April 15, 2014

CFPB Offers Reprieve to Banks on Foreign Remittance Transfers

Photo credit: epSos.de
In August of last year, I summarized the Consumer Financial Protection Bureau's Foreign Remittance Transfer rules here on the North Carolina Business & Banking Law Blog. Those rules became effective in late October 2013. 

By way of reminder, remittance transfers are transfers of money from the U.S. to a foreign country, usually by immigrants or temporary workers in the U.S. to family members in another country.  

One aspect of the new rules is the requirement to disclose to consumers, at the outset of the transaction, not only the fees imposed by the initial service provider, but also all third party fees and exchange rates. 

The Dodd-Frank Act contained an exception from this requirement for federally-insured depository institutions (banks, thrifts, credit unions, etc.) allowing them to estimate third-party fees and exchange rates when they cannot determine exact amounts, but the exception was set to expire on July 21, 2015.

Today, the CFPB proposed to extend that temporary exception by five years, until July 21, 2020. 

The reason for the extension is that some financial institutions reported that the markets have not yet adjusted to allow them to determine in advance what the exact fees and exchange rates would be imposed on some foreign remittance transfers. Without the exemption, these institutions would be unable to send some transfers to certain parts of the world that they currently serve. Obviously, a termination of services to certain areas is not the result the CFPB had in mind, so the CFPB is allowing more time for the remittance market to adjust to the new rules.

You can read more about the partial extension here.  For a refresher on the new foreign remittance transfer rules, you can review the piece from last summer, available here

March 15, 2014

Banks Can (and Must) Manage Social Media Risks Effectively

image by Matt Cordell using Creative Commons content BY-SA 3.0
Bankers, does your bank use social media?  Do employees use social media on behalf of the bank? Did you know that examiners will be looking for a social media risk assessment and a social media risk management program?  Do you understand the risks that come along with the benefits of social media?

Why are the banking regulators focusing on social media? 

Bankers have recognized the opportunities and are flocking to social media in droves.  For those of you who have been living under a rock for the past decade, social media presents a huge opportunity to communicate directly with your target audience.  Consider these facts:

The Federal Financial Institutions Examination Council (FFIEC) has published guidance recently that will be used by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the National Credit Union Administration (NCUA), and the Consumer Financial Protection Bureau (CFPB) to evaluate financial institutions' compliance with various privacy and other laws and regulations.

What kinds of social media are covered?

The guidance defines "social media" as any form of interactive online communication in which users can generate and share content through text, images, audio, and/or video. Examples include micro-blogging sites (e.g., Facebook, Google Plus, MySpace, and Twitter), forums, blogs (e.g., BizLawNC.com or PrivacyLawNC.com), customer review web sites and bulletin boards (e.g., Yelp), photo and video sites (e.g., Flickr and YouTube), sites that enable professional networking (e.g., LinkedIn), virtual worlds (e.g., Second Life), and social games (e.g., Farmville). These platforms have a wide spectrum of uses, and their user profiles vary.

Financial institutions most often use social media for marketing directly to customers, but it can also be used to provide incentives, collect feedback from the public, recruit employees, and to otherwise engage with prospects and customers. Each of these efforts carries with it particular goals and varying types and degrees of risk.

The FFIEC Guidance states that every financial institution must conduct a risk assessment that addresses the risks raised by its use of social media and maintain a risk management program that is tailored to the risk profile. Every institution using social media should identify, measure, monitor,and control the risks related to social media.

How detailed should the policy statement be? How comprehensive should the procedures be?

The size and complexity of the program should be commensurate with the degree of the institution's involvement in social media, both in terms of depth and breadth. For example, a financial institution that relies heavily on one medium (e.g. Facebook) should have a more focused program. An institution using several media (e.g., Facebook, LinkedIn, Twitter, Yelp, Google +, and YouTube) should have procedures that are more comprehensive.

Who should be involved?

The FFIEC advises that a social media risk management program should be designed with participation from specialists in compliance, technology, information security, legal, human resources, and marketing. A better suggestion, in my opinion, is the inclusion of individuals whose expertise spans more than one of these categories. (Can you think of anyone who might know about more than one of these areas?)

What are the elements of a social media risk management program?

  • A governance structure with clear roles and responsibilities;
  • Policies and procedures (either stand-alone or incorporated into other policies and procedures) regarding the use and monitoring of social media and compliance with all applicable consumer protection laws and regulations;
  • A process for selecting and managing third-party relationships;
  • An employee training program;
  • An oversight process;
  • Audits to ensure ongoing compliance; and
  • Reporting to the board of directors or senior management to enable periodic evaluation of the program.

What are the key areas of risk?

What if we don't use social media at our bank?

Even financial institutions that do not use social media should perform a risk assessment, say the regulators: "a financial institution that has chosen not to use social media should still consider the potential for negative comments or complaints that may arise within the many social media platforms described above, and,when appropriate, evaluate what, if any, action it will take to monitor for such comments and/or respond to them." I have already written about online reputation management at length, and rather than repeat my advice here, I will refer you my earlier post on the subject.

Furthermore, just because an institution does not have an official social media account does not mean individual employees (especially those with business development responsibilities) are not posting on LinkedIn, Facebook, Twitter, and other platforms about, and apparently on behalf of, the the institution. It is unusual these days to find anyone in a sales role who is not active on social media.


The FFIEC Guidance is intended to help financial institutions understand and successfully manage (not eliminate) the risks associated with use of social media. The regulators expect institutions to manage potential risks to themselves and and their customers by identifying areas of risk proactively and adopting and implementing programs to mitigate those risks effectively...and more importantly, so do an increasing number of customers.

February 26, 2014

Important Supreme Court Case Regarding Spousal Guarantees

image by Silver Season
Few things seem to vex commercial lenders with more frequency than spousal guarantees.  The Equal Credit Opportunity Act ("ECOA"), its implementing regulation, Regulation B, and the interpretations given to them by some courts and federal regulators, can present challenges to commercial lenders when arranging and underwriting loans to married borrowers or married business owners.

A relatively recent opinion of the North Carolina Court of Appeals has held that a spouse may escape his or her obligations under a guaranty if the guaranty was improperly obtained.   

The North Carolina Supreme Court has agreed to hear the appeal of the creditor in this case.  On behalf of the North Carolina Bankers Association, one of my colleagues and I filed an amicus curiae (friend of the court) brief with the Supreme Court.  You can read our motion, which the Court granted, here, and the brief here.  Here's an excerpt:

"This case presents an issue of first impression in North Carolina, and involves issues of great importance to lenders conducting business in North Carolina, including the banking community, as well as borrowers in North Carolina who rely upon the access to credit that those lenders provide."


[Post Script - NC law most commonly uses the spelling "guaranty" rather than "guarantee."]

February 19, 2014

A Win for Arbitration Clauses in North Carolina

art by Todd Berman / flickr
Arbitration clauses in consumer contracts are now more likely to be enforced in North Carolina, thanks to a a pair of opinions issued a few days ago by the North Carolina Court of Appeals.  The companion cases are Torrence v. Nationwide Budget Finance and Knox v. First Southern Cash Advance.

Arbitration clauses are used in contracts to limit the delay and expense often associated with traditional litigation in the judicial system.  Generally speaking, they serve to streamline the dispute resolution process.  Consumer advocates, however, have long objected to their use in consumer contracts, believing they weaken the ability of consumers to obtain remedies for breaches and violations of law.

In Torrence, which contains the rationale for both of the Court of Appeals' recent decisions, the Court ruled that an earlier North Carolina Supreme Court decision limiting the use of arbitration clauses in consumer contracts has been preempted by subsequent decisions of the U.S. Supreme Court.  The leading case in North Carolina dealing with the invalidation of arbitration clauses is Tillman v. Commercial Credit Loans, Inc., 362 N.C. 93 (2008).  Two cases subsequently decided by the United States Supreme Court have changed the legal landscape, however: AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), and American Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013).  In Concepcion, the Court held that the Federal Arbitration Act supersedes any state law (including a state court opinion) that sets aside arbitration agreements upon grounds that are exclusive to arbitration agreements (i.e., not applied to contracts generally).  In 2013, the Court decided in Italian Colors that arbitration clauses could be used to effectively prevent class-action lawsuits by consumers. 

In Torrence, the North Carolina Court of Appeals was forced to acknowledge that the North Carolina Supreme Court's decision in Tillman had been essentially overruled by the United States Supreme Court in Concepcion and Italian Colors.  The Court of Appeals explained that, despite judicial hostility to arbitration clauses, the law clearly permits them: "The United States Supreme Court has made it clear that the use of unconscionability attacks directed at the arbitration process can no longer serve as a basis to invalidate arbitration agreements."

As a result of these two recent opinions, arbitration clauses should be enforced more reliably in North Carolina.  Businesses in North Carolina may want to re-evaluate the use of arbitration clauses, or the language of arbitration clauses, in light of the recent decisions.

February 12, 2014

How Does a State of Emergency Affect Prices in North Carolina?

On Tuesday, Governor McCrory issued Executive Order number 43, which declared a state of emergency across the entire state pursuant to Chapter 166A of the General Statutes (the North Carolina Emergency Management Act).

One of the interesting legal consequences of this development is that the ordinary economic rules of supply and demand are partially suspended, and price gouging prohibitions become effective under Section 75-38 of the General Statutes.

Price gouging is selling or renting certain goods and services "with the knowledge and intent to charge a price that is unreasonably excessive under the circumstances."   The goods and services covered by the statute are those "which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property." 

Although we commonly think of price gouging as a retail issue, the price gouging law applies to all parts of the chain of distribution, including manufacturers, suppliers, wholesalers, and distributors.

The law makes price gouging an "unfair trade practice" and gives consumers who were gouged the right to sue and recover treble (triple) damages from the seller.  The Attorney General may also sue to enforce the law, and courts can impose civil penalties against price gougers of up to $5,000 per violation.  (By way of example, the Consumer Protection Division of the N.C. Department of Justice obtained $71,000 from 14 gas stations as result of a price gouging investigation in 2008.)

If the event the Attorney General investigates a complaint of price gouging and determines that a seller has not violated the law, the wrongfully-accused seller can demand that the Attorney General issue a signed statement indicating the seller's innocence.

The Executive Order--and therefore the prohibition on price gouging--will remain in effect until rescinded by the Governor.

Wampa from the frozen planet Hoth (Star Wars reference) by Chris Griego

Read more here: http://www.newsobserver.com/2014/02/12/3614487/nc-price-gouging-law-in-effect.html#storylink=cpy

February 4, 2014

Consumers May Now Dispute Debts Verbally

The U.S. Court of Appeals for the Fourth Circuit (which covers North Carolina) has ruled that debt collection notices violate the Fair Debt Collection Practices Act (FDCPA) if they require consumers to submit disputes of debts in writing. 

In Clark v. Absolute Collection Service, Incorporated (4th Circuit, Jan. 31, 2014), the Court ruled that the FDCPA does not require a consumer to dispute the validity of a debt in writing. 

The FDCPA requires that debt collectors send written notices to consumer debtors containing “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.”

However, if the consumer notifies the debt collector that he or she disputes the validity of the debt, the debt collector must stop the collection activity until it has mailed a verification of the debt to the consumer. (This is sometimes used as a delay tactic by consumers and their lawyers.)

The Court ruled that any collection notice sent by a creditor that purports to require a consumer to dispute the validity of the debt in writing is incorrect, and the consumer's oral dispute is all that is necessary to stop collection efforts and trigger the verification requirement.  (Furthermore, an incorrect debt collection notice might be deemed invalid even if the consumer does not orally dispute the validity of the debt.) 

The decision of the Fourth Circuit Court of Appeals in this case is now the law of the land in North Carolina, and creditors and collection agencies in North Carolina will now have to adjust their policies and procedures to accommodate oral disputes from customers.

"Squeezing the Turnip"
Photo credit: Ula Gillion

January 29, 2014

New Bank CEO Survey Released: More Optimism, but Top Worries Include Regulatory and Information Security Risks

In December, Abound Resources, a banking industry consultancy, surveyed CEOs of community banks
(which it defined as depository institutions with less than $10 billion in assets). Sixty one percent (61%) had a positive outlook for 2014. This is a significant shift in attitude from last year, when only 28% of CEOs polled had a positive outlook for 2013.
photo by Micky.! 

Here are some highlights from the survey:
  • Regulatory concerns topped the list of CEO worries for the third consecutive year. (86% of CEOs surveyed) This is not surprising given the volume and pace of rulemaking by the CFPB and other federal agencies as the Dodd-Frank Act-mandated regulations continue to be rolled out. 
  • 85% of CEOs named commercial lending as their top priority for growth.
  • Almost half (49%) will expand their bank's online presence to drive growth.
  • 25% of CEOs saying that reducing personnel costs will be a priority in 2014.
  • Concern about information security has risen dramatically on the CEO priority list, and is now the fourth most cited CEO concern. (As those of you who read this blog regularly know, I have been vocal about the growing information security and privacy risks faced by community banks in recent years, from speaking at the North Carolina Bankers Association's 2013 Security Summit to founding a blog on the topic, the North Carolina Privacy & Information Security Law Blog. It is reassuring to know that CEOs are paying attention to this area of risk. Addressing these risks properly involves legal, as well as technological, components.)
I encourage you to read the full survey report, which is available here. (Registration is required, but no fee is charged.)

January 28, 2014

Using a Limited Liability Company to Protect Privacy

There are a host of perfectly legitimate reasons to use a Limited Liability Company to preserve the owner's privacy.

People have formed LLCs to allow them to buy real estate when the the bidder's identity, if known, would affect the price.  (When purchasing many parcels of real estate for the construction of Walt Disney World, the Walt Disney Company famously used trusts so that landowners would not realize the buyer had deep pockets and attempt to hold out for more money.)

Financial institutions have formed LLCs to sell foreclosed property.  Some bidders offer "lowball" bids when they believe a lender is selling a foreclosed asset, thinking the lender will take almost any price to dispose of the property.  Creating an LLC to hold the property has been thought to yield higher bids in some instances.

The list goes on and on....

I have written more about this topic in a new post on the North Carolina Privacy & Information Security Law Blog.  I hope you find it useful.

photo by Roo Reynolds

January 18, 2014

NASDAQ Updates Compensation Committee Requirements

Companies listed on NASDAQ will have new criteria to apply when making director nominations and preparing proxy statements this year.

credit: dkshots
In December, NASDAQ amended its listing standards in order to permit compensation committee members to receive fees from their companies.  NASDAQ Listing Rule 5605(d)(2)(A) previously stated that a compensation committee member could not accept, either directly or indirectly, any "consulting, advisory or other compensatory fee" from the company or its subsidiaries. 

The change makes a director's receipt of fees for services provided to the company merely one a factor in determining director independence (for purposes of the compensation committee service)--it is no longer an automatic disqualification.  In weighing compensation as a factor in determining independence, the board of directors must consider the source of the compensation and whether the compensation would impair the director’s ability to make independent judgments about the company’s executive compensation.  In other words, if a director receives fees as a result of an executive's decision, the board needs to decide whether the director's decisions about the executive's compensation would be influenced.

This rule change certainly gives boards of directors more flexibility, but also potentially opens them up to criticism if they exercise their discretion in this area.  It will be important for boards who deem compensation committee members eligible despite the receipt of fees to document the basis for the board's determination and to articulate it carefully in their proxy statements.

This NASDAQ rule change has implications for even unlisted companies and non-public companies. The SEC's rules require public reporting companies that are not listed on a national securities exchange to apply the rules of one of the exchanges for purposes of stating which directors are independent in their proxy statements.  Therefore, even unlisted reporting companies will need to consider the rule change when making independence determinations.  Furthermore, listing standards are something of a "best practice" standard for non-public companies, and therefore the rule change could have some relevance to the decisions made by non-public company boards when making committee appointments.

NASDAQ-listed companies must comply with the independence requirements of compensation committee members by the first annual meeting after January 15, 2014 (or October 31, 2014, if no meeting has been held).

As a result of this amendment, NASDAQ’s compensation committee independence rules are now in line with the NYSE.

You can read the amended rule here.

January 17, 2014

A Sincere Thank You--Again! (The 2014 "Super Lawyers" List Has Been Released)

The list of North Carolina Super Lawyers has been released for 2014, and I am honored to share this recognition with some of the finest lawyers in North Carolina (including 20 of my partners at Ward and Smith, P.A.).   While there are many stellar lawyers who were not included in the list, it is a great honor to be named along with the exceptional lawyers who were listed this year. 

What Does Inclusion in "Super Lawyers" Mean?

Super Lawyers' stated objective is to create a credible, comprehensive listing of outstanding attorneys.  Super Lawyers compiles its list each year using 
peer nominations from lawyers around the state, peer evaluations, and independent, third-party research.  Each candidate receiving sufficient nominations from across the state is evaluated on 12 criteria of professional achievement. 

The selection process for the "Rising Stars" list is the same as the ordinary Super Lawyers selection process, with one exception: to be eligible for inclusion in Rising Stars, a candidate must be either 40 years old or younger or in practice for 10 years or less.  The idea is that it is very difficult for young lawyers to develop a significant statewide reputation within the first ten years of practice, so a separate process is used for them.  While up to 5 percent of the lawyers in the state are named to Super Lawyers, no more than 2.5 percent of eligible lawyers are named to the Rising Stars list.

To the lawyers who take the time to participate in this and other peer review surveys, I give you my sincere thanks.  Please know that I always submit Super Lawyers nominations and respond to peer review surveys, and I am very pleased to recommend exceptional professionals.