Posts tagged ‘arbitration’

Does Your Deposit Agreement Contain an Arbitration Clause?

If your answer to that question is no, then my next question is why not?  Let’s face it, the world is changing.  Members are more willing to sue you than they were just 15 years ago; more lawyers have become skilled at cost effectively bringing class action lawsuits over alleged violations of consumer banking orders; and, as credit unions grow, they also become bigger litigation targets.

In many ways, now is an ideal time to be considering the issue.  The law now firmly establishes the right of credit unions and banks to include arbitration provisions in their account agreements.  For instance, just last week a court upheld the legality of a credit union’s amendment to its deposit agreement stipulating that members agree to arbitrate disputes arising under the agreement and to waive participation in class action lawsuits.  The credit union’s victory reflects increasingly settled law in this area.  I just popped in the words arbitration agreement/class action/credit union into Westlaw and it came back with 85 cases, many of which have been decided within the past year.  Secondly, a rule promulgated by the CFPB banning class action arbitration charges was repealed by Congress and President Trump, albeit after a 50-50 vote in the Senate.

Equally as important, the Supreme Court has made it quite clear that state courts have very narrow grounds upon which to invalidate arbitration clauses.  “Simply put, even though contract law is governed by state law, the Federal Arbitration Act demonstrates a strong federal commitment to ensuring that individuals have the right to arbitrate disagreements.” DIRECTV, Inc. v Imburgia, 577 US 47, 136 S Ct 463, 193 L Ed 2d 365 [2015]

Those of you who decide to go forward with these clauses shouldn’t just run a Google search and cut and paste language into your agreement.  Many arbitration clauses give your members a certain number of days to opt out of the class action ban and always clearly explain precisely what these agreements do.  Otherwise, you are engaging in precisely the type of activity which the courts will find the contracts unenforceable. 

Last, but not least, arbitration agreements and account agreements are only valid to the extent that members were given adequate notice of the language.  Your attorney should review cases in which courts found that members received adequate notice.  One more thought, some credit unions are reluctant to incorporate arbitration agreements because it just doesn’t seem like a credit union-y thing to do (hey, I just invented an adjective).  But remember, suing the credit union isn’t a particularly credit union-y thing to do, either, but with potentially millions of dollars at stake, there are going to be plenty of members willing to do so on issues ranging from NSF fees to overdraft disclosures.  Why wouldn’t you take basic steps to cut them off at the pass?

March 15, 2021 at 8:57 am Leave a comment

A Wednesday Hodgepodge

Good morning. Yours truly is back from a college tour in the great Northeast, and there are a lot of odds and ends I need to catch you up on. First, however, congratulations to all you Nats fans out there. Your team finally won a big game. Now don’t get me wrong, all you won was the right to lose to the Dodgers, but at least that’s something. Besides, that was the most fired up Washington crowd I’ve heard since the Redskins were good. Maybe D.C. can get united about something after all. Now onto the material you read the blog for.

Beware of the Business Appraisal Rule

CU Today is reporting that an advisory group of the National Association of Credit Union Service Organizations put out a welcomed reminder telling credit unions to practice “careful restraint” when it comes to taking advantage of the new commercial real estate appraisal requirements for credit unions, which take effect in this month.

Their warning should be taken to heart. In July, the NCUA finalized a regulation that increases the threshold for required appraisals in commercial real estate transactions from the current $250,000 to $1 million. The regulation was an aggressive move by Chairman Hood and Board Member McWaters, who argued that the increased threshold did not raise safety and soundness concerns and would help credit unions provide member business loans. The decision was a controversial one. Credit unions now have more commercial real estate transaction flexibility than do banks. Board Member Harper voted against the proposal. Against this backdrop, even though only 4% of credit unions make these types of loans, you can bet that the industry will be under the microscope with critics anxious to point to this new regulation as an example of NCUA being too aggressive.

Treasury Moves Forward with GSE Reform

Lest anyone doubt that the Trump Administration is serious about moving forward with major reforms of the secondary housing market, those doubts should be put to rest once and for all. On Monday, the Treasury announced that it would be authorizing Fannie Mae and Freddie Mac to retain up to $25 and $20 billion in earnings, respectively, as opposed to the $3 billion capital cushion at which they are currently capped. This means that the government is deciding that it will no longer be taking almost all the profits being generated by the GSEs.

More than a decade ago now, when the government gave the GSEs a $200 billion line of credit and a huge bailout, it received preferred shares which made it the first in line to receive dividend payments. This has proven to be an incredibly lucrative investment for the government, and has led to lawsuits with irate shareholders claiming that the government has effectively taken their profits for themselves. The cynics among us have even suggested that the profits are so appealing that the government would never want to privatize Fannie and Freddie. This is the clearest sign yet that their cynicism is misplaced. The Treasury’s ultimate goal is to allow Fannie and Freddie to build up huge capital reserves and then function as private entities absent implicit government support. Just how much of this goal can be accomplished without Congressional support remains to be seen.

Arbitration Update

In a recent blog, I said that all medium to large sized credit unions should consider putting arbitration agreements into their account agreements and their HR handbooks. Now that the Supreme Court has consistently and emphatically upheld the legality of such arrangements, it is almost negligent not to consider making this move if your credit union is large enough to be the target of class action lawsuits. Those of you interested in looking into the issue further would be well advised to take a look at this excellent analysis of the issue provided by the Weil, Gotshal & Manges LLP’s September employment law report. The firm summarizes several cases demonstrating how courts are going to scrutinize arbitration agreements to make sure that employees affirmatively agree to be subject to arbitration clauses. I also think some of the concepts are useful when getting your members onboard with arbitration.

Collins Pleads Guilty, Resigns

Western New York Republican Congressman Chris Collins resigned yesterday after pleading guilty to insider trading charges. Nationally, Collins is best known for being the first sitting Congressman to endorse Donald Trump. Trump ended up winning the district by 26 points, but Collins only narrowly won reelection in 2018 after being arrested on the insider trading charges. Credit unions in New York will also remember Collins and his staff for being well-informed and generally supportive of credit unions and their issues. Governor Cuomo will call a special election to fill the vacancy.

October 2, 2019 at 9:12 am Leave a comment

Time for the Arbitration Talk

It’s time to sit everyone down and have “The Talk.”

I’m bringing this to your attention because of an article in the American Banker (subscription required) detailing the travails of a New Jersey pastor who was falsely accused of passing fraudulent checks by- who else- Wells Fargo. The misidentification of the pastor was quickly resolved, but when he went to sue the bank, he discovered that he would have to arbitrate his dispute.

While I empathize with the pastor’s plight, everyone reading this blog has an obligation to balance consumer needs against fiscal and legal realities. I have been doing my annual review of cases in preparation for next week’s legal and compliance conference (again, shameless plug) and, whereas the difficulty used to be finding enough cases to talk about, now the challenge is deciding what cases to exclude. The leading culprit in this explosion in litigation against credit unions is class action lawsuits claiming violations of account agreement disclosures. Another factor fueling the rise in litigation is that employees seem much more willing to sue their employers than they used to be, particularly in a state like New York, which adds so many protections to the federal baseline.

Given this reality, it’s time to call up your outside counsel and have a discussion about the costs and benefits of integrating an arbitration clause into your account agreement, and even into your employee handbook. Both Congress and the courts have given employers and financial institutions the green light to use arbitration clauses. Congress took the unusual step of voting to repeal CFPB regulations banning arbitration clauses, which banned class action lawsuits. And last year, the Supreme Court issued the latest in a string of cases emphasizing that the Federal Arbitration Act should be expansively interpreted, and understood as preempting state laws which try to limit its impact. Lamps Plus Inc. v. Varela upheld the enforceability of an arbitration clause in an employee handbook against a challenge that it was too vaguely written to be enforced.

To be clear, arbitration clauses don’t make sense for all credit unions. For example, if you’re more likely to be sued in small claims court than you are to be made subject to a class action, then including an arbitration clause in your account agreement may actually increase the amount of member litigation you have to deal with. In addition, your employees may not respond well to having to agree to arbitration clauses as a condition of employment. But given the state of the law, your credit union should at least be having a conversation. From a strictly legal standpoint, arbitration makes an awful lot of sense.

New York extends Wild Card provisions for another five years

                Legislation extending existing law is the lobbying equivalent of getting a new roof on the house; it’s something that has to be done, but it does not generate all that much excitement. Nevertheless, let’s not underestimate the importance of news that Governor Cuomo has extended New York’s Wild Card provisions for another five years.

The Wild Card law permits state chartered financial institutions to apply to the State’s Department of Financial Services for permission to exercise a power which a federally chartered institution has, but which state charters do not. It was originally passed in 1996 to aid banks, and was extended to credit unions in 2007. In recent years, it has played a crucial role in enticing federally chartered credit unions to look at the state charter. Aside from some of the specific powers which have been authorized under the legislation, it signals to federally chartered institutions that New York wants their business, and is willing to talk to them about minimizing the paint points of a conversion.

On another note, the Governor has approved legislation dealing with the creation of a state task force to provide the Governor and Legislature with information on the “effects of the widespread use of cyber currencies” in New York State. The task force will have a year to submit its findings. A great place for it to start would be to review the findings of a multiday hearing that the DFS held several years ago, examining cyber currencies. It was this hearing which led to the creation of New York’s cyber security licensing framework.

September 3, 2019 at 9:46 am Leave a comment

PEW-IE Survey Distorts Arbitration Debate

I’m more than a little surprised by the amount of attention research released earlier this week by the Pew Charitable Trust is getting.  Survey results indicate that overwhelmingly consumers across genders, generations and the political spectrum want access to the legal system and believe that banks should not be allowed to deny it.

Incidentally, the Web page reporting the results provides a link for persons to support the CFPB’s proposed regulations forbidding financial institutions from including arbitration clauses that forbid consumers from joining class action lawsuits.  What a coincidence. 

Its survey of 1008 people reveals that 95% of respondents want to be able to be heard by a judge and jury if they find out that they have been charged a fee for a service for which they are sure they didn’t sign up.  Keep in mind that the opinions I express are mine and mine alone, Pew does some great work, but this one really misses the mark. 

First, the premise of the question is all wrong.  Of course, 95% of respondents want access to the courts, just as I am sure they’d like the option of buying a Mercedes-Benz.  But the real question is if they could choose between a system that encourages swift, equitable and cost-effective solutions or one in which trial lawyers can potentially make millions of dollars for settling similar cases while the class member receives almost enough money to go to the movies, which would it be?

What annoys me so much about the arbitration debate is not the attempt to deal with arbitration’s inequities, but the CFPB’s pig-headed belief in and glorification of a class-action system that is far from perfect and at best is a very crude instrument to incentivize consumer protection.  For instance, legal fees based on a percentage of the amount awarded to a class of plaintiffs creates an incentive for attorneys to settle before trial so as not to run the risk of getting nothing for their efforts.  Furthermore, I don’t believe that the vast majority of consumers are anxious to go to court every time their financial institution does something they don’t like.  What they want is to be treated fairly and equitably. 

This is why I continue to believe that there is a middle ground in this whole debate.  Financial institutions should be able to mandate that disputes get settled through arbitration as opposed to class action.  But only if the arbitration provisions provide basic due process protections.  Courts reviewing these protections should have more flexibility to invalidate arbitration findings based on inadequate due process.  Unfortunately, both sides are speaking past each other with the only result being that the only big winners in this whole dispute will be plaintiffs’ lawyers.

Anyway, for the type of changes I’m talking about, Congress would have to act.  It’s so much easier to simply have the CFPB handle consumer protection on its behalf.

August 19, 2016 at 8:49 am Leave a comment

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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