How Safe Are You From Overdraft Lawsuits?

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Just because you use a model form when asking members if they want to opt-in to overdraft protections, don’t assume that your credit union is safe from being sued over the adequacy of these disclosures. That is my takeaway from the latest case I have seen. It joins a growing body of litigation in which members are being allowed to sue credit unions for providing inadequate account balance disclosures which lead to unnecessary overdraft fees.

First some background, with apologies to those of you who already know most of this. There are two basic methods for calculating account balances: the actual or ledger balance method refers to all money currently in a member’s account. In contrast, the available balance method refers only to those funds actually available for use by the member. A second key point to keep in mind is that 12 CFR 1005.17 stipulates that opt-in disclosures for overdraft protections shall be “substantially similar” to model form A9. My guess is, this is the form your credit union uses. The Electronic Funds Transfer Act shields credit unions from liability for any failure to make disclosures improper form provided that the model form is used.

The most recent example I have seen involving this type of litigation is Gunter v. United Federal Credit Union (Dist. Ct. Nevada 2017). In this case, a member wanted to bring a class action lawsuit against the credit union on behalf of persons who were charged an overdraft fee even though the member’s actual balance was equal to or greater than the transaction causing the overdraft. Gunter also wanted to sue on behalf of members who opted into the credit union’s program and were charged an overdraft fee, contending that the overdraft disclosure provided did not describe the credit union’s balance procedures properly.

The credit union argued that since it used the appropriate model form, it was shielded from the member’s lawsuit. It argued that if it included language different from that provided in the model form, it ran the risk of losing its safe harbor against precisely these types of lawsuits. The language, the member argued, should have been included in the disclosure, would have meant that the form used by the credit union would no longer be substantially similar to the form mandated by the regulators.

But the court disagreed. Its logic should send a shiver down the spine of any compliance officer relaxing in their safe harbor. “United could have explained that it authorizes overdrafts based on available balance rather than actual balance without violating Regulation E because Regulation E expressly requires financial institutions to describe their overdraft services. Presumably that description must be accurate and not misleading. United implicitly contends that it would have faced liability for including such a description because its opt-in agreement must be “substantially similar” to Model Form A-9, id. § 1005.17(d), but such a description would not destroy substantial similarity. In fact, such a description would further the purpose of the regulation to help consumers understand the overdraft services their financial institutions offer.”

This decision is not binding in New York but if the court’s logic catches hold, model form language could become a breeding ground for future litigation. Personally, I would discuss this case and other similar litigation next time you catch up with the vendor who provides your account disclosures. In the meantime, make sure that you understand what account method your credit union uses and that your disclosures give your members adequate notice of this method.

October 3, 2017 at 10:10 am Leave a comment

First Monday In October Starts Quietly For Legal Geeks

With the Supreme Court back to nine members, this promises to be one of its most prolific terms in several years as the high court takes on hot button issues ranging from refugee policy to the right of businesses to deny services to same-sex couples. But, as it stands right now, I don’t see any cases on the docket that would have much of a direct impact on credit unions. This may change.

Typically there are at least some issues that impact the way credit unions go about their business. For example, last year the Supreme Court decided cases ruling that merchants challenging the legality of credit card surcharge bans were entitled to first amendment protections and it also ruled that banks could be sued by municipalities for violations of the Fair Housing Act, albeit under very narrow circumstances. No such issues are up for review so far.

This is not to say that there aren’t some key issues out there that will most likely be reviewed by the court if not this term, then the next. For example, PHH’s case challenging the constitutionality of the CFPB’s one director structure is still at the appellate level. Once this case is decided, the losing party will undoubtedly appeal.

Then there is the issue of how much harm consumers have to prove in order to sue companies responsible for data breaches. Circuit courts have already split on this issue and it’s only a matter of time before the Supreme Court feels the need to explain how its Spokeo decision is to be applied in the context of data breaches. Specifically, does a consumer have to prove that their personally identifiable information was compromised in a data breach or do they also have to prove that their data was used to facilitate identity theft?

Finally, there’s the issue of the TCPA and how it is to be interpreted in the age of the cell phone and texting. One case that I believe cries out to be reviewed is the recent 11th Circuit ruling holding that members could partially revoke the authorization of third-parties to contact them.

Speaking of the TCPA, CUNA on Friday filed a petition with the FCC requesting that informational calls to the cell phones of members with whom they have an existing relationship be exempt from the TCPA.

Key Changes In NY Committee Leadership

New York Assembly Speaker, Carl Heastie announced appointments to several key committees last week. The changes were triggered by the retirement of long time Manhattan Assemblyman, Denny Farrell, who retired after 42 years, during which time he rose to lead the Assembly’s Ways and Means Committee.

Most importantly for our purposes, Assemblyman Jeffrey Dinowitz moves to the Assembly’s Judiciary Committee, which has jurisdiction over many issues of operational concern to credit unions such as foreclosures and levy and restraints. He replaces Assemblywoman Helene Weinstein who was recently named the first woman chairman of the Ways and Means Committee. Generally speaking, any bill with spending implications must go through this committee.

October 2, 2017 at 9:20 am Leave a comment

Five Things You Need to Know This Friday

With apologies for the late start, here are five things you need to know:

Show Me the Money 

As you probably already know, at yesterday’s board meeting, the NCUA announced that it was closing down the Temporary Corporate Credit Union Stabilization Fund on October 1, 2017 The decision sets the stage for credit unions to see a rebate of between $600 million and $800 million in 2018.

Now for the bad news: NCUA is forging ahead with plans to raise the Normal Operating Level to 1.39%. Under federal law, NCUA can set the Normal Operating Level anywhere between 1.20 and 1.50 provided that any funds in excess of the NOL are returned to CUs.

In his statement, Chairman J. Mark McWatters broke down the 1.39 rationale this way

There are three key risks to the equity ratio for which the 1.39 percent normal operating level accounts. Specifically, the 1.39 percent level accounts for the following:

  • Four basis points to reflect the risk posed by the remaining obligations of the Corporate System Resolution Program;
  • Two basis points to reflect the projected decline in the equity ratio through 2018 that will occur even without a recession; and
  • 13 basis points of protection for risks to the equity ratio posed by insured credit unions.

GOP Tax Plan Takes Dead-Aim at NY

 Credit unions in states with high local and state taxes—I’m talking to you New York, New Jersey and Connecticut—have more to more to worry about then protecting the credit union tax exemption as Congress debates tax reform. The tax cut blueprint announced by GOP leadership earlier this week ends the deductibility for state and local taxes. In addition, by doubling the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers, members will find it less attractive to itemize for the mortgage interest deduction. This could impact the mortgage businesses, particularly downstate.

By the way, contrary to popular belief, New York State gives a lot more money to the federal government than the federal government gives to New York State.

Advertising Relief

The Share Insurance Fund wasn’t the only thing on the minds of the NCUA yesterday. It also released proposed regulations amending signage requirements. OK, this might not be the most exciting thing in the world, but it does affect what goes into your advertising disclosures.

Association Testifies On Data Breach Solutions  

 In the aftermath of the Equifax Data breach, the State Senate’s Consumer Protection Committee held a hearing to examine steps that could be taken to strengthen consumer data protections. The Association was among those groups invited to testify. Our key points were:

  • We need baseline security standards for all businesses that hold large amounts of consumer information.
  • The Legislature should not impose additional obligations on financial institutions such as credit unions, which have been taking steps to prevent identity theft for more than a decade.
  • Consumers and credit unions need the right to sue businesses for the direct and indirect costs of data breaches.
  • More needs to be done to enhance consumer education in schools.

Why Dentists Are the Best Marketers In The World

 The brilliance of the dental industry is that it has figured out a way to have parents pay thousands of dollars for the right to inflict medieval treatments on their children that would make an inquisitor squirm. My eight year-old recently got an expander, which, as far as I can tell, is the equivalent of sticking a pair of pliers in your kid’s mouth for a couple of years and seeing what happens.

On that note, have a nice weekend.

September 29, 2017 at 11:15 am Leave a comment

NY Gets Ready To Ramp Up Enforcement Of It’s Marquee Regulations

New York’s Department of Financial Services is signaling that it is getting ready to ramp up enforcement of two high-profile regulations.

Last Wednesday, it announced that it was launching a series of information sessions to tell local governments about New York’s law requiring banks and credit unions above certain thresholds to maintain vacant and abandoned property. This announcement was coupled with a new guidance reminding impacted mortgagees of their basic obligations, such as that they are responsible for securing boarded windows or doors that are loose or forced open. In addition, mortgagees are required to register vacant or abandoned property to the department. They were also reminded of the obligation lenders have to report abandoned property to the state. §1308 (c) of the Zombie Property Law gives municipalities the right to enforce this law. Don’t be surprised if you begin to have more discussions with your local officials.

Remember that the obligation to maintain property under §1308 only applies to mortgagees which reach thresholds further described in this blog. This is distinct from the obligation to report vacant or abandoned property.

New York’s second major regulation imposes cyber security requirements. As readers of this blog will know, this regulation imposes baseline data security protocols on covered institutions. It applies to “any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.” Institutions covered by the regulation, such as a credit union mortgage CUSO or a state chartered credit union have to register with the state by using this link, the portal is on the upper right hand side and the Q and A’s provide some guidance: http://www.dfs.ny.gov/about/cybersecurity.htm.

I know originators have started to receive notices that they must comply with Part 500’s registration requirements by September 27th. The good news is that individuals who work for businesses subject to Part 500 are exempt from these requirements provided that the institution for which they work is properly registered with the state and has received permission to register on behalf of its employees. The bad news is that unless they work for an institution that has 50 or more employees, each individual still must indicate to the state that he or she is exempt from the regulation’s requirements by filing a notice of exemption.

 

 

September 26, 2017 at 9:36 am Leave a comment

When Employees and Employers Clash

Former Supreme Court Justice Byron White, who was also an all American football player, once famously noted that he turns to the sports pages to learn about man’s successes and the front page to learn about his failures.

Maybe it’s because I couldn’t escape the deluge of negative news enveloping the country even after I turned on yesterday’s football games; Or maybe it’s because after watching Ken Burns’ documentary on the Vietnam war last night that got me thinking that the country has never been so divided since 1968, but I decided to throw away my intended subject for today’s blog and remind all you employees and employers out there to take a deep breath when it comes to discussing issues in the work place.

Let’s be honest, with Facebook now that everyone has a soapbox and wants everyone to be their friend, there’s a good chance that supervisors will know where exactly their employees stand on the hot buttoned issues of the day.

For example, let’s say your employer has deeply held beliefs about whether or not it was appropriate for athletes to boycott the national anthem. Before you decide to say something to him or her, keep in mind that New York law makes it “unlawful for any employer or employment agency to refuse to hire, employ or license, or to discharge from employment or otherwise discriminate against an individual in compensation, promotion or terms, conditions or privileges of employment because of: a. an individual’s political activities outside of working hours, off of the employer’s premises and without use of the employer’s equipment or other property, if such activities are legal” (N.Y. Lab. Law § 201-d (McKinney). Keep in mind also, that the National Relations Labor Board has banned employers from taking action against their employees who speak out against issues of work place concern such as wages or working conditions. As a result, if an employee takes to Facebook to criticize workplace conditions, that criticism might actually be protected if other employees express similar concerns.

Now there are exceptions to everything I have just said and I’m certainly not saying that your employee gets to shoot off on issues with impunity. But what I am saying is, is that your employee has more protections than you might think when it comes to holding him or her accountable for viewpoints with which you might disagree. Before you go off half-cocked, take a deep breath and talk to your counsel before punishing an employee for taking part in political activities or expressing views with which you disagree.

 

 

September 25, 2017 at 8:54 am Leave a comment

More Bleak Medallion News

Crain’s is reporting that 46 NYC taxi medallions were valued at $186,000 a piece at a private auction in Queens on Monday. The paper reports that a 6% premium paid to the auction house meant that the final purchase price was approximately $198,000.

The auction has been anticipated within the industry since it offered an opportunity to see if the price of medallions has stabilized. The winning bid is in contrast to New York medallion prices in excess of $1 million as late as 2013. It indicates that the ultimate floor for medallions may be even lower than the industry’s most pessimistic assessments.

The 46 medallions were owned by the self-proclaimed medallion king, Evgeny “Gene” Freidman, who filed for Chapter 11 Bankruptcy. Taxi Cab Management, Inc. of which he was the owner, held more than 800 medallion taxi cabs in Manhattan, Woodside, Brooklyn and Long Island City. In June of 2017 he was arrested by New York’s Attorney General and charged with tax fraud for allegedly failing to turn over $5 million worth of surcharges that were due to the Metropolitan Transportation Authority.

 

 

 

 

 

 

September 22, 2017 at 8:40 am Leave a comment

RIP To The Twist

At the conclusion of yesterday’s Federal Open Market Committee, Chairman Yellen confirmed what had been speculated about for weeks now: The Federal Reserve will start unloading the treasury bonds and mortgage back securities it has purchased to keep interest rates low. No one knows for sure what impact this will have on interest rates, but it is certainly something that lenders should be paying attention to.

Since 2011, the Federal Reserve has aggressively brought a combination of mortgage-backed securities and treasury bonds, utilizing a strategy called Quantitative Easing. The idea is that by supporting the price of treasuries and mortgage securities, the Federal Reserve could keep interest rates from growing higher. In 2014, it stopped buying additional securities but it continued to rollover its existing portfolio. It now has a balance sheet of $4.5 trillion which, according to Bloomberg, represents a quarter of the country’s gross domestic product. From the start, the program has been controversial.

Critics had two primary concerns: First, they argued that by keeping interest rates artificially low, the Federal Reserve was effectively subsidizing large banks and companies that had the ability to capitalize on low rates. They argued that the program penalized small lenders such as community banks and credit union that are more dependent on interest rates than are the behemoth lending institutions. Secondly, critics argued that the Federal Reserve would not be able to reintroduce these purchases into the market place without causing economic disruption. It’s that second proposition that is now being tested.

Under the Fed’s approach, it will gradually shrink its balance sheet by not reinvesting in securities once they mature. The Fed will cap the size of its balance sheet reduction in the hope of minimizing the impact of this buy-down.

No one knows for sure what exactly the impact of this unwinding will be, but at the very least, it should create some upward pressure on interest rates. Given the start of this grand experiment as well as continued uncertainty about the direction of the economy, now is one of the key times for your credit union to be keeping a close watch on how sensitive your credit union is to sudden changes in interest rates.

CFPB Releases Important HMDA Regulations

I have not yet had time to read these babies, but I wanted to give you a heads-up that our good friends at the CFPB released two important regulations related to HMDA yesterday. A final regulation harmonizes the requirements of the Equal Credit Opportunity Act, which forbid lenders from taking an applicant’s race into account when making lending decisions with the mandates of HMDA which require lenders to obtain information about a lender’s race and ethnicity.

The new HMDA regulations will not only result in the collection of much more information about applicants, but also will result in much more of this information being readily available to the general public starting in 2019. Yesterday, the CFPB released a proposed guidance and is seeking feedback on how to balance greater transparency with the need to protect consumer privacy.

September 21, 2017 at 9:01 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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