3 Things You Need to Know On a Rainy Friday Morning

Your faithful blogger has been busier than usual this week and fallen behind on fulfilling his oath to provide you with news you can use to stay on the straight and narrow in Credit Union Land. Here are some quick hits.

CFPB Releases FDCPA Proposal

In its first major foray into amending consumer regulations in the Kraninger Era, the CFPB used a town hall meeting to unveil its proposal to amend the Fair Debt Collection Practices Act. I haven’t gotten near finishing the 500+ page proposal but the first thing I did was make sure that the CFPB wasn’t trying to pull in creditors. So, I am happy to report that the regulation still only applies to third party debt collectors. That being said, there’s plenty in here of which you should be cognizant. Many credit unions seem to use the FDCPA as de facto guidance for their own collection practices.

The proposal that is getting the most push-back so far is one that places a hard cap of seven on the number of phone calls that a debt collector can place to one person in a week. To its credit, the CFPB is also looking for feedback on how the FDCPA impacts compliance with other regulations such as the TCPA, which does apply to credit unions, but is one of the few consumer regulations left not under the direct jurisdiction of the CFPB. The Association will be sending out a survey on this proposal.

Time to File that 990?

Everyone’s favorite government agency, the IRS, sent out this pleasant reminder the other day. It reminded tax exempt organizations that under IRS rules organizations that must file Form 990s typically must file with the IRS by the fifteenth day of the fifth month after the end of their accounting period. In other words, if your organization operates on a calendar year and you are a state chartered credit union, your tax day cometh. The IRS also reminded filers that it generally does not ask for or want to see social security numbers on the form. Since most of the form is going to be publicly disclosed, this is excellent advice.

Oh, that wacky AOC. . .

Now that she has explained to the world why Long Island City doesn’t need 25,000 high-paying tech jobs, and how she could guarantee a world free of pollution with full employment if only people would adopt her ideas, the inimitable Alexandria Ocasio-Cortez has teamed up with avowed Socialist Bernie Sanders to take on banking. If her past attempts at policy are any indication, her idea of capping credit card interest rates at 15% is sure to generate lots of enthusiasm but be devoid of any thoughtful explanation as to how this would actually work or acknowledgement that proposals such as these would actually negatively impact credit opportunities for many people. But then again, why let facts get in the way when your goal is to blow up the system.

So, let’s see. As a relatively moderate, middle-aged man, I may very well have to choose between an avowed socialist who thinks the country is broken and an allegedly Republican president who thinks America isn’t great enough. Isn’t it funny how the extremists have more in common with each other than they would like to acknowledge.

 

May 10, 2019 at 7:53 am Leave a comment

If you’re responsible for handling member bankruptcies you should read this blog

How’s that for a catchy title?

Seriously though, what are your responsibilities as the holder of an account when your member declares Chapter 7 bankruptcy? That was the important issue recently decided by New York’s Southern District which upheld a nationwide Wells Fargo policy placing an administrative freeze on the accounts of Chapter 7 debtors with $5,000 or more deposited at the bank. The policy has already been upheld in other jurisdictions but this decision is noteworthy because it is the highest level New York court to address the issue and reverses an earlier ruling that the bank’s policy violates the automatic state provisions of the bankruptcy code (11 USC 362).

In 1995 the Supreme Court ruled in Citizens Bank of Maryland v. Strumpf that financial institutions owed money by an account holder who has declared bankruptcy can freeze the amount of money they are owed in the account provided they immediately seek permission from the bankruptcy trustee to access the funds they are owed. Building on this ruling Wells Fargo has implemented a nuanced nationwide policy which  it  applies to consumers with at least $5,000 in aggregate account holdings who have declared bankruptcy even when no money is owed to the bank.

In re Weidenbenner, No. 15-CV-244 (KMK), 2019 WL 1856276, (S.D.N.Y. Apr. 25, 2019) involves a couple which  declared Chapter 7 bankruptcy. Pursuant to the Wells Fargo policy the bank immediately froze all amounts over $5,000 and sent a notice to the bankruptcy trustee inquiring what they should do with the account funds. While they waited for instructions, the bank continued to give our debtors access to their funds and used any money deposited by them subsequent to the bankruptcy notice  to honor monthly payment requests. However eventually  there was not enough money left in the account to honor third party payment requests- referred to by normal people as bills. Unfortunately for our account holders but luckily for us, one of their payments  bounced and they sued the bank for violating the automatic stay by  freezing the account.

In the first round of litigation the debtors successfully argued that the bank’s administrative freeze constituted a violation of 362 by effectively denying them access to all of their funds even though the bank was not specifically ordered by the bankruptcy trustee to do so. In the case just decided the Southern District reversed this ruling, providing needed guidance to consumer bankruptcy aficionados throughout the state.

Among the key points made by the court (1) bank account funds are debts owed by the financial institution to the depositor (2) once a Chapter 7 bankruptcy is declared all debts owed to the debtor become part of the bankruptcy estate which is under the control of the bankruptcy trustee. Since accounts are debts owed to the debtors the financial institution has no right to disperse those funds without the approval of the bankruptcy trustee.

Against this backdrop Wells Fargo’s policy is a logical extension of the Supreme Court’s Strumpf holding. It places an administrative hold on monies ultimately to be dispersed by the bankruptcy trustee while at the same time not interpreting its requirements so strictly as to deny the account holder funds that they need to live. Incidentally while some of the funds subject to the freeze will ultimately be exempt from the bankruptcy estate that is a legal determination to be made by the trustee.

By all means talk to your attorney if you decide to make any changes to your bankruptcy policies as a result of this decision. That being said, the case clearly gives financial institutions greater flexibility when deciding how to handle the account of a bankrupt consumer without violating the dreaded automatic stay.

 

May 8, 2019 at 10:18 am Leave a comment

Does The GDPR Apply To Your Credit Union?

Few issues in recent years have unsettled credit unions as much as the General Data Protection Regulations adopted by the European Union in 2016 which took effect last April. For the companies to which it is applicable, the regulations usher in a radical new conception empowering consumers to better control who has access to their  data and it comes with hefty potential fines for entities that violate its mandates.  Furthermore, by its very terms the regulation was designed to apply not simply to companies in the European Union but to companies outside of the union which have European consumers. Consequently, while I have always felt that your average credit union did not have much to fear from the GDPR, I have never been able to opine unequivocally which credit unions would and would not conceivably find themselves subject to its mandates.

Fortunately, proposed guidance is currently pending which applies a commonsensical framework to the GDPR’s application. If the guidance is finalized as proposed, the vast majority of credit unions can return to worrying about regulations on this side of the Atlantic.

First some background. The GDPR is an important new regulation which aims to implement a regulatory framework for consumers to control who has access to their data, generally referred to as data portability; give consumers increased ability to know how that data is being used and who it is being given to; establish “the right to be forgotten” whereby internet companies must have the ability to wipe information about an individual off the internet and impose transnational data breach notification requirements.

As explained in this pending guidance the European Union wanted to make the regulation reach as far as possible. Consequently, Article III of the regulation stipulates that it applies to any entity that targets EU members irrespective of where they are located as well as to establishments that process EU data. Of these two criteria, the one that credit unions need to be concerned about is the targeting criteria.

Several months ago I was talking to a compliance specialist in the metropolitan area. In response to the EU regulations the credit union had done some due diligence and discovered that 150 of its members actually lived in the European Union. They were a combination of Europeans living abroad and students studying abroad. Does this mean that the GDPR applied to this credit union? Under the pending guidance the answer is no. The proposed guidance stresses that “the processing of personal data of EU citizens or residents that takes place in a third country does not trigger the application of the GDPR, so long as the processing is not related to a specific offer directed at individuals in the EU or to a monitoring of their behavior in the Union.”

You can tell that credit unions weren’t the only ones concerned about the GDPR’s applicability because the proposed guidance includes this handy example, “a bank in Taiwan has customers that are residing in Taiwan but hold German citizenship. The bank is active only in Taiwan; its activities are not directed at the EU market. The bank’s processing of personal data of its German customers is not subject to the GDPR.” Amen brother.

In fact, credit unions are further shielded from the GDPR’s mandates because their field of memberships by and large limit them to individuals within this country. There are of course exceptions to this general rule but those exceptions clearly don’t apply to your average credit union. Now get back to those regulations on this side of the Atlantic. I will tell you when this is finalized.

 

May 6, 2019 at 9:37 am Leave a comment

HMDA Amendments and Fintech Charters Highlight an Important Day of News

Two things happened yesterday that you should pay some attention to:  One development involves HMDA and could have a direct operational impact on your credit union within the next several months; the other development is a federal court decision allowing New York State to go forward with a lawsuit seeking to block the OCC from issuing “fintech charters”. This one could impact the entire financial services industry for decades to come.

First, the consumer Finance Protection Bureau issued a set of proposals-suitable for framing-which will further decrease the number of credit unions that have to comply with the Home Mortgage disclosure Act and its companion Regulation C. Most importantly, this proposed rule raises the numerical thresholds that, in conjunction with other criteria, trigger HMDA compliance.

For those of you too big to avoid HMDA there is also good news. When Dodd- Frank was passed Congress increased the categories of data points that lenders had to collect. It also gave the CFPB discretion to add additional categories. This was the equivalent of offering unlimited make-your-own Sundays at a 10 year-old’s-birthday party. The CFPB added more than a dozen data points that had to be collected. In a separate request for information referred to as an ANPR issued yesterday the CFPB is looking for feedback about the   burdens imposed buy these additional collection responsibilities, raising the very real likelihood that it will follow- up with regulations sharply reducing the number of CFPB mandated categories.

While this is all good news, I wonder if it’s happening a little too late to help credit unions. After all, many financial institutions have already absorbed the expense of updating software, training staff and developing new policies and procedures Still, these proposals represent the most important mandate  relief Credit Unions have seen in the Dodd-Frank era. They are worthy of a comment letter.

in the other development yesterday , New York’s very own Department of Financial Services was given the go-ahead to challenge the authority of the OCC to issue special purpose “fintech charters “ The decision means that the state will be front-and-center in a good old-fashioned legal dispute about the power of the OCC to grant federal   charters to technology companies offering banking services under the erstwhile National Banking Act. The question comes down to this: when is a bank a bank?

There is also a very practical reason why this case is so important for state-level regulators: Depending on how the charter is implemented, it could provide a convenient means for entities traditionally regulated by states, such as mortgage bankers and payday lenders, to nationalize their operations using computer platforms and in so doing, no longer being subject to state oversight.

The issues at stake should actually be taken on by Congress but merely suggesting that makes me come across as a foolish idealist. Get ready to hear more about both of these developments in future blogs.

 

On that note have a good weekend.  Lets Go Islanders!!!

May 3, 2019 at 10:32 am Leave a comment

What’s Next On The Regulatory Hit List?

If you’re wondering what’s next on the regulatory to-do list a good place to start is the Fair Debt Collection Practices Act. On April 17th, Director Kreninger used an appearance before the Bi-Partisan Policy Center to announce that the CFPB would shortly be coming out with proposed regulations to update the FDCPA. On May 8th she will be hosting a town hall meeting in Philadelphia and if the Bureau’s past practice is any indication, it’s likely that the meeting will coincide with the unveiling of new proposals in this area.

What type of changes does she have in mind? As she explained in her speech, the FDCPA regulatory framework needs to be updated. As a result she says, “The Bureau will propose clarifying rules to better enable the use of modern communications technology in collections activity. The proposed rules also would protect consumers with clear, bright-line limits on the number of calls they may receive from debt collectors on a weekly basis.  We will propose to provide clarity on how collectors may communicate via newer technology such as email or text messages. We will propose that collectors provide consumers with more and better information at the outset of collection to help them identify debts and understand their options, including their rights in disputing debts or paying them.”

When the Bureau previously considered regulations in this area, my primary concern was that the regulators would attempt to bootstrap regulations in a way that made creditors and not just third-party debt collectors subject to these mandates. We will have to see how this unfolds. Stay tuned.

FDIC Continues To Push For BSA AML Reforms

FDIC Chairman Jelena McWilliams is continuing to lead the way when it comes to advocating for reducing the  burden imposed on financial institutions by anti-money laundering regulations. The American Banker is reporting that she is working with the Financial Crimes Enforcement Network to meet with financial regulators within a month. According to the paper, McWilliams wants the meeting so she can better “understand what law enforcement and intelligence officials do with the millions of suspicious activity reports banks submit every year without much feedback.” Her hope is to find out if there are changes that can make the reporting requirements less burdensome. Efforts like this can only help credit unions but the fact remains that many of the antiquated reporting thresholds are in statute and not regulation.

FOMC Keeps Market Rates Unchanged

Skimming the paper this morning the most interesting takeaway I have from yesterday’s announcement that the Fed’s Open Market Committee will leave interest rates unchanged is that we are once again seeing concerns voiced about the risk of too little inflation. In the first paragraph of its statement, the Fed noted that, “On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.” The economy might be rolling along but policy makers continue to be befuddled by the lack of inflationary pressures. It defies  conventional logic. The concern policy makers have is that if inflation continues to run below average when times are good, we could be into unchartered deflationary waters when the economy turns sour again.

May 2, 2019 at 9:00 am Leave a comment

DFS Creates Consumer Protection and Enforcement Division

There’s a new Sheriff in town.

In the latest example of how states are responding to the regulatory pull back of the federal CFPB, New York’s Acting Department of Financial Services’ Superintendent Linda A. Lacewell announced on Monday that the Department was creating a new consumer protection enforcement division to be headed by a former federal prosecutor who also has an extensive compliance background.

The newly created division combines the previously separate enforcement and financial frauds divisions. The acting superintendent believes that the newly created entity “will be a power house.”

The first head of the division will be Katie Lemire who previously served, among other things, as an assistant US Attorney for the Southern District of New York which is based in Manhattan and is considered among the most prestigious legal assignments in the country. What makes her appointment  intriguing is that prior to accepting her new appointment she founded and oversaw a compliance firm.

New York’s announcement follows a trend in which states including Maryland, New Jersey and Pennsylvania, have beefed up their state level consumer protection efforts in a manner modeled after the CFPB under previous Director Cordray. What caught my eye in the press release was that one of the top priorities will be enforcement of banking, insurance and financial services law with a “particular focus on the review and response to cybersecurity events.” As we find out more about the structure of this division and its activities, we will pass it on.

As blog groupies will know one of my favorite days of the year is when I find out a new issue of Consumer Compliance Outlook has arrived, to me this is a high level but informative attempt by federal regulators to explain/highlight compliance trends. In other words, even though it’s not put out by the NCUA or CFPB it is very much worth the read.

Bellwether Victory in the Hudson Valley?

As those of you who walked the halls of the state Capital with the Association yesterday no doubt noticed there are a lot more democratic senators than there used to be. If republicans have any chance at all of once again playing a meaningful role in the Senate their path to victory must include winning back seats in the previously conservative but increasingly progressive Hudson Valley. So republican political operatives can’t be all that happy this morning. Democrat Pat Ryan easily won a special election to become Ulster’s newest county executive. It’s not just that he won but how easily he won which provides further proof that the Hudson Valley is responding to more than anti trump sentiment in turning to the Democratic Party. Remember that following the next election the majority party will be responsible for drawing the election maps, a process which could condemn senate republicans to permanent minority status in the chamber that they dominated for decades.

May 1, 2019 at 9:18 am Leave a comment

Do your account agreements include arbitration agreements? Why not?

To arbitrate or not to arbitrate, that is the question.  Last week, the Supreme Court decided one of three cases in this year’s term which continue to uphold the scope of arbitration clauses against potential class action claims (Lamps Plus, Inc. v. Varela, #17, 988, April 24, 2019).  It is time for your credit union to consider integrating arbitration clauses into its account agreements, if it hasn’t done so already.  First, some background.

The Supreme Court has for several years now given businesses, including banks and credit unions, the ability to integrate arbitration clauses into their consumer agreements and employee handbooks.  For example, in 2011, the Supreme Court in AT & T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011), ruled that the California legislature could not pass a law barring class action bans in arbitration clauses as they were pre-empted and therefore not enforceable under the Federal Arbitration Act.  It was decisions like these that got consumer groups and the Cordray CFPB fired up enough to propose a framework which would have sharply reduced the use of arbitration clauses.  But this regulation was never finalized.

In the ensuing years a virtually unbroken string of cases has made clear that arbitration clauses are a legitimate means to keep both employee disputes and consumer complaints out of the court house and most importantly, for our purposes, allow business to contract their way out of facing class action litigation.  Last week’s decision is surprising only because the Court ruled that vaguely written arbitration clauses should be interpreted as banning class action arbitration.  Generally speaking, vagaries in contracts involving consumers are interpreted against the drafter of the contracts.

Against this backdrop, here’s the question your credit union should be grappling with.  Should our account agreements include clauses mandating that member disputes be settled through arbitration?  Arbitration is not without cost and for smaller credit unions that don’t face the threat of expensive litigation, arbitration clauses might not make sense.  But for larger credit unions, arbitration should certainly be a serious consideration.  As readers of this blog know, class action law suits alleging that credit unions have engaged in wrong doing from improperly disclosing overdraft requirements to not properly handling account restraints are becoming more and more common.  As members become willing to sue their own credit union, credit unions have an obligation to take the steps necessary to protect their resources.

April 30, 2019 at 12:05 pm Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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