Many banks and credit unions may not be aware of a notable "Advisory" issued in March 2016 by the CFPB and available on its website. The Advisory identifies best practices in dealing with exploitation of elderly and disabled customers by con artists. This is a fast-growing area of banking law that has generated numerous statutes across the country in recent years. In the introduction to its Advisory, the CFPB describes elder and disabled financial exploitation as "the crime of the 21st century." Only a small fraction of the incidents are reported. Older people are attractive targets for con artists because they often have assets and a regular source of income. These consumers may be especially vulnerable due to isolation, cognitive decline, physical disability, health problems, and/or bereavement….Banks and credit unions are uniquely positioned to detect that an elder accountholder has been targeted or victimized, and to take action.
Deposit account takeover litigation continues apace. In a recent federal decision from New York, the court refused to dismiss a claim brought by a Wells Fargo customer (Banco del Austro) whose deposit account had been hacked by unauthorized SWIFT wire transfers. Even though the court did dismiss the plaintiff's breach of contract and common-law negligence claims, it ruled that the plaintiff's fact-intensive claim under Article 4A of the New York UCC precluded Wells Fargo's motion to dismiss.
In our prior story, we analyzed a recent Ohio case that imposed severe enforcement risks on the transferee of a lost mortgage note. These risks were based on the rules found in Ohio's version of UCC 3-309. Another variation on this theme is risk-allocation in connection with lost remittance instruments, particularly cashier's checks. These issues are primarily resolved by UCC 3-312, which establishes a set of guidelines to cover cases when the lost instrument is a bank obligation, including cashier's checks, certified checks, teller's checks, bank drafts, or bank money orders.
The federal bank fraud statute makes it a crime for someone to:
In a recent case from Ohio, the court ruled that the assignee of a home mortgage (U.S. Bank) was not entitled to enforce the mortgage through a foreclosure action because there was no evidence that the mortgage assignee was in possession of the mortgage note, or was entitled to enforce it in spite of the lack of possession, as allowed by Ohio's version of UCC 3-309. Since enforceability of the mortgage was dependent upon enforceability of the note, the bank was not entitled to foreclose. The case would have come out differently had Ohio enacted the 2002 amendments to the UCC, which give greater protection to non-holders who seek to enforce lost promissory notes. In any case, we think the Ohio decision is problematic.
This term, the United States Supreme Court takes up the issue of whether a “debt collector” who files a proof of claim based on a debt that may no longer be enforced because of applicable statutes of limitation violates the Fair Debt Collection Practices Act (“FDCPA”).
Mai Thi Thu Tran was a newly arrived immigrant from Vietnam. She relied on a translator for English language communications. In April 2012, she established an account with Citibank, N.A., depositing $200,000.00. During this process, she was provided with the terms and conditions governing the account through the bank’s Client Manual, in English. She was not offered a translator.
On September 6, 2016, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued Advisory FIN-2016-A003 to financial institutions, which concerns e-mail compromise fraud schemes. FinCEN intended for the Advisory “to help financial institutions guard against a growing number of e-mail fraud schemes in which criminals misappropriate funds by deceiving financial institutions and their customers into conducting wire transfers.”
In a recent decision, the Seventh Circuit has ruled that the loss caused by a counterfeit check deposited by a naïve attorney into his firm's trust account must be shouldered by the purported drawer's bank. Once the check was paid by that bank, the attorney wired most of the proceeds to the Japanese fraudster, never to be seen again. The payor bank tried like the devil to move the loss upstream to the bank of first deposit and the Federal Reserve collecting bank, based on breach of warranty, but to no avail. First American Bank v. Federal Reserve Bank of Atlanta, Citizens Bank, N.A. and David M. Goodson, 2016 U.S. App. LEXIS 20934 (7th Cir. 11/22/16).
Sometimes UCC rules conflict with other state statutes and the courts need to determine which statute controls. In a recent decision, the West Virginia Supreme Court has ruled that the state's Wage Payment Collection Act (WPCA) preempted the UCC rule that allows standby letters of credit to be designated and enforced as "perpetual." In reaching its decision, the court employed standard tenets of statutory construction. We agree with the decision.
Since 2004, October of every year has been observed as National Cyber Security Awareness Month. This year regulators seem to have geared up for the occasion with a spate of new guidance and regulatory proposals starting in September and continuing through October. For example, in September, the Federal Financial Institutions Examination Council (“FFIEC”) issued an update to the Information Security booklet of its Information Technology Examination Handbook (“IT Handbook”).
On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued its highly anticipated opinion in PHH Corp., et al. v. CFPB, 2016 U.S. App. LEXIS 81332 (Case No. 1577, D.C. Cir. 10/11/16), holding that the Consumer Financial Protection Bureau’s (CFPB) structure is unconstitutional. But, surprisingly, that may not be the most significant holding in the opinion because the court also held that the CFPB’s administrative enforcement actions are subject to applicable statutes of limitations, which could significantly limit the agency's authority and companies’ potential exposure to fines and penalties for alleged offenses.
After two years of study, on October 5 the CFPB came down with its much-anticipated final rule on prepaid products. The rule, together with its accompanying materials, comes in a fat package of 1,689 pages. The new rule becomes effective October 1, 2017. Predictably, industry representatives think it goes too far, particularly the way it transplants credit card rules to prepaid products with overdraft features. By contrast, consumer advocates don't think overdrafts should be allowed at all on prepaid products. In order to digest the compliance challenges of the new rule, let us offer a checklist of issues:
If a debtor has granted a consensual security interest in the funds in its deposit account to a secured lender, does the lender have priority over the claims of a judgment creditor who later levies against the deposit account? In a recent decision from California, the court gives priority to the judgment creditor under the rules of Article 9. The decision is both thoughtful and exhaustive in resolving the priority issue based on the language and policies behind UCC 9-332(b). Yet there's a good argument on the other side.
On September 29, the U.S. Supreme Court granted review in Expressions Hair Design v. Schneiderman (Case No. 15-1391), a case out of the Second Circuit testing whether New York’s anti-credit-card surcharge statute runs afoul of the First Amendment’s free speech protections. The Second Circuit is one of three circuit courts to have recently considered the constitutional validity of anti-surcharge laws. The Second Circuit and the Fifth Circuit (analyzing a Texas statute) both determined that the laws before them regulated conduct rather than speech and were readily understandable, not unconstitutionally vague. In contrast, the Eleventh Circuit held that Florida’s anti-surcharge law “directly targets speech to indirectly affect commercial behavior.”
In a notable and well-reasoned decision, a New York court has ruled that the funds in a wire transfer, frozen for 14 years at a New York intermediary bank pursuant to a Presidential executive order, were properly returned to the originator's bank (and the originator) once the freeze was lifted, as though the wire had never occurred. The court rejected the argument of the intended beneficiary that the intermediary bank had an obligation to complete the wire as intended once the funds were unfrozen by the government. The court concluded that the intermediary bank had no obligation, enforceable by the intended beneficiary, to complete the wire transfer by issuing a payment order to the beneficiary's bank to pay the beneficiary. The funds at issue needed to be sent backward, not forward. In reaching this conclusion, the New York court wrestled with a number of interrelated rules under Article 4A of the UCC.
At the end of last year, the Comptroller of the Currency issued a revised “Credit Card Lending” booklet for the Comptroller’s Handbook, replacing a 1996 booklet of the same name. The OCC, part of the U.S. Department of the Treasury, is the prudential regulator for all national banks, federal savings associations, and federal branches of agencies of foreign banks. Part of the OCC’s role involves supervising these institutions to ensure their “safety and soundness.” Thus, as with other booklets, the Credit Card Lending booklet “is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations.”
“Remote deposit capture” is the convenient, innovative process of depositing a check to a deposit account through the digital transmission of an image of a check and other related transaction information to a depository bank by its accountholder. By digitally transmitting this image and information, the accountholder is not required to tender a paper check to a retail banking location or an ATM to facilitate deposit of the check.
Accounts receivable have been called "precarious collateral" because the assignee is subject to all terms of the underlying contract, and the account debtor has a right to refuse payment to the assignor if it has claims or defenses that it may assert. This baseline rule is codified in UCC 9-404. The rule reflects the fact that, in the absence of a waiver, the secured party as assignee of a receivable simply steps into the shoes of the assignor. Receivables are not negotiable instruments, where a holder in due course takes free of claims and defenses. A secured lender learned this lesson the hard way in a recent decision from New York.