Filed under: directors, NCUA, The WWR Letter | Tags: directors, fiduciary duties, matthew young, NCUA, officers, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: Matt Young, Associate
Whether an individual serves on a board of directors for a community theater group, homeowner’s association or other not-for-profit organization such as a credit union, the law in every state imposes fiduciary duties upon these board of directors in the same manner it imposes these duties on the chairman of a Fortune 500 company. Fiduciary duties more broadly refer to two duties: the duty of care and the duty of loyalty. The duty of care standard requires that directors undertake their role diligently, staying informed on the organization’s purposes, goals and activities as well as regularly attending meetings in the same manner as an “ordinarily prudent person.” The duty of loyalty requires that a director avoid conflicts of interest as well as using the officer’s position to further his/her personal interests above those of the organization.
The National Credit Union Administration (“NCUA”) has adopted a proposed rule to clarify these fiduciary duties and provide a uniform fiduciary standard for federal credit union directors. As part of this rule, directors will be required to have or obtain a basic understanding of finance and accounting principles. Moreover, under this proposal, federal credit unions would not be permitted to indemnify its directors for grossly negligent, reckless, or willful misconduct that affect the basic rights of its members. In response to the proposed additions, the Credit Union National Association (“CUNA”) called the prohibition on director indemnification unnecessary and expressed concern that such a prohibition could make it difficult for credit unions to find qualified volunteers to serve on the board. CUNA, however, supported the requirement that all board members have a basic understanding of the finances and balance sheet of the credit unions
they serve.
Despite concerns with these changes, the proposal only reinforces common law requirements that have been codified by a majority of states and offers greater clarity as to directors’ responsibilities. For example, as part of the duty of care as a member of a credit union board of directors, you must be diligent in reviewing the credit union’s affairs. As a financial institution, having a basic understanding of finance and balance sheets is a prerequisite to making sound decisions on behalf of a credit union. After all, an ordinarily prudent person would gain this basic understanding!
This requirement does not require directors to be experts. Similar to most state laws under the proposed rule, directors may rely on attorneys, accountants, financial advisors and other consultants, reasonably believed to be reliable, in analyzing and making decisions in certain matters. The prohibition of indemnification under the proposed rule does not change the landscape of serving as a member of a credit union board of directors. Importantly, this prohibition is limited to grossly negligent, reckless or willful conduct. As it stands in most states,
indemnification for such acts may be limited anyway. Grossly negligent, reckless and willful acts involves egregious actions such as terminating deposit insurance coverage or engaging in acts of self dealing. In these scenarios, the credit union would not be indemnifying its Board and typically, the credit union’s bond coverage for director and officer liability would contain exclusions for such activities. Accordingly, the NCUA’s proposed rules concerning fiduciary responsibility clarifies rather than changes or adds requirements relating to a director’s duties and responsibilities. Credit union directors should view the NCUA’s proposal as a tool to further understand their existing obligation under state law
Matthew Young is an Associate in Consumer Collections; Corporate & Financial Services and Credit Union Groups and is based in the Brooklyn Heights office. Matt can be reached at (216) 739-5726 or myoung@weltman.com.
Filed under: giftcards, The WWR Letter | Tags: gift cards, matthew burg, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: Matthew G. Burg, Associate
Gift cards are popular gift items because they take some of the guesswork out of selecting the perfect gift. According to one survey, over 95% of Americans have received or purchased a gift card.* Despite the relative ease gift cards provide to a recipient, in the past, they have had some pitfalls. When gift cards were not immediately used (or, not used at all, which included approximately 10% of all gift cards purchased in 2007**) recipients were exposed to hidden fees and short expiration dates.
In response to consumers who were upset that gift cards could unexpectedly lose value or expire, the Federal Reserve Board intervened and recently announced the final rules on gift cards, which went into effect on August 22, 2010.
The final rule on gift cards amends Regulation E to implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“Credit CARD Act”). The final rule applies to gift certificates, store gift cards, and general-use prepaid cards. Specifically, those gift card products covered include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand. The final rule does not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award or promotional program. Also, the scope of the final rule is generally limited to gift card products sold or issued to consumers primarily for personal, family, or household purposes, and not those where the end use is for business purposes. Finally, the rules may not protect consumers if an issuer files for bankruptcy protection or goes out of business.
So what do the final rules cover? Two main issues have been addressed:
1: Restrictions on dormancy, inactivity, or service fees. The final rule restricts dormancy, inactivity, or service fees with respect to a gift certificate, store gift card, or general-use prepaid card.
> Dormancy, inactivity, and service fees may only be assessed for a certificate or card if:
- There has been at least one year of inactivity on the certificate or card;
- No more than one such fee is charged per month; and
- The consumer is given clear and conspicuous disclosures about the fees.
> Fees subject to the restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees, ATM fees, and point-of-sale fees.
2: Restrictions on expiration dates. The final rule prohibits the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date a certificate or card is issued or the date funds are last loaded.
> The expiration date restrictions apply to a consumer’s funds, and not to the certificate or card itself. The final rule also includes provisions intended to give consumers a reasonable opportunity to purchase a certificate or card with at least five years before the certificate or card expiration date.
> The final rule prohibits any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.
The final rule should sustain the popularity of gift cards because recipients are now better protected from gift card pitfalls.
Matthew G. Burg is an Associate in Litigation & Defense; Consumer Finance Litigation, Real Estate Default and Federal Court Litigation Groups and is based in the Cleveland office. Matthew can be reached at (216) 685-1111 or mburg@weltman.com.
* Comdata, 2007 Adult Gift Card Study
** www.creditcardchaser.com
Filed under: probate, The WWR Letter | Tags: julie dibaggio, Ohio, probate, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: Julie A. DiBaggio, Associate
Generally, a creditor’s claim against a deceased debtor is not extinguished upon death but the procedure in attempting to collect the debt through the courts is different from a traditional collection matter. Prior to the death of a debtor, a creditor can file a lawsuit if warranted and personally name the debtor in order to obtain a judgment and subsequently file a judgment lien. However, when a debtor passes away, a creditor cannot simply file a lawsuit against the deceased debtor to obtain a judgment. In order for a creditor to protect its rights to collect a debt from a decedent, a claim must be presented into the decedent’s estate according to the particular state probate laws that govern presentment of a claim. In some cases, the creditor must apply to administer an estate in order to present its own claim.
Each state has adopted its own probate laws and each county court within a state has unique rules that outline the requirements for presenting a claim into an estate. The individual state and local court requirements in presenting a claim will vary on the time allowed to file a claim, the procedure or form used to file the claim, and the actions a creditor may take when a claim is rejected or disallowed by the estate’s representative. Thus, a creditor needs to be aware of the particular state laws and local court rules, which has jurisdiction over the deceased debtor’s estate, to ensure they are not barred from collecting a debt simply for failing to comply with
the procedural requirements.
A creditor needs to be particularly aware of the imposed statute of limitations to file a claim under each state’s presentment statutes. In Ohio, for example, a claim of a general creditor against an estate must be presented within six (6) months from a decedent’s date of death whether or not the assets of an estate are released from administration or if an executor or administrator is appointed during the six-month period. O.R.C. 2117.06 (B). This means that the time for a creditor to present a claim in Ohio starts to run from the date of death, not from when an estate is
actually opened, and that the time period expires after six months has passed.
In theory, the imposed time periods are to simplify the estate process and to facilitate a speedy administration, which should include satisfying a decedent’s debts and liabilities. Yet, the recent trend in Ohio is for a decedent’s family members to use the statute to their benefit by waiting to open an estate until after the six-month time frame has lapsed in order to time-bar all creditors’ claims that would be presented once the estate is actually opened. The question then becomes how can a creditor protect its rights in collecting against a deceased debtor if no estate is opened within the allowed time frame?
One option is to send a demand letter and/or invoice statement in the name of the decedent to his or her last known address, and to anyone appointed as the individual’s caregiver, guardian, or power of attorney, if known.* The reason for sending a demand letter is an exception exists under the presentment statute that will deem a creditor’s claim timely filed if the person who is eventually appointed the executor or administrator is actually in receipt of a written notice of the claim within the sixth months from date of death. O.R.C. 2117.06 (A)(c). The challenge for a creditor is proving that the appointed representative was in receipt of the written notice within the required time period. This becomes a factual issue and the estate’s representative typically will reject the claim on this basis, which in turn will require the creditor to file a lawsuit against the estate to litigate the issue. Upon receiving a rejection of the claim, a creditor faces another imposed statute of limitations in Ohio, which requires a lawsuit on a rejected claim to be filed against the estate within two (2) months from the date the rejection is received. O.R.C. 2117.12.
A second option for a creditor if no estate is timely opened is to apply to administer the estate, as a creditor, within the six-month time period. Primarily, the Probate Courts in Ohio will accept an Application for Authority to Administer along with a creditor’s claim being filed simultaneously in order for the claim to be timely filed. The objective in forcing open the estate is to put the known heirs and/or family members on notice that an estate application has been filed to liquidate the decedent’s assets to pay his or her debts. Ideally, the intent is for the heirs to respond by taking over the estate administration but the creditor is still protected because the claim was timely filed. However, the risk is that no one takes over the estate and the creditor’s representative is appointed as the administrator over the estate.
In summary, a creditor can collect a debt against a deceased debtor in Ohio by filing a claim into the debtor’s estate but the manner in which a creditor protects its interest is governed by the individual state laws on presentment of a claim and the local court rules. In certain circumstances, an estate is not timely opened and in order to protect its rights, a creditor must decide to apply to be appointed the administrator to file its own claim within the required filing deadline. The creditor should be aware that its representative could be appointed as administrator over the estate if no one comes forward on behalf of the decedent. Before proceeding down the path of applying to administer an estate, a creditor should evaluate if it is cost-effective to administer an estate given the amount of assets, if any, that are available to satisfy the outstanding debt.
Julie A. DiBaggio is an Associate in Commercial Collections; Special Collections Group and Consumer Collections; Probate Group. She is based in the Cleveland office. Julie can be reached at (216) 685-1033 or jdibaggio@weltman.com.
* Ohio Courts have held that “no strict form requirements are imposed for the presentment of claims to an executor.” H & R Accounts, Inc. v. Steel, 2006-Ohio-2331, citing Children’s Med. Ctr. v. Ward (1993), 87 Ohio App.3d 504, 622 N.E.2d 692. Claim can be letter or document (writing) and must contain the name of the decedent, creditor’s name and address, nature of the debt, and the amount owed to constitute “sufficient compliance” with the Ohio Revised Code. H & R Accounts, Inc. at ¶ 27.
Filed under: credit unions, Reg-Flex, The WWR Letter | Tags: hannah singerman, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: Hannah F.G. Singerman, Associate
Despites the efforts of CUNA, NAFCU, and many individual credit unions, the National Credit Union Administration (“NCUA”) is well on its way to making changes that will impose new restrictions on members and change Regulatory Flexibility (“Reg-Flex”). The proposed Reg-Flex changes impact the percentage Reg-Flex credit unions may invest in fixed assets, the member business loan (“MBL”) rule, stress testing of investments and discretionary control of investments.
Reg-Flex originated in 2002 when NCUA decided to grant certain federal credit unions that had
demonstrated sustained superior performance some specific exemptions from regulatory restrictions in 10 different areas (charitable contributions, nonmember depositions, fixed assets, MBLs, discretionary control of investments, stress testing of investments, zero-coupon securities, borrowing repurchase transactions; commercial mortgage related securities, and purchase of obligations from a federally insured credit union).
Initially, to qualify for Reg-Flex, a credit union needed a CAMEL (capital adequacy, asset quality, management, earnings and asset/liability management) rating of 1 or 2 for two preceding examinations and a net worth ration of 9% or more above the minimum regulatory standard for being “well-capitalized.” NCUA changed the 9% number to 7% for six consecutive quarters in 2006, allowing for more federal credit union eligibility under Reg-Flex.
The proposed changes, as noted above, will place four additional burdens on all credit unions that used to be exempt under Reg-Flex. If the changes happen, even Reg-Flex credit unions will be required to de-invest some of their shared and retained earnings in some fixed assets. The new regulations may require all credit unions to limit their fixed asset investments to 5%. All credit unions should be aware of their percentage investment ahead of time and plan for potential changes in the future.
Another important change involves MBLs. The proposed changes would require Reg-Flex credit unions to obtain personal liability and guarantees from all of the borrower’s principals when making a member business loan. If this change comes to pass, credit unions previously exempt by Reg-Flex should find a way to alert their members of this change and create forms to implement the change ahead of time so that the transition is smooth and members are not unpleasantly surprised. Credit unions need to assure their members that taking on an MBL through the credit union is still advantageous despite this regulation, so as to not lose the competitive advantage that Reg-Flex formerly afforded.
A potentially costly change to Reg-Flex is stress testing. The proposed changes will now require Reg-Flex credit unions to prepare a monthly written report setting out the fair value and dollar change in value for each security held in its portfolio. The report must contain summary information as well. Such monthly testing is expensive and time consuming. Credit unions should
include this testing in their budgets and designate personnel to deal with this new compliance requirement.
Credit unions must be ready to absorb the time and costs of this unfortunate change.
Stress-testing does not only apply to investments as described above, but unfortunately applies to discretionary control of investments as well. This change requires quarterly reports on certain assets and will once again result in further expense for credit unions.
CUNA, NAFCU, individual credit unions and lobbyists have been voicing their objections and concerns to the NCUA. Whether or not the new regulations will pass is not yet known. Nevertheless, credit unions should be prepared for the potential changes and budget time, money and personnel efforts to implement them.
Hannah F.G. Singerman is an Associate in Commercial Collections; Commercial Banking, Commercial Business, Special Collections and Commercial/Agency Services Groups and is based in the Cleveland office. Hannah can be reached at (216) 685-1162 or hsingerman@weltman.com.
Filed under: Credit CARD Act of 2009, interest rates, The WWR Letter | Tags: credit CARD Act, david wolfe, interest rates, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: David A. Wolfe, Associate
With the passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“The Act”), Congress sought to provide better protections to consumers. As part of that effort, that legislation removed the “floor” interest rates on credit cards. The interest rate floor is set by the card-issuer as the minimum annual interest rate, and is the lowest possible rate available after any introductory period is over for an account. The majority of credit card accounts have a variable interest rate where the annual percentage rate (“APR”) is based on the prime rate plus a margin that rises and falls in lock-step with the federal funds rate set by the Federal Reserve, which is currently at 3.25%.
Under the Credit CARD Act of 2009, the Federal Reserve prohibits accounts with interest rate floors because the card-issuers are preventing rates from freely dropping as the prime rate falls.
While the Fed has trumpeted its new rule as a benefit to those consumers who have variable rate interest credit card accounts, this may be an example of the law of unintended consequences where consumers may actually end up paying higher interest rates. According to the Federal Reserve, credit card charge-off rates peaked at 10.25% in the 3rd quarter of 2009 and remained at 9.95% in early 2010. The card-issuer controls the initial index and margin, and cost of funds and other expenses require the card issuer to charge a minimum rate just to remain profitable. If the card-issuer projects lower future margin interest rates without the protection of the floor rate, it is likely that the card-issuer will raise the index or margin rate, resulting in higher costs to the consumer.
In the Fed’s quarterly survey of senior loan officers released in May 2010*, banks indicated they tightened their lending standards on both consumer and small business credit cards in the first quarter of 2010. With interest rates at historic lows, rates are unlikely to fall much further.
Over the past couple of years, many consumers complained that their rates were raised as a result of minor infractions, including one missed payment. The Act contains revisions that took effect on August 22, 2010, designed to remedy this issue, including a requirement that the credit card issuer re-evaluate the borrower’s interest rate every six months if the borrower’s rate was raised after January 1, 2009. Examining the same criteria used by the issuer to evaluate new customers (including creditworthiness, current market conditions and other factors), if these conditions have improved, the issuer is required to lower the rate. If the rate is not lowered, the card issuer is required to reevaluate the rate every six months indefinitely. If the issuer raises customer rates in the future, it is required to provide an explanation for the increase, such as changes in the customer’s creditworthiness or account behavior.
While these new provisions regarding allowable interest-rates are designed to protect consumers, their effectiveness is not assured; they may result in additional costs to consumers and may reduce the availability of credit to financially disadvantaged consumers.
David A. Wolfe is an Associate in Consumer Collections; Consumer Collections (General), Corporate & Financial Services, Credit Union and Collateral Recovery/Replevin Groups and Litigation & Defense, Consumer Finance Litigation Group. David is based in the Detroit office and can be reached at (248) 362-6142 or dwolfe@weltman.com.
* http://www.federalreserve.gov/boarddocs/snloansurvey/201005/default.htm
Filed under: Regulation E, The WWR Letter | Tags: kevin susman, opt-in, Regulation E, wwr letter
The following is an article reprinted with permission from the upcoming Fall 2010 edition of The WWR Letter:
By: Kevin A. Susman, Associate
On November 12, 2009, the Federal Reserve Board (“FRB”) adopted a final rule (“Final Rule”) amending Regulation E, which implements the Electronic Funds Transfer Act. The Final Rule is meant to address issues related to the assessment of overdraft fees on automated teller machine (“ATM”) and one-time debit card transactions unless the consumer has “opted-in” to the payment of the overdrafts. The Final Rule is a stronger version of the proposed rule issued in January 2009.
The Regulation E Final Rule adopted the opt-in approach, under which an institution must not assess fees or charges relating to its overdraft service for ATM and one-time debit card transactions unless the consumer provides affirmative consent for such service. Confirmation of the consent, including a statement informing the consumer of the right to revoke the consent, must be provided in writing or, if the consumer agrees, electronically. Consumers may provide consent and may revoke consent at any time. The rule went into effect on January 19, 2010, with a mandatory compliance date of July 1, 2010.
Financial institutions:
> May not condition the payment of overdrafts for other types of transactions, such as checks or ACHs, on opt-in to overdrafts on ATM and onetime debit card transactions, and
> May not decline to pay checks and other types of transactions that overdraw an account because a consumer has not consented to ATM and onetime debit card transaction overdrafts.
Institutions must also provide consumers who chose not to opt-in with the same terms, conditions, and features provided to those who do opt-in.
If an institution has a policy of declining to cover overdrafts on ATM or one-time debit card transactions with respect to a particular type of account, the notice and “opt-in” requirement does not apply to that account. Also, the Final Rule does not apply to overdraft transactions other than by ATM or one-time debit, such as by check, Automated Clearing House (“ACH”) transactions or recurring debit.
If a consumer does not “opt-in” to an institution’s overdraft payment services, an institution may decline ATM withdrawals and one-time debit card transactions that would overdraw the consumer’s account. The institution also may cover overdrafts in these circumstances, but may not charge a fee for doing so. The Final Rule specifically prohibits an institution from declining the payment of a check, ACH transaction, or other type of transaction that may overdraw a consumer’s account, due to that consumer’s failure to “opt-in” to that institution’s overdraft payment service for ATM/debit card withdrawals.
The opt-in notice provided to consumers must be substantially similar to the Federal Reserve Board model notice and contain the following information:
> A brief description of the institution’s overdraft service and the types of transactions for which a fee or charge may be imposed,
> The dollar amount of any fees or charges assessed for paying ATM or one-time debit card transactions under the overdraft service,
> The maximum number of overdraft fees or charges that may be assessed per day, or, if applicable, that there is no limit,
> An explanation of the consumer’s opt-in right to overdraft services, including the methods by which the consumer may consent to the service; and
> If the institution offers a line of credit subject to Regulation Z and services to move funds from another account to cover overdrafts, a statement to that effect.
This notice must not generally contain additional information, although certain modifications to the
model form are permitted, such as description of any right the consumer has to opt-in or out of overdraft services for other transaction types, any associated fees, and the consumer’s right to revoke consent.
The volume of recent developments in the federal regulation of deposits and payment systems has been significant. Until the economic and financial conditions start to normalize, it is likely that even more federal law changes are on the horizon.
Kevin A. Susman is an Associate in Consumer Collections; Consumer Collections (General) Group and is based in the Cleveland office. He can be reached at (216) 685-4298 or ksusman@weltman.com.
