Credit Union Legal Update – Summer 2007

    By , Credit Union

    Bankruptcy Filings Down – But Watch Out! Select Lawsuits May be on the Horizon

    Several debtor’s rights attorneys have recently sued scores of credit unions and credit providers for discrepancies in credit reports. Kaufman & Canoles successfully defended a major federal credit union in federal bankruptcy litigation. A former member sought damages for discrepancies in his credit report. (In re Jones, 2007 WL 1160420 (Bkrtcy. E.D. Va. 2007)). The Court denied the debtor’s motion to reopen the bankruptcy case and impose sanctions, even though – as the Court noted in its opinion – such motions are ‘almost routinely granted.’

    Under the Federal Fair Credit Reporting Act (‘FCRA’), a credit provider generally cannot be held liable for damages unless it has received notice that there is a reporting problem. Across the country bankruptcy attorneys are attempting to short-circuit this notice requirement. By examining credit reports for individuals who have previously been discharged from bankruptcy, these attorneys are able to find potential plaintiffs from their Rolodex of previous clients. If they find any discrepancies in credit reporting, rather than notify the credit union, a lawsuit is filed against the credit union. They assert that the credit reporting discrepancy is an unlawful (and intentional) attempt to collect a debt. Because it is alleged that the credit union has intentionally violated the bankruptcy court’s discharge order, substantial sanctions in the form of money damages are possible. In many of these cases the first notice a credit union receives regarding the alleged improper credit reporting is service of the lawsuit.

    Although the Kaufman & Canoles case is a significant victory and can be cited as precedent, potential liability for discrepancies in credit reporting in the post-bankruptcy context continues to be a serious concern for credit unions. A credit union may have no notice of a credit reporting discrepancy until suit is filed. Once suit is filed, there is normally very little time before the matter comes before a federal bankruptcy judge for consideration.

    Dividend Rewards Programs

    NCUA recently responded to questions regarding specific rewards programs that could be offered by a federal credit union. Could members reap financial rewards based on their use of certain products or services? In the specific situation presented to NCUA, if a member met certain minimum monthly automated transaction requirements the federal credit union wanted to offer financial rewards. Was this permissible? NCUA answered in the affirmative.

    Under NCUA’s incidental powers rule a federal credit union may conduct marketing activities, promote membership, and create additional products and services for the members. Interestingly enough, NCUA concluded that a dividend rewards program would be permissible even though it could result in members with the new type of account receiving a different dividend rate when compared with other members of the same type of share account. Additionally, variable rate structures for a similar type of share accounts were found to be permissible as long as the federal credit union’s board of directors has a rational basis for distinguishing between the same types of accounts and determining dividend rates. NCUA cautioned, however, that a federal credit union cannot contract to pay a particular dividend rate. Unlike deposit accounts at banks, shares in a federal credit union earn dividends, not interest. Payment of dividends is contingent on earnings availability and federal credit unions should ensure that their members are aware of this distinction.

    NCUA also cautioned that varying dividend rates could require additional or separate disclosures under the truth-in-savings rule. NCUA encouraged federal credit unions to consult with legal counsel.

    15 Disaster Planning Pointers & Questions

    1. Appoint a disaster recovery committee charged with developing your plan.
    2. Look at each issue from both sides by including board members and staff.
    3. Assign each committee member a duty and be open to new ideas.
    4. Meet at least semiannually to evaluate the plan.
    5. Assess risks for each type of disaster. Do no copy another credit union’s plan.
    6. How many days can the credit union stay closed?
    7. What if employees do no return?
    8. Can you operate without gas or electricity? If so, for how long? Do you have potable water? Will you receive emergency services? What if they are not available?
    9. What is your credit union’s communication plan (employees, volunteers, members)? Who will contact the media?
    10. Do you need a temporary location? Is it equipped with modems, phone lines, and hardware?
    11. What if landlines and call phones do not work? What back-up communication devices do you have?
    12. What are vendors’ disaster plans?
    13. How long can members live on cash if credit processing systems are down?
    14. Will your facility be safe when you reopen?
    15. Are insurance papers secure? Is your disaster plan secure, in a waterproof location, and specific to each branch?

    D.O.L. FairPay Regulations: Are You In Compliance?

    The Department of Labor (‘D.O.L.’) implemented the Federal FairPay Regulations on August 23, 2004, modifying the set of laws that govern the payment of overtime for the ‘white-collar’ exemptions (executives, administrative, and professional employees). Many employers were concerned about what impact these new rules would have on their operations. After all, this was the first attempt to revise the rules governing when employees can be treated as exempt from overtime in decades.

    The most obvious major change under the FairPay rules was increasing the salary that certain white-collar employees must receive to be exempt from overtime. All workers (regardless of title or responsibilities) earning less than $23,660 per year, or $455 per week, are now guaranteed overtime protection. The FairPay rules also created a new overtime exemption — the ‘highly-compensated’ employee exemption — which generally eliminates overtime to white-collar employees who make more than $100,000 per year.

    For other white-collar employees, the FairPay rules created a new single standard test used to determine whether an employee is an exempt executive, administrative, or professional employee.

    Since the FairPay regulations went into effect, employers are also taking advantage of new flexibility they have in certain areas. For example, the FairPay rules allow employers to suspend exempt employees without pay for one or more full days for serious misconduct. This can now be done without jeopardizing the exempt status of employees. This disciplinary-deduction policies need to be in writing, so many employers have modified their disciplinary policies accordingly. Another area that has led to modified policies for employers is the ‘Safe Harbor’ protection afforded to employees from any wrongful deductions. Employers who have such policies now have an enhanced protection against inadvertent violations of the salary basis requirement for various overtime exemptions.

    If you would like more information about the FairPay rules, or help with a wage-hour self-audit, contact Heather A. Mullen at (757) 624-3312.

    Reminder: Do Not Call List Requirements

    A recent bulletin issued by the Office of the Comptroller of the Currency reminds national banks of the Telephone Consumer Protection Act and the related telemarketing compliance requirements. Many know of this law because of its ‘do not call’ opportunities.

    Under the law, credit unions, even if they restrict their telemarketing to members must:

    1. Adopt a written policy for maintaining a do-not-call list;
    2. Provide a copy of the policy to anyone who requests it, even if that person is not a member; and
    3. Train everyone involved in telemarketing about the existence and use of the do-not-call list.

    A copy of the OCC Bulletin No. 2006-37 is available on the OCC’s website.

    Health Insurance for Volunteers

    A federal credit union recently sought guidance from NCUA as to whether or not they could reimburse volunteer officials for premiums associated with health insurance. NCUA acknowledged what is generally known by most. The Federal Credit Union Act generally prohibits directors and committee members from receiving any compensation. Federal credit unions are, however, allowed under the Act to provide ‘reasonable health, accident, and similar insurance protection’ to volunteers.

    NCUA’s regulations implementing this provision of the Act state that the prohibition on compensation does not prohibit insurance protection that might be supplied by credit union officials, at the expense of the credit union. Coverage must cease immediately upon the insured person’s departure from office and there can be no residual benefits other than from pending claims.

    In this credit union’s situation, the specific health insurance to be provided to volunteer officials (or the cost reimbursed for volunteer officials) was ‘disease management insurance.’ Conceptually, disease management programs reduce health care costs by improving the health of those with chronic conditions, such as diabetes, renal failure, or cancer. NCUA concluded that a federal credit union may choose to provide an insurance plan with comprehensive coverage, including disease management insurance. Alternatively, FCUs may reimburse officials for costs related to health insurance instead of providing health insurance directly. However, they can only do so as long as the reimbursements do not amount to compensation.

    Employer-sponsored health plans offering disease management programs are becoming more common place, in turn, providing these plans for volunteer officials has become reasonable.

    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 2022.