Credit Union Legal Update – Fall 2009
By Credit Union
PROOFS OF CLAIM PRIVACY ISSUES AND POTENTIAL BREACHES/RISK ALERT
Buckle your seatbelt. There is more litigation on the way. An increasing number of lawsuits are being filed against financial institutions, including credit unions, for alleged breaches of a federal bankruptcy rule that provides for the required redaction of certain personal information from any document filed with the Bankruptcy Court.
Effective December 1, 2007, a new bankruptcy rule was adopted to address the disclosure of private identifying information. Creditors, including credit unions, are now prohibited from reporting on any proof of claim form (or an attachment to the proof of claim form) full account numbers, full social security numbers, dates of birth, or drivers license information. Basically, all personal identifying information is prohibited from disclosure.
Seminars are being conducted by plaintiffs attorneys on how to utilize this infraction and other alleged violations of consumer laws to bring lawsuits. Damages are often sought in excess of $100,000. Ironically, those members that have already cost a credit union money may be considering suing if their private information has been disclosed in a Bankruptcy Court filing. Last fall, CUNA Mutual issued a risk alert regarding this issue. If you missed the alert, a copy can be found by clicking here.
Authorized/redacted Bankruptcy Court filings regarding private identifying information may include:
- The last four digits of a social security number;
- The year of an individuals birth;
- A minors initials; or
- The last four digits of the financial account number.
Special care should be taken to insulate a credit union from any liability that may arise from an unintentional disclosure of confidential information.
If you discover that protected information was filed with the Bankruptcy Court on a proof of claim or an attachment to a proof of claim, immediate efforts should be undertaken to redact the information before litigation is brought. This may help eliminate potential damages that could be claimed by a plaintiff in a lawsuit against a credit union. Legal counsel should be consulted regarding the procedures that might be necessary to address potential liability to the credit union.
CREDIT CARD ACT AND 21-YEAR-OLDS
For most credit unions, the implementation of the 21-day rule for periodic statements required under the Credit Card Act of 2009 was an absolute nightmare. Some may say that the pending new rules with regard to those members that are under the age of 21 will similarly cause bad dreams. With advanced planning, that might not be the case.
Effective February 22, 2010, credit unions will not be able to issue open end credit not limited to credit cards to any member under the age of 21 unless:
- A cosigner, including a parent, spouse or legal guardian over the age of 21, cosigns the loan application; or
- The consumer under the age of 21 provides financial information showing that he or she has independent means of repaying the open end credit loan obligation. The Federal Reserve has not yet issued regulations as to what would give credit unions or other lenders the standards for determining the ability to repay.
Remember, this section of the new law does not take effect until February 22, 2010. What are most credit unions doing about it? Some are acting now and marketing open end credit, including credit cards, to those members and potential members under the age of 21. Why not? Interest rates for credit unions tend to be lower than banks and payment schedules often are more flexible than banks. Take advantage of this opportunity between now and February 22, 2010 and decide if this is a good way for your credit union to proceed.
After February 22, 2010, all credit unions must first:
- determine if they desire to extend credit to members under the age of 21; and, if so
- create policies and procedures to reflect the new requirement regarding the ability to repay.
UNDERUTILIZED OR FIXED ASSETS THAT HAVE NOT BEEN USED
During boom times, many credit unions purchased land in anticipation of building a branch or relocating their headquarters building to the site. During troubled economic times, these plans have become stalled. In some cases, the land has sat idle and has not been developed by the credit unions.
There are various aspects of the NCUA fixed asset rule that apply to the non-use or under-utilization of real property. However, it is interesting to note that NCUA was recently asked by the Credit Union Association of Colorado about how a federal credit union should proceed if real property had been not used or had otherwise been abandoned for at least four years. NCUA was also recently asked what actions are sufficient to meet a requirement in the fixed asset rule that federal credit unions must publicly advertise property for sale after it has been abandoned for four years. Specifically, NCUA was asked if it is sufficient for a federal credit union to list property for sale with a real estate broker. The broker would post a for sale sign in front of the property and market the property for sale under the ordinary course of business.
NCUA reminded all federal credit unions that the fixed asset rule limits federal credit union investment in fixed assets and requires the credit union to dispose of abandoned property. Abandoned property is specifically defined as real property that the credit union is no longer using. This includes real property that may have been originally acquired for future expansion but is no longer sought for its intended use. The rule specifically states that if the property has been abandoned for four years, a federal credit union must publicly advertise it. Listing the property for sale with a real estate broker and allowing the broker to market the property makes sense and NCUA agreed. However, they also stated that the fixed asset rule requires sale of the abandoned property within five years unless NCUA provides written approval of a deferral.
A copy of this NCUA opinion letter can be downloaded by clicking here.
CUSOs CAN BUY AND RESTRUCTURE NON-PERFORMING LOANS
It is a different world in credit union land and many of the articles in this newsletter address issues that could reduce the risk or exposure to a credit union, or otherwise enhance and protect safety and soundness. Recently, NCUA was asked whether a CUSO could engage in purchasing and servicing of delinquent loans. Previously, CUSOs were prohibited from engaging in the origination of new consumer loans with the exception of credit card lines of credit, residential mortgage loans, and student loans. NCUA has now concluded that CUSOs can restructure loans in aid of their collection activity. The CUSO rule was recently amended to provide several new examples of permissible CUSO activities related to the routine operation of credit unions, including the purchase and servicing of non-performing loans. Previously,
NCUA had found that the purchase of non-performing loans was a permissible part of CUSO debt collection activity, but the prior interpretation of NCUA did not fully address the authority of a CUSO to engage in debt restructuring when it purchases non-performing loans. NCUA found that CUSOs may purchase non-performing loans to restructure delinquent debt that is owned by a credit union (so long the credit union made the original underwriting decision and no new credit is being extended to the borrower).
Be it either through loan modifications or other courses of action, CUSOs can restructure loans by changing the terms of the loans, such as maturity dates, the payment schedules, or even the interest rates. They cannot advance new principal. NCUA cautioned that they would carefully evaluate actions of credit unions and make sure that such restructuring was not in an effort to circumvent lending restrictions such as loan maturity or interest rates higher than those permitted for a federal credit union. NCUA continues to prohibit CUSOs from engaging in the origination of new consumer loans other than credit card lines of credit, residential mortgage loans and student loans. The broadening of the opportunity for CUSOs to aid in collection activities should greatly assist those that are addressing delinquent real estate loans, and the number of delinquent real estate loans nationwide for credit unions seems to be growing.
A copy of the NCUA letter can be downloaded by clicking here.
WHAT TO DO WHEN A REPORTER CALLS
During these troubled economic times, there is an increase in litigation against credit unions. There are also potential increases in losses. We are often asked about the approach that a credit union should undertake when a reporter calls and seeks comment. Reading a long article in the newspaper and at the end seeing the comment that a party has been contacted and has failed to respond or maybe responded with a no comment is often not always the recommended approach. A positive sound bite at times is the preferred method of dealing with the press.
A short sound bite regarding a credit unions record or policies and procedures dealing with compliance or their positive efforts in the community is often viewed as a positive approach to what could be a negative comment from a reporter. The other means is to develop an ongoing relationship with the reporter so that the credit union becomes the reliable, trustworthy source of valuable information and one that the reporter could come back to time and time again. Such a relationship is often most helpful when the reporter must address negative news. Past assistance to the reporter may assist in a more favorable quote or slant on the article.
Make yourself easy to contact and readily available. Most importantly, respond quickly, but remember, it is not a good idea to try the matter in the press. It is important to speak to the readers, not just the reporter. Most importantly, do not work alone. It is usually preferable to have your media relations representative or a staff person take notes and make sure you provide all the information that the reporter has requested.
Used effectively, a newsworthy article in the paper is free marketing, and in todays economy, it is wonderful when a credit union can get anything for free. However, be cautious, be prepared and have your sound bites ready.
TEXT MESSAGES AND THE TELEPHONE CONSUMER PROTECTION ACT
The Telephone Consumer Protection Act (TCPA) prohibits the use of an automatic telephone dialing system to make any call to any telephone number assigned to a cellular telephone service. Calls made for emergency purposes made with express prior consent of the called party are permitted. Although the TCPA does not define call, the Federal Communication Commission has explicitly stated that call includes voice calls and text messages to wireless numbers including short message service calls. Since Congress has not sought to clarify the issue, the courts have become involved. Recently there was a lawsuit involving the sender of an unsolicited advertisement via text messaging using an automated dialer. The question was whether or not an unsolicited text message violated TCPA. The court ruled that a call includes both voice calls and text messages (Satterfield v. Simon & Schuster, Inc., 9th Cir.).
Regrettably, more and more credit unions are being confronted with the issue of foreclosed assets. When a credit union forecloses against a home, great consideration should be given to safety and soundness. Credit unions should act to protect member assets by acquiring and managing foreclosed property until such time as the property can be marketed for sale at a price that is reasonable in relation to the propertys current fair market value.
Boards of Directors of credit unions are encouraged to adopt a foreclosed assets policy. The policy should address the risks associated with ownership of such property. It should also ensure compliance with all applicable laws, rules, regulations, and accounting practices.
The policy should consider when the credit union may own foreclosed assets. For example, purchases at a foreclosure sale should be authorized. Deeds in lieu of foreclosure should be considered, and evaluation of the loan-to-value ratios is certainly most critical. Lastly, but perhaps most importantly, careful consideration by the Board of Directors as to liquidity and the total amount of foreclosed assets should be determined. A holding period with a maximum amount of time that the credit union may consider holding the foreclosed assets, without further Board authorization, is also an important consideration.
The key is documentation. Important items such as appraisals or broker evaluations, property management, the payment of real property taxes, and insurance are critical to any foreclosed asset policy and procedure.
W-9 AND APPLICATIONS – 2 SIGNATURES OR 1?
Question: We are redesigning our account application. We see some credit unions that require two signatures – one for the credit union application, and a separate signature for the substitute W-9. Other credit unions require one signature. Which is correct?
Answer: Either method is permissible. The IRS allows credit unions to incorporate a substitute W-9 within their membership application. A W-9 is an IRS form used to request the taxpayer identification number of a U.S. person, including a resident alien. The form also asks for certain certifications and claims for exemptions. Credit unions that incorporate a substitute W-9 into their application must clearly state certain things. The IRS has indicated that substitute W-9s that require a separate signature line for the certifications satisfy the requirement that the required disclosures be clearly stated. If your credit union decides to use a single signature line for the required certifications and other provisions, the certifications must be highlighted, boxed, printed in bold face type, or presented in some other manner that causes the language to stand out from all other information contained on the substitute form. In addition, the IRS requires the following statement to appear immediately above the single signature line: The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding.
Etc., Etc., Etc.
- Sometimes patience is a virtue. Dealing with the U. S. Patent and Trademark Office is often a challenge. Kaufman & Canoles continues to be successful in achieving federal trademark registrations on credit unions names, logos and taglines. Recent successes include taglines for ABNB Federal Credit Union with Better Than a Bank; Virginia Beach Schools Federal Credit Union with THE SMART FINANCIAL CHOICE.; and acceptance for registration of Entrust Federal Credit Unions 2LIVE2GIVE tagline.
- Kaufman & Canoles has recently revamped its website and its tagline. We are a firm that judges its own success by the success of its clients. We can and we will. Please check out the new website and let us know your thoughts.
- On behalf of the Maryland and DC Credit Union Association, Andy Keeney conducted a day-long program entitled, Lets Make a Deal: Managing Your Real Estate Portfolio. For a copy of the PowerPoint presentation and other related handouts, please send an email to firstname.lastname@example.org.
- Foreclosures?? If you are looking for a summary of the foreclosure laws or procedures state-by-state for all 50 states, look no further. The American College of Mortgage Attorneys publishes a National Mortgage Law Summary for $75 per book. Write to the American College of Mortgage Attorneys, 9707 Key West Avenue, Suite 100, Rockville, MD 20850 or email them at email@example.com and mention Andy Keeneys name to achieve the $75 price.
- A Kaufman & Canoles client, membersTrust Credit Union in Hampton Roads identified the need for a new headquarters location. After identifying a site, negotiating a contract, having the property rezoned and thereafter entering into a development agreement, membersTrust Credit Union was able to achieve a total buildout cost which was approximately 1/3 less than other competitive pricing. Please feel free to contact Michael Guida, the President/CEO of membersTrust, at firstname.lastname@example.org for more details.
- Andy Keeney was recently honored to be re-elected to the Board of Regents for the American College of Mortgage Attorneys. This nationally-recognized association consists of approximately 400 attorneys that, after being critiqued and nominated, are selectively elected to the College.
- NAFCU offers a compliance blog which many view as a helping hand for credit union compliance officers. Previously, the blog has mentioned Kaufman & Canoles and provided a link to Kaufman & Canoles website. You can view the blog at www.nafcucomplianceblog.typepad.com.
- ABNB Federal Credit Union, a Kaufman & Canoles client, found another way to build a branch at considerable savings. They acquired and then renovated a former Wachovia full-service branch building. With the consolidation in the banking industry and the closing of many branches, this is a concept that many credit unions should consider. For more information, please contact Carl Ratcliff, the President/CEO of ABNB, at email@example.com.
- The other ABA (the American Bar Association) has a committee on Credit Unions. Andy Keeney was recently named the co-chair to the supervisory subcommittee which serves the full committee. The supervisory committee addresses such items as governance and many Board of Directors related issues.
- As a proud parent of a very successful daughter, Andy Keeney would like to share that his daughter, Pamela Keeney Lina, recently authored an Intellectual Property Advisory dealing with Social Networking: Balancing Intellectual Property Concerns with Your Business Model. Please click here to review this most interesting commentary on the impact of Twitter, YouTube, Facebook and LinkedIn.
INVESTMENT ADVICE SERVICES BY CREDIT UNIONS
NCUA was recently asked if a federal credit union can offer investment advice services. Clearly, a federal credit union employee cannot provide investment advice. Investment advice would subject the employee or federal credit union to federal or state securities laws. However, a federal credit union can establish a shared employee arrangement with a third-party registered investment advisor (RIA) so that a federal credit union employee can act as an employee of the third-party RIA.
NCUA stated that firms and individuals offering advisory account services must be registered as RIAs. The question before NCUA was: since banks are exempt from the registration requirements, are federal credit unions also exempt? The answer, a resounding NO!
NCUA noted that, under the Investment Advisors Act of 1940, banks were specifically excluded from the definition of an investment advisor. Federal credit unions are not excluded. They further noted that there is no authority under the Federal Credit Union Act for federal credit unions to act as RIAs or to provide investment advice.
If a credit union wishes to offer the option of investment advisor services to its members, it can do so in one of three ways. The first is through a shared employee with a broker, dealer, or RIA. In such a situation or arrangement, the credit union employee is acting in a dual capacity as an employee of the credit union and also an employee of the third-party investment advisor. A shared employee may provide investment advice when doing so exclusively on behalf of and under the control of the third-party RIA, but not in the employees capacity as a credit union employee. The program must be abundantly clear and structured as such so that it is without doubt as to when a shared employee is acting on behalf of and under the control of the third party and not as a federal credit union employee.
The second means of offering investment advisor services is for the federal credit union to act as a finder. As a finder, a federal credit union may introduce or otherwise bring together an outside vendor of investment advisor services to its members so that the two parties may separately and independently negotiate a transaction.
Finally, a federal credit union may, wholly or partly, own a CUSO that provides investment advisor services. A CUSO, however, must register as an RIA. Clearly, this is a complex area of financial services and credit unions are encouraged to consult with legal counsel.
A copy of this NCUA opinion can be downloaded by clicking here.
As noted and addressed in another article in this newsletter, loan modifications are becoming the norm rather than exception to the rule. In recognition of this fact, NCUA has recently issued a regulatory alert to all federally insured credit unions. In the alert NCUA reminded boards that, in the current economic environment, many homeowners are encountering significant difficulty in making their mortgage payments. This difficulty has led to an increasing amount of fraud in the form of loan modification/foreclosure rescue schemes. Credit unions were reminded to report suspected scams on suspicious activity reports (SARs). Sometimes credit union members are the victims of a scam and the credit union is adversely impacted because the loan goes delinquent. NCUA reminded credit unions of the requirement to implement appropriate risk-based policies, procedures and processes to aid in the identification of potentially suspicious transactions. Credit unions were encouraged to undertake the appropriate member due diligence.
Normally, a SAR is not considered the proper vehicle by credit unions to report such scams. However, NCUA and FinCEN request that all SARs include information available for each party suspected in engaging in the fraudulent activity. This information should include the individual or company name, address, phone number, and any other identifying information. In the event the homeowner is the victim of the scam, the homeowner should not be listed as the suspect unless there is reason to believe the homeowner knowingly participated in the fraudulent activity.
A copy of the NCUA regulatory alert can be downloaded by clicking here.
In todays troubled economy, most credit unions find that monthly, weekly, or even daily, a member seeks to modify a loan. Initially, requests were for real estate loans, but most recently modifications have been for all types of loans. Decisions regarding loan modifications are difficult at best. Loan modifications require careful thinking by a credit union and documentation can be challenging.
In Spring of 2009, Andy Keeney of Kaufman & Canoles was the keynote speaker at a training session for the Maryland and DC Credit Union Association. The all-day program addressed loan modifications.
Recently the Michigan League sought guidance from NCUA on whether federal credit unions can offer shared appreciation loan modifications. Shared appreciation loan modification programs are viewed as a tool for credit unions to help reduce home foreclosure rates. The loan modification agreement, among other things, would state that in exchange for a reduction of the principal balance of the troubled borrowers outstanding residential mortgage loan, the borrower would agree to share with the federal credit union any future increase in the homes appreciation. Shared appreciation would be based on a predetermined calculation and occur upon the sale of the property at some future date.
NCUA has consistently encouraged credit unions to work with members who could benefit from various loan modification agreements. They believe that prudent workout arrangements can be in the best interests of all parties involved. NCUA encouraged credit unions to consider reasonable loan modifications, whenever it is safe and sound, to help keep members in their homes. NCUA has concluded that it is legal and permissible for a federal credit union to offer a shared appreciation loan modification program.
Those credit unions that offer loan modifications should consult legal counsel. They should also consult a competent tax advisor to determine if loan modifications can raise tax issues for its members. The Treasury Department has drafted some uniform home affordable modification agreements, but they do not include any provisions for shared appreciation arrangements.
Lastly, NCUA recently stated that credit unions must report any loan modifications on their NCUA 5300 Report. A copy of this NCUA opinion letter can be downloaded by clicking here.
EEOC CHARGES REACH RECORD HIGH
The Equal Employment Opportunity Commission (EEOC) is the principal federal agency responsible for investigating employee charges of discrimination. The final statistics for charges handled by the EEOC during its fiscal year 2008 revealed that the total number of charges increased by 15% to a record-high of 95,402 private sector discrimination charges. While there was an increase in every major category of bias, the largest annual increases were for age bias charges and retaliation charges. Charges based on race, sex, and retaliation remained the most frequently alleged violations.
According to the EEOC, the surge in charges may be due to multiple factors, including: the economic downturn; increased diversity and demographic changes in the U.S. workforce; and employees greater awareness of federal anti-discrimination laws. The increased number of charges, combined with somewhat limited resources to investigate charges, has also led to a dramatic increase in the backlog experienced by almost every EEOC office. This may increase frustration for both employers and employees as they may be required to wait two years or more for cases to be investigated.
As the number of charges increases, employers can expect the EEOC to continue to urge parties to resolve cases via the EEOC Mediation Program. As confirmed by the EEOCs current Chairman, Stuart Ishimaru, the EEOC will also continue to invest in programs such as its systemic litigation program to maximize its effectiveness. For more information, K&C will present a workshop on defending EEOC charges at its November 5, 2009 showing of the 26th Annual Employment Law Update, to be held at the Chesapeake Conference Center.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2019.