Legal Bulletins
Legal Bulletin - Credit Union Edition - January 2017
This Legal Bulletin from Gordon Feinblatt LLC is sent to you to keep you updated on Maryland legal developments affecting credit unions. If you would like more information about the items in this issue, please click on the specified links below.
In this issue:
- ARE YOU HANDLING VENDOR MANAGEMENT CORRECTLY?
- IT'S TIME TO REVIEW YOUR CREDIT COLLECTIONS PRACTICES
- PROTECTING DIRECTORS AND OFFICERS FROM PERSONAL LIABILITY
- OVERDRAFT CLASS ACTIONS BASED ON ACCOUNT AGREEMENT LANGUAGE
- NEED FOR SECURITY INTEREST TO OFFSET CREDIT CARD DEBT
ARE YOU HANDLING VENDOR MANAGEMENT CORRECTLY?
In October of 2016, the Consumer Financial Protection Bureau (CFPB) amended its service provider guidance (previously published in the Federal Register in 2012). The amendments are largely a re-release of CFPB Bulletin 2012-13, but the amended guidance serves as a reminder that vendor management is a significant focus of the CFPB and other supervisory agencies. In addition to what the CFPB views as key vendor management requirements, credit unions should review National Credit Union Administration (NCUA) guidance in this area, including NCUA Supervisory Letter 07-01. A key component of vendor management is to end up with a contractual arrangement that adequately protects the credit union and accurately details the obligations of the vendor. NCUA guidance advises credit unions that "it is prudent to seek qualified external legal counsel to review prospective third party arrangements and contracts." We have helped many clients establish appropriate vendor management programs and we provide many of our clients with contract review/negotiation assistance. Please contact Marjorie Corwin or Christopher Rahl for questions concerning vendor management in general or for assistance with vendor contract review.
IT'S TIME TO REVIEW YOUR CREDIT COLLECTIONS PRACTICES
In October of 2016, the Consumer Financial Protection Bureau (CFPB) faulted a large credit union for allegedly using improper collection practices. The resulting consent order requires the credit union to change its collection practices and pay $28.5 million ($23 million in consumer refunds and a $5.5 million civil money penalty). The CFPB alleged that the credit union: (1) threatened legal action, including wage garnishment, when it seldom took such action; (2) misrepresented the credit consequences of not making loan payments; and (3) improperly froze member account access. Of particular interest is the CFPB's focus on the suspension/termination of online/electronic account access when a member's loan payments became delinquent. It is common for financial institutions to restrict or discontinue access to ancillary services (such as internet banking) for seriously delinquent consumers. In most cases, no funds will be in the related deposit accounts and once a loan reaches the point of charge-off, it makes little sense for a financial institution to continue to provide services/tools for a consumer who is likely not using the services and/or the related accounts. The ability to discontinue access to such ancillary services is typically described in the related service terms/agreement and/or in the financial institution's deposit account or member services agreement. In this case, the CFPB faulted the credit union for: (1) turning off access to online services too soon (almost immediately after a loan became delinquent in many cases); (2) not adequately disclosing the possibility of suspension/termination of services; (3) not providing advance notice that the services would be suspended/terminated; and (4) allowing the electronic deposit of federal benefits but preventing consumer access to the deposited funds. The consent order serves as a good reminder for all financial institutions to review their credit collection practices, including suspension/termination of ancillary services. Please contact Christopher Rahl or Marjorie Corwin if you need assistance reviewing your collection letters or your collection policies and procedures.
PROTECTING DIRECTORS AND OFFICERS FROM PERSONAL LIABILITY
Maryland corporation law, which can apply to federally-chartered credit unions and does apply to Maryland-chartered credit unions, requires corporations to provide certain indemnification for directors and officers. In addition, Maryland law permits a corporation, through its charter, bylaws, or separate agreements, to provide even greater indemnification protections. Maryland law also allows a corporation to exculpate directors and officers from certain claims by the corporation, or derivatively by its stockholders, but only if the corporation's charter or articles of incorporation so provide. There is a specific narrowing of this permitted exculpation for bank and credit union directors and officers when claims are asserted by certain parties, including by receivers or conservators. Careful consideration and drafting is important to achieve director and officer protections that are consistent with the corporation's culture and desired outcomes. Please contact Andy Bulgin or Marjorie Corwin if you would like to discuss how your institution can best protect directors and officers from liability for simply doing their jobs.
OVERDRAFT CLASS ACTIONS BASED ON ACCOUNT AGREEMENT LANGUAGE
Several credit unions in Maryland have been targets of class action lawsuits concerning overdraft practices. A California firm that previously brought claims against several large banks (and obtained significant settlements) shifted its focus to credit unions. At least two out-of-state credit unions subject to these claims have settled for large sums. The class complaints fault the named credit unions for imposing overdraft fees based on "available balance" (actual balance less any pending transactions or anticipated debits) rather than actual balance at the time of item presentment. The complaints are primarily based on breach of contract theories and point to language in credit union disclosures that overdraft fees will be imposed only when there are insufficient funds or when there are not enough funds in an account to cover a transaction. We wrote in our April 2015 Maryland Legal Alert about the importance of maintaining carefully drafted account documentation and these overdraft cases are a reminder that all depository institutions should verify that their actual overdraft practices closely match the language of account disclosures. Please contact Christopher Rahl for more information concerning this topic.
NEED FOR SECURITY INTEREST TO OFFSET CREDIT CARD DEBT
It is always good to remember that the federal Truth in Lending Act (TILA) and its implementing Regulation Z have special rules regarding offset that apply only to credit card accounts. And at least one Maryland court has held against credit unions in connection with credit card offsets. In a 2012 unpublished order deciding issues raised in competing summary judgment motions, the United States District Court for the District of Maryland decided that the defendant credit union's practice of recovering credit card debt from the cardholder's share accounts violated this provision in TILA because the defendant was not enforcing a "consensual security interest" as described in the Official Commentary to Regulation Z. Of note, the Court first needed to decide whether the debtor or the creditor has the burden of proving the existence of a valid consensual security interest. The Court concluded that once the debtor makes a threshold showing that a credit card issuer took funds from a deposit account and used them to satisfy the debtor's consumer credit card debt, then the burden shifts to the creditor – as an affirmative defense – to prove it did not violate the TILA offset prohibition rule. The Court made it clear that the well recognized banker's common law right of offset does not rise to the level of a consensual security interest. (While not addressed by the Court, we note that the federal credit union's statutory lien also does not rise to the level of a consensual security interest.) Relying on the Official Commentary to Regulation Z, the Court concluded that the facts presented by the credit union defendant – language included in an unsigned loan application and in two different sets of standard credit card disclosures – were not sufficient to establish a consensual security interest. We recommend that all credit card issuing depositories in Maryland carefully review their credit card documents to ensure a consensual security interest in deposit accounts is created. Please contact Christopher Rahl or Marjorie Corwin if you would like to discuss this subject further.