Speak Softly and Carry a Big Lawyer Emerging Legal Risks to Credit Unions

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1 Speak Softly and Carry a Big Lawyer Emerging Legal Risks to Credit Unions Stuart M. Richter Andrew Demko (May 1, 2018)

2 What You will Hear About Today Class Action and Other Litigation Risk Areas Arbitration Clauses and Other Ways to Avoid Claims

3 Litigation Risk Areas-Where are the Darts Coming From? Overdrafts The TCPA Foreclosure Claims Cybersecurity ADA Claims Indirect Auto Lending Auto Repossession Force Placed Auto Insurance

4 Overdrafts and Other Share Account Fees The Claims being Asserted Sufficient Funds: There was enough money in the Account APPSN (Approve Positive Purportedly Settle Negative) Continuing Negative Balance Recurring v. Non-Recurring Fees Overdraft coverage account transfer fees

5 Overdrafts and Other Share Account Fees Consider a hypothetical Transaction. A member has $100 in both her available and ledger balances. She swipes her debit card for $96 at Nordstrom to buy a shirt. When she leaves the store, she swipes her debit card at Starbucks for $6 to buy a latte. She has spent $102. Both transactions post to her account the next day and there are no other deposits or payments. How many fees?

6 AVAILABLE LEDGER/CURRENT $100 $100 Nordstrom ($96) -- $4 $100 Starbucks ($6) -- ($2) $100 Nordstrom Posts $96 ($96) ($96) ($2) $4 Overdraft ($20) ($20) ($22) ($16) Starbucks Posts (6) ($6) ($22) ($22) Overdraft ($20) ($20) Total ($42) ($42)

7 Sufficient Funds Overdrafts Theory: Money is in the account until it is paid. Disclosures don t say available balance is used to assess overdrafts Available balance is not defined Available funds refers to the Funds Availability Policy, not debit card holds Ledger balance is used to report deposits, calculate dividends, etc. In the example, the Nordstrom charge posted and the ledger balance was sufficient to pay the $96 charge. The money had not yet been paid out of the account. Solution Use ledger balance to assess fees? Definitely beef up your disclosures

8 APPSN Overdrafts Theory: When a debit card swipe is authorized, the funds are put on hold or set aside for that transaction The CU took the money away from the available funds Its ok to assess fees on intervening transactions, but the on hold funds must be used to pay the authorized transaction Even if ledger balance is negative, the money on hold is set aside. In the example, the Nordstrom transaction was approved with a positive available balance. Solution Don t charge fees on approve positive transactions Beef up your disclosures and include an example of how this works.

9 Continuing Negative Balance Fees In the example, if the member does not bring the balance positive within a certain number of days, he will be charged a fee. The theory is the fee is really interest and it is usurious Depends on applicable law in California no usury for a licensed entity Solution Legally overdraft fees are not interest Can t be usury because it can be avoided, like a late fee

10 Recurring v. Non-Recurring Charges Merchants like Uber classify payments as recurring or non-recurring Generally, CU will accept that classification for purposes of processing Under Reg E, you can t charge overdraft fees for non-recurring charges without an opt in Under Reg E the CU can rely on merchant s designation This may be a defense under Regulation E, but still a violation of UDAP laws. Solution Evaluate pre-authorized charges Charges from companies like Uber, Netflix, etc. are not recurring

11 Transfer Fees Transfer from Savings in not enough to cover a transaction and member gets charged a transfer fee and overdraft fee In the example, if the member s savings account only had $2 and it was transferred, then the Nordstrom transaction would still post to a negative available balance and the member would be charged an overdraft fee and a transfer fee. Solution Not improper and claims generally preempted Not a good practice; should probably be eliminated

12 The TCPA: Why Businesses Hate Lawyers (And Politicians) The TCPA prohibits any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice (iii) to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call; 47 U.S.C. 227(b)(1)(A)(iii)

13 Liability Under the TCPA (According to Regulations Adopted by the FCC) To avoid liability under the TCPA when calling or texting cell phones, with an ATDS, a lender or servicer must have: Prior Express oral or written consent for non-telemarketing (e.g., collection, activity alerts or other servicing issues) calls or text messages; and Prior Express written consent for calls or text messages made for a marketing or sales purpose. If you are not using an ATDS, the TCPA generally does not apply.

14 The Growth of TCPA litigation TCPA pleading standards are easily met. TCPA is a strict liability statute with no cap on statutory damages $500 per call and $1500 for each call willfully made Most cases define willful as an intent to call, not an intent to violate the TCPA

15 15 The TCPA Litigation Landscape

16 Why is TCPA Litigation Increasing 16

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19 Is the TCPA still a threat after ACA International v. FCC? The DC Circuits Ruling in a nutshell The FCC s definition of an autodialer is vacated The FCC s one call rule for transposed cell phone numbers is vacated The FCC s rule that consent can be revoked by any reasonable means What is an autodialer? The court did not say exactly what constitutes and ATDS But it can t be defined merely as something that has the capacity to dial The Court did not rule on the issue, but went out of its way to question whether a device that could be an autodialer, but is not used as one, can violate the TCPA.

20 Avoiding TCPA Liability: Marketing Don t use the ATDS function for marketing calls Prior express written consent in applications and member agreements Consent can be electronic, but must say calls will be for marketing purposes and will be made by using an ATDS If you are buying leads, ensure third-party compliance Get an indemnity and deal with vendors who can show consent and can back up the indemnity Don t Mix marketing messages with alerts Always scrub for cell phone numbers Some services will identify changed numbers Unless you are sure about the consent, the first call to a cell phone is always a manual dial

21 Avoiding TCPA Liability: Collections Express consent must be for the transaction subject to collection Scrub for cell phones and changed numbers Work with areputable collection firm Get an indemnity that will hold up They should contractually agree to full TCPA and collection compliance Manually dial cell numbers to ensure right party calls Set up processes to record consent and revoked consent

22 ADA Claims ATM Machines not Accessible to the Vision Impaired Federal claims under the ADA allow injunctive relief only Some states, like California, provide for damages To avoid claims, set up regular maintenance and monitoring Websites not accessible to the Vision and Hearing Impaired The DOJ has taken the position that websites, whether connected to physical places of business or not, are public accommodations subject to the ADA. Several Courts have found liability even though DOJ has no implemented rules Hundreds of demands sent and individual and class cases filed across the country To avoid liability, websites must be compliant with The World Wide Web Consortium s Web Contact Accessibility Guidelines.

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25 Rees-Levering and Auto Repossession Claims These cases continue to be filed across the country The theory is that the lender charges in excess of amounts specified in the notice. Remedy may be forfeiture of deficiency. To avoid liability make sure your forms are up to date Don t charge fees, just state delinquent loan amounts in the Notice

26 Force Placed Auto Insurance Two theories: Adding premiums to loan balance is a TILA violation Rebates by third-party insurance service company are kickbacks Not much traction for the TILA theory, but you should avoid Insurance Services rebates

27 Indirect Auto Lending-A Potential Minefield? Not really, but there are some issues to consider: 1. Buying loans to non-members Compliance with regulations in terms of who can be a member If membership fee is advanced, don t add it to loan balance 2. Disclosing the Buy Rate. Some Plaintiffs are attempting to allege credit unions have a duty to disclose buy rate to members. NCUA regulations provide that CUs owe fiduciary duties to all members

28 Cybersecurity Requirements and Best Practices Cybersecurity Threat landscape for credit unions Existing vulnerabilities continue to be exploited New technology creates new risks Ensure risk assessment with every technology upgrade Social networking is enabling more targeted attacks Malware continues to evolve and ransomware is exponentially on the rise

29 Arbitration: The Regulatory Environment May 3, 2016 CFPB Proposed Rule: Class action waivers are barred in pre-dispute arbitration clauses. Many consumer financial products like credit cards and bank accounts have contract gotchas that generally prevent consumers from joining together to sue their bank or financial company for wrongdoing. These widely used clauses leave consumers with no choice but to seek relief on their own usually over small amounts. With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB s proposal is designed to protect consumers right to pursue justice and relief, and deter companies from violating the law. The rule was implemented after the change in administration and the House and Senate voted to reject it.

30 Should Your CU have an Arbitration Agreement? Many Credit Unions have historically been averse to implementing arbitration clauses But as membership and business operations expand, Credit Unions have become targets in class actions A class action waiver will protect you and your membership from the burden and expense of meritless class action claims The clause can be crafted so that it is very member friendly Members should be given the opportunity to opt out and maintain all other benefits of membership. In California, the class waiver cannot prohibit public injunctive relief. McGill v. CitiBank, California Supreme Court Case No. S (April 6, 2017) When can you use an arbitration provision? An arbitration clause can and should be included in your membership agreement, any non-mortgage loan agreements and other services contracts Generally not permitted in residential mortgage contracts Make sure any automobile Retail Installment Sales Contracts you purchase have an arbitration clause

31 Questions? Stuart M. Richter Andrew Demko