The Most Important Case of the Year

Often, the biggest battles happen by accident. For instance, the first shots at Gettysburg were fired only after a small contingent of Southern troops came to town foraging for  shoes.

Similarly, you wouldn’t necessarily think that an esoteric legal battle involving the applicability of mortgage reinsurance to the Real Estate Settlement Procedures Act (RESPA) would become the most direct and credible legal challenge to the structure of the CFPB. But that’s what has happened.

On the surface, PHH Corporation v. Consumer Financial Protection Bureau involves whether the CFPB abused its authority when it issued a cease and desist order and a large fine on PHH for violating RESPA. The CFPB argued, an administrative law judge agreed, that   PHH violated RESPA when  it referred   borrowers in need of mortgage insurance to mortgage insurers based on whether the mortgage insurer had entered into a captive reinsurance arrangement with PHH.  The company took the unusual step of appealing the decision to Director Cordray  who issued an opinion increasing the $6.5 million fine imposed by by the administrative law judge to   $109 million fine.

In challenging both the Director’s and the CFPB’s actions, the company’s lawyers allege that the structure of the CFPB violates the Constitution. It alleges that “the CFPB is the first and only federal agency to amass such broad and unchecked powers in the hands of a single person.”  It goes on to argue that the type of broad executive and quasi-judicial powers exercised by the Bureau can only be exercised by a multi-person board.  Otherwise, it effectively runs afoul of the President’s authority.

PHH’s argument got the attention of the D.C. Appellate Court. It also took an  unusual step: It  put both PHH and the CFPB on notice that it wanted answers to the question of whether it is constitutional for an independent agency to be headed by a single person and what the appropriate remedy should be if it decides that the Bureau’s structure is unconstitutional. According to the WSJ the  oral  argument featured questions indicating that some judges are skeptical that its legal to have an independent agency run by a single director not  answerable to the President.

This case appears more than ripe to ultimately be decided by the Supreme Court. When Congress gets around to selecting a 9th Justice, expect there to be a lot of talk about the Justices’ interpretation of agency powers.

April 18, 2016 at 9:09 am Leave a comment

GSEs Will Grant Principal Reductionn After All

In a demonstration of just how influential my blog is, on the same day that I explained why principal reduction by the GSEs would be a bad idea, the Federal Housing Finance Agency announced it was instituting a principal reduction program for seriously delinquent mortgages owned by Fannie and Freddie.  Although the program doesn’t directly impact your credit union, you undoubtedly will get some phone calls from members interested in seeing if the program works for them.

According to the announcement released by the FHFA, principal reduction will generally be available to those who are 90 or more days delinquent as of March 1, 2016, with mortgages less than $250,000, and whose loan to value ratio is more than 115%.

If the program works as intended, servicers will begin offering modifications to eligible borrowers by October 15, 2016 through December 31, 2016.  Here is some more information.

China Syndrome, Continued

I wasn’t able to make last night’s Capital Region chapter event, which was dedicated to a discussion of the impending CECIL accounting standards, but judging by the number of scheduled attendees, the proposal really has grabbed everyone’s attention.  Regardless of what you are ultimately required to do, I would certainly be keeping my eyes on the news from China to gauge what the economy will be like six months to a year from now.

Against that backdrop, China is reporting its slowest first quarter growth this year.  On the bright side, its 6.7% growth rate is actually higher than economists were predicting.  Then again, some of these same economists have grumbled for years about the accuracy of China’s official economic statistics.

My Political Comment of the Morning. . .

Comes from one of my wife’s Facebook friends, who shared the saying going around that there’s only one moderate Republic in the Presidential Race and she’s running as a Democrat.

On that note, enjoy the beautiful weekend.  See you Monday.

April 15, 2016 at 7:41 am Leave a comment

A Matter of Principal. . .Reduction?

I’m back blogging this morning after attending the State Governmental Affairs Conference all week.  Kudos to those of you who attended.  I understand why most of you are too sane to want to do this type of thing for a living, but a few of your stories to well-place legislators and staff go a long way toward getting things done.  Ok, no more Mr. Nice Guy.

One of the areas of unfinished business is housing policy reform.  An article that came out earlier this week in the Housing Wire reports that New York Attorney General Eric Schneiderman wrote a letter to the Federal Housing Finance Administration urging it to adopt mortgage principal reduction as a policy.  According to Schneiderman, in 2013 alone there were 60,000 homeowners in New York who were delinquent in mortgages controlled by Fannie Mae and Freddie Mac.  He goes on to argue that “there is significant evidence that homeowners who are seriously delinquent on their mortgages are most likely to avoid foreclosure and remain in their homes when reduction of principal balance is part of the loan modification offer. . .while virtually all of the large, commercial single family lenders now include principal reduction in their foreclosure mitigation options,” Fannie and Freddie do not. 

First, I would love to know how much an academic researcher got paid for figuring out that people who get a reduction in their mortgage principal are more likely to be able to afford their house.  Next thing you know, we will have conclusive proof that the sun rises in the East and sets in the West.  Secondly, having just watched The Big Short, calls for principal reduction have a certain facial appeal.  You wouldn’t know it from watching the movie, but Fannie and Freddie were willing participants and contributors to the securitization frenzy that indirectly led to the Great Recession.  Surely, giving a little back is the “right thing to do.”

But then, let’s get back to reality.  First, Fannie and Freddie are bankrupt entities and like any trustee administering a bankrupt estate, the FHFA has a fiduciary obligation to maximize its value.  Furthermore, as my Mother taught me growing up, two wrongs don’t make a right.  Should policy makers do more to reign in the big banks?  Absolutely.  But, for the life of me I don’t understand why taxpayer supported entities should be on the hook for bailing out the bad financial decisions of other taxpayers. 

I believe that if we don’t learn from our mistakes, we are bound to repeat them.  The American public wasn’t a victim of excessive real estate zeal so much as a willing accomplice.  I, for one, don’t want to see taxpayer supported institutions, which shouldn’t even exist at this point, bail out one set of taxpayers at the expense of others who were able to pay their bills.  Foreclosures are a tragedy, but they shouldn’t be avoided at all costs.

http://www.housingwire.com/articles/36747-new-york-attorney-general-pushes-fhfa-for-principal-reduction

 

 

April 14, 2016 at 7:45 am 1 comment

Merchants Continue to Fight Liability Shift

Over the years, I’ve learned a couple of things the hard way.  One is never underestimate what can happen in the last nine holes of the Masters.  Secondly, never underestimate the legal prowess of merchant lawyers. 

So, it is with a skeptical but weary eye that I reviewed a class action lawsuit (B & R Supermarket, Inc. d/b/a Milam’s Market vs. Visa, Inc., Case No. 3:16-cv-01150-WHA) commenced in federal court in California arguing that Visa, MasterCard and others violated anti-trust law by imposing a timeline on merchants to be capable of processing chip-embedded EMV cards that they “knew” to be impossible to meet.  (paragraph 75 of the Merchant’s complaint).  As a result, the argument goes, since October 1, 2015 merchants have been stuck with the cost of chargebacks for unauthorized transactions that would have historically been the responsibility of issuers (i.e. credit unions and banks).  The merchants are looking for reimbursement of these charges, but fortunately, a preliminary injunction seeking to suspend the liability shift was denied on March 16, 2016.

On the face of it, this lawsuit strikes me as the legal equivalent of the dog ate my homework defense.  Merchants were put on notice of the liability shift by Visa in 2011.  To suggest that they didn’t have enough time to upgrade their equipment is a bit of a stretch.  Many merchants simply made the business decision that the costs of upgrading their terminals to be EMV compliant weren’t justified.  Legalities aside, however, the lawsuit does highlight the challenges that are still being confronted with the integration of EMV chips into the payment system.  For instance, according to the KrebsonSecurity blog, customers can expect EMV enabled card machines to be used in fewer than 1 in 5 face-to-face transactions.  In addition, in fairness to the merchants, there is apparently a backlog to get the upgraded terminals certified for use. 

In a blog later this week, I will be delving into certain chargeback dilemmas.  Stay tuned.  On that note, I am headed to downtown Albany where I hope to see some of you later today.    

April 11, 2016 at 8:53 am Leave a comment

What Marriages and Mortgages Have in Common

Sex sells.  

So in a blatant attempt to keep your interest when discussing an incredibly bland subject, I have a question for you:  what does consummation – in the biblical sense – and a mortgage loan in New York State have in common? Simply put, neither is legally binding until it is consummated.  For marital purposes, that means that the ceremony notwithstanding, the wedding night is what seals the deal.  Unfortunately, for mortgage purposes, when a mortgage loan is consummated is not all that clear, which brings me to the purpose of today’s blog.

Of course we all know that under the new mortgage regulations, members are now entitled to have mortgage disclosures at least three days before a mortgage loan is consummated.  This, of course, means that for purposes of complying with the regulation, it is crucial to know when a mortgage loan is consummated.  The Truth in Lending Law and Regulation Z have always deferred to a state’s definition of when a mortgage loan is consummated.  This makes sense since mortgage loans are contracts and contracts are interpreted pursuant to state law. 

The problem is that New York State has never defined in statute when a mortgage loan is consummated.  In addition, things get even more dicey because an argument can be made that as a matter of case law, a mortgage loan is consummated when a commitment letter is signed and sent to the borrower.  Murphy v. Empire of Am., FSA, 746 F. 2d 931, 934 (2d Circ. 1984).  That would that you have to make sure that closing disclosures are in the member’s hands three days before they receive a commitment letter from your credit union, as opposed to three days before the excited couple closes on their new home. 

Fortunately, the Legislature, at the urging of the Association, and with the support of the banking industry, has a fix on the way.  Legislation was recently introduced, S.7183 (Savino) and A.9746 (Richardson) that would define consummation as the point at which “the applicant for the mortgage loan executes the promissory note and mortgage.”  Since this typically happens at the closing, it should remove any confusion as to when consummation has occurred. 

On that note, have a good weekend, and I expect to see many of you bright eyed and bushy tailed next week for our Annual State Government Affairs get together.

 

April 8, 2016 at 8:36 am 1 comment

When Does An Employee’s Post Go Too Far?

How much can you, or should you, discipline employees for comments they make on their own social media accounts, like Facebook?  That is the question I have been asking myself since reading this article in the CU Times reporting that MTC Federal Credit Union based in Greenville, South Carolina fired one of its loan officers for using a racial slur on Facebook. 

The CU Times reports that Gerri Cannon admitted to posting the slur, but also contended that she is not a racist and has retained a lawyer.  As I like to point out, retaining a lawyer doesn’t mean you have a case.  Ms. Cannon’s dilemma provides an important teaching moment for credit union employers and employees alike. 

The first thing I always hear in these cases is that the employee’s free speech rights are being violated.  But they aren’t.  The First Amendment restricts government conduct, not the conduct of private citizens. Hudgens v. N. L. R. B., 424 U.S. 507, 513, 96 S. Ct. 1029, 1033, 47 L. Ed. 2d 196 (1976).  This means that Ms. Cannon has a right to post just about anything she wants on Facebook and MTC FCU has every right to fire her for it. 

The second question that always gets raised in these situations is that the Employee Handbook didn’t ban the specific conduct.  But to answer this question, we need to take a little detour.  As most of you know, New York, like most other states, is an at-will employment state.  This means that unless otherwise specified, employment is for an indefinite period of time and may be “freely terminated by either party at any time for any reason or even for no reason.”  Lobosco v. New York Tel. Co., 96 N.Y.2d 312, 316, 727 N.Y.S.2d 383, 751 N.E.2d 462 (2001).  There is a misconception on the parts of employees and employers that a handbook creates a contract which modifies at-will employment.  And, in fact, there have been cases in which a poorly drafted handbook restricted the ability of employers to get rid of an employee.  Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 465-66, 443 N.E.2d 441, 445 (1982). 

But this is very much the exception to the rule.  As a federal court noted earlier this year New York’s Court of Appeals has pointed out, “[r]outinely issued employee manuals, handbooks, and policy statements should not be lightly converted into binding employment agreements.  This is especially true where the handbook contains an express disclaimer.”  Rumsey v. Ne. Health, Inc., 89 F. Supp. 3d 316, 340-41 (N.D.N.Y. 2015), aff’d, No. 15-833, 2016 WL 336196 (2d Cir. Jan. 28, 2016), as corrected (Jan. 29, 2016). 

Does this mean that a credit union can just ignore its handbook?  Not at all.  A more typical case than the one involving MTC FCU involves a discharged employee who argues that she was unfairly disciplined by her employer because of her race.  For instance, let’s say that a credit union routinely looks the other way when it hears about inappropriate comments on employee Facebook pages.  If that same credit union turns around and fires a pregnant or minority employee who makes such a comment, the unequal treatment can be used as evidence of discrimination on the part of the employer.  Redford v. KTBS, LLC, No. 5:13-CV-3156, 2015 WL 5708218 (W.D. La. Sept. 28, 2015), on reconsideration in part, No. CV 13-3156, 2016 WL 552960 (W.D. La. Feb. 10, 2016).

One more thing to keep in mind when monitoring employee social media conduct is to make sure you are not violating federal labor laws.  As I’ve mentioned in previous blogs, the NLRB is aggressively protecting the right of employees to engage in “concerted activity” using social media.  This means that an employee’s complaints about his workplace may in fact be protected.  It also means that you must be sure that your social media policies are not so poorly written that they can be read as prohibiting employees from taking to Facebook to talk about workplace concerns.

Needless to say this is one of those fast evolving areas that creates confusion and legal actions.   This is one of those areas where a review of your handbook and a call to your attorney make a lot of sense.

On that note, enjoy your day.

 

 

 

April 6, 2016 at 9:04 am 1 comment

Four Crucial Lessons…Kind Of

I have many important lessons to impart to you this morning:

Most importantly, if you live in the Northeast, never ever move the snow blower to the back of the garage before May even if it has been such a freakishly warm winter that golf courses are already open.

Second, always record any sporting event that starts after nine PM on the off-chance that you will sleep through one of the greatest endings in college basketball history.

Third, you should all take the time to read a legal opinion letter on the custodial powers of federal credit unions recently issued by the NCUA.

In response to an inquiry from Paul T. Clark of the Seward & Kissel Law Firm, NCUA’s General Counsel said that a federal credit union is authorized, at a member’s direction, to place funds, which initially have been deposited into the FCU, into an FDIC account and to serve as custodian for that account, provided that several conditions are met. It is an important clarification of the flexibility FCUs have to serve members without crossing the line between acting as custodians of funds to becoming trustees and broker dealers.

Why is this flexibility important? Unfortunately, the letter does not explain what the firm was seeking to do with this authority, but I can think of situations where a credit union and its member may want the flexibility to move funds into a FDIC account without leaving the credit union.  For example, as explained in a legal opinion letter from 2009, the CDARS service enables a bank to accept large deposits from its customers and, on behalf of the customer, spread the deposits in excess of FDIC insurance limits to other FDIC-insured banks, so the funds are fully insured.  In its 2009 letter, NCUA authorized the participation of credit unions in this program but that opinion dealt specifically with credit unions authorized to accept public funds.  (https://www.ncua.gov/Legal/OpinionLetters/OL2009-1022.pdf#search=cdars).  NCUA’s most recent letter makes it clear that federal credit unions are authorized to  place funds in FDIC accounts while still being the custodian of  a member’s  accounts.  This letter also makes it easier for credit unions to place a portion of a member’s money into a trust.

But be careful when using this letter. The General Counsel stresses that credit unions “generally” don’t have trust powers or broker dealer authority.  Why is this distinction important?  Because, as explained by Blacks’ Law Dictionary, a trustee must “protect and preserve the trust property, and to ensure that it is employed solely for the beneficiary, in accordance with the directions contained in the trust instrument.”  In contrast, a custodian is simply responsible for holding funds, making sure they are available and making sure that only authorized persons have access to them.

Which leads us to my fourth important lesson of the day.  I have a sneaking suspicion that there are many credit unions that confuse custodial and trust powers.  My simple rule of thumb is that if you find yourself reading a trust document to understand the credit union’s responsibilities, you are probably doing more than you can or should.  All you need to do is properly label the account and make sure that only authorized trustees can access it.  It is the trustee’s job to make sure the account is properly administered.

Here is where you can access the letter:

https://www.ncua.gov/regulation-supervision/Pages/rules/legal-opinions/2016.aspx

April 5, 2016 at 9:57 am 1 comment

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Authored By:

Henry Meier, Esq., Deputy 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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