for credit card transactions. According to court records the lawsuit has resulted in a mere 400 depositions and the production of 80 million documents.
Is The CFPB unconstitutional?
Since we are talking about lawsuits I feel like mentioning one of my favorites. In 2012 State National Bank of Texas challenged the constitutionality of the Dodd Frank Act. With the backing of several State AGs it argued, among other things, that (1) Dodd-Frank gave the CFPB powers that only Congress could exercise and (2) that it was unconstitutional to vest all of the Bureau’s powers in a single director.
The suit has always been a longshot and no one was all that surprised when it was dismissed in August of 2013 on the grounds that the bank lacked standing to sue the CFPB. Last week the Court of Appeals for DC caught more than a few court watchers by surprise; The Court held that the bank could bring its lawsuit because it was regulated by the CFPB and impacted by its regulations. State Nat. Bank of Big Spring v. Lew, No. 13-5247, 2015 WL 4489885 (D.C. Cir. July 24, 2015).
As an unabashed constitutional dinosaur when it comes to the ever-expanding powers of regulators, I have a real soft spot for this lawsuit even if it is the longest of long shots. I’m not saying that the CFPB is going away but what I am saying is that, since the 1930’s-like I said I’m a dinosaur-Congress has gotten too used to delegating too much power to agencies. These agencies are ostensibly constrained by Congress, but as Dodd Frank demonstrates, so much legislation is so broadly written there are few actual constraints on regulators. By letting this case go forward the courts can begin reexamining what limits, if any, the constitution places on Congress to delegate de facto legislative power to unelected regulators.
As early as this week, New York is expected to take its next big step toward legalizing the distribution of marijuana for medical purposes. Its Department of Health is expected to announce the five companies that will be responsible for producing and distributing cannabis throughout the State. These five entities will be authorized to establish up to four “dispensing facilities,” meaning that if all goes according to plan, on January 5, 2016, qualified ailing New Yorkers will be able to purchase and use cannabis.
Regardless of whether you think medical marijuana is the greatest wonder drug since penicillin or that legalizing drugs will unleash refer madness across the state, New York is entering into a legal haze, which is unlikely to clear any time in the near future. Most importantly, cannabis remains illegal as a matter of federal law. This has several implications for states such as New York that have legalized marijuana. Most importantly, as I’ve discussed in previous blogs, credit unions are still responsible for filing Suspicious Activity Reports (SARS) on institutions with accounts that engage in the business of legally selling marijuana pursuant to state law. The Department of Justice and FinCEN have issued guidance authorizing credit unions and banks to issue so-called “marijuana limited SAR filings.”
The basic idea is that the Department of Justice and FinCEN will not prosecute certain types of legal marijuana businesses so long as they do not, among other things: distribute marijuana to minors; facilitate distribution of drug money to criminal gangs, facilitate the distribution of marijuana to states where it is not legal; use legal marijuana sales as a pretext to sell illegal drugs; or aid in the growing of marijuana on public land where it poses public safety or environmental risk. Institutions that choose to help legal marijuana dispensaries take on a huge oversight responsibility. They will have to have the ability to monitor these companies on an ongoing basis to make sure that they are complying with the federal government’s criteria. The amount of paper work and staff is enough to prevent all but the largest institutions from aiding these organizations.
Does this mean that New York’s law will not impact your credit union? Not by a long shot. For example, your HR department will have to decide how to deal with the employee who informs you that she uses medical marijuana. In addition, even though there are only a total of 20 dispensaries at this point, many of you may have business accounts with doctors who may become certified prescribers of marijuana. In my opinion, such activities will require your credit union to exercise increased oversight of these accounts.
Now I don’t mean to scare anyone away. New York is implementing one of the most tightly regulated medical marijuana industries in the country. As a result, it should be easier to comply with oversight requirements. However, at the end of the day cannabis remains illegal as a matter of federal law. Until Congress takes a serious look at this issue, there is nothing to stop a future President from ordering the DOJ to prosecute businesses that legally dispense drugs on the state level.
With its usury caps of 16 and 25 percent, New York effectively bans pay day loans. Then why does it seem that pay day lenders continue to do business in the State? The story behind the so-called Fort Drum Loophole demonstrates why pay day loans are one area that can only be effectively controlled on the federal level.
Licensed lenders are neither banks nor credit unions. They are state-licensed corporations authorized to simply lend money. As state licensed entities, it would seem that they clearly have to comply with New York’s laws and regulations. So, how is it that for more than a decade Omni Loan Company, a Nevada corporation, has been able to provide loans well in excess of New York’s usury limits to members of the military in the Fort Drum area.
Article IX, Section 40 of the New York Banking Law regulates the loans made by licensed lenders to “individuals then resident in this state.” In 2005, Omni Loan obtained a legal interpretation from the then-Banking Department opining that the “resident” requirement in the statute permitted it to make loans to non-resident military personnel stationed on New York military bases. Fast forward to Monday, when the Cuomo administration announced that it was withdrawing this opinion and that Omni had agreed to become licensed in New York State.
The Fort Drum exception demonstrates yet again that if someone really wants a pay day loan in New York State, they are going to get one, despite the best efforts of the DFS. The simple truth is that we have a multistate, dual charter financial system and technology makes it easier than ever to connect unscrupulous lenders to desperate borrowers. Credit unions should more aggressively market and highlight the pay day loan alternatives they offer to their members. In addition, they should support the CFPB’s nascent efforts to regulate these loans provided that the regulation is not drafted too broadly.
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.
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.