Some Random Occurrences--Of Note to Bankers

“In politics, stupidity is not a handicap.” 
― Napoléon Bonaparte

We are heading into the long session of the New Mexico legislature, which starts at noon on January 20.  For the first time in many decades the House has a Republican majority.  Business groups are pushing the legislature to enact Right to Work legislation on the theory that new businesses coming from out of state view Right to Work as a key factor in location of plants or business. Under the New Mexico Senate’s rules the Right to Work legislation may hit a roadblock:  Senate Majority Leader Michael Sanchez has vowed to block Right to Work bills from reaching a vote in the Senate.  Apparently the Senate rules permit that although a supermajority could override the decision.    Sounds like the dropped penalty flag in the Dallas-Detroit game, maybe unfair but maybe no way to change it?  The legislative agenda will include the usual proposed mortgage and foreclosure “remedial” bills, as well as the unexpected legislative measures that no one could have thought of except a legislator caught up in the glory of his or her position.

Our friends at the Consumer Financial Protection Board are busy again.  CFPB has announced revisions and new provisions for the Mortgage Servicing Rules.  The changes primarily deal with the treatment of successors in interest to residential property that result from death, inheritance and similar events.  Comments are due by March 16, 2015.  Most of the proposals appear unneeded under New Mexico law.  The CFPB has also announced that it will engage in a comprehensive rule making for so-called “Pay Day” loans.  One New Mexico legislator has already announced a plan to seek legislation to limit Pay Day loans to a 36 % interest rate.  Although Pay Day loans may be of primary interest to those in that business, sloppy drafting or the amendment process could pose risks to banks. 

In the waning days of New Mexico Attorney General King’s term his consumer protection division chief fired what a last shot at banks.  In an article in the Albuquerque Journal in mid-December, the Attorney General’s consumer protection division announced an investigation into certain New Mexico banks misleading residential lending consumers by advertising that loans would be secured by mortgages and then using a standard form New Mexico Fannie Mae/Freddie Mac Deed of Trust at closing.  The article stated that it was unclear whether under the New Mexico Deed of Trust Act foreclosure could be by judicial foreclosure, as required by the Home Loan Protection Act.  The Attorney General’s charge that banks are misleading in using the Deed of Trust form betrays a lack of knowledge of the Deed of Trust Act and current banking practices in New Mexico.  It is the author’s understanding that the use of the form deed of trust is not by choice, but is at the urging of the Federal Home Loan Mortgage Association and Federal National Mortgage Association to facilitate bundling of mortgages and resale.  Anyone familiar with the Deed of Trust Act and Home Loan Protection Act is aware that in New Mexico residential foreclosure must be by judicial foreclosure.  Only commercial loans can be foreclosed by non-judicial foreclosure.  The Deed of Trust Act clearly provides for judicial foreclosure under the mortgage statute.  Any bank or financial service business that relies on non-judicial foreclosure with a deed of trust would have serious title problems with the foreclosed property.  It is unknown if the new Attorney General will pursue this inquiry in the same manner as his predecessor. 

Do good,  belated Happy New Year.

MARSHALL G MARTIN

505-228-8506

A Judge Does Not Like Foreclosure Lawyers or Deficiency Judgements

"There are too many attorneys and not enough lawyers."   Willard Kitts (1919-1982)

Bill Kitts practiced trial law for about 30 years in New Mexico.  He was a chubby, jovial man who was a consummate trial lawyer.  He was also well read and cultured. His annual party to mark the Defenestration of Prague was an event for those few invited.    He was never part of a big firm, usually practicing solo in plaintiff's personal injury work.   Bill was also proud of being a lawyer.  Judges always knew when Kitts cited a case or a fact that it did not have to be checked.  He also frequently would sit with young lawyers from small firms alone in their first deposition or first day of trial because Kitts wanted to encourage lawyer’s skill and ethics.  Despite some big trial wins I doubt he died with a big estate.  When he died the local bar started a Willard Kitts mentoring program, which has morphed into other   programs.

Kitts would have been upset by Judge Allen Malott’s column in the October 17 Albuquerque Journal was titled, “Lawyers inflating fees, adding to foreclosure woes”.  Judge Malott, a respected Albuquerque district judge, reviewed the Colorado Attorney General’s recent actions against two Colorado law firms for violations of consumer protection laws and antitrust laws. Judge Malott stated that one of the firms had offices in Albuquerque until it was shut down.  Judge Malott also stated that some local New Mexico attorneys were guilty of inflating their fees and costs.   This lead, it was claimed, to deficiency judgments inflated by attorney related fees and costs.  In turn, lenders hounded debtors in foreclosure cases to recover deficiency judgments, making the foreclosure crises worse.  Judge Malott closes also makes the point that Colorado and New Mexico are in the minority of states that allow deficiency judgments. 

 Judge Malott overlooked one clear difference between Colorado and New Mexico foreclosure laws that contributes to the need for substantial lawyer involvement in the foreclosure process:  Colorado has an efficient deed of trust system in which most residential foreclosures are handled without the need of lawyers, except to file routine notices.  The trustee under a Colorado deed of trust is a governmental public trustee who serves in all non-judicial foreclosures.  In the cases brought by the Colorado Attorney General the law firms were not charging legal fees for the court related work. Instead, they had captive title companies, agreements with competitors about notice costs, and other hidden costs.

I have no facts upon which to question Judge Malott’s observation that unreasonable attorney fees have been sought in New Mexico foreclosures.  Regrettably, Judge Malott’s opinion is probably correct since when areas of the law—like foreclosure—become “hot” the hot areas attract attorneys (not lawyers).

However, Judge Malott’s article neglects some important background that New Mexico bankers might use to their advantage in favorable legislative setting. 

First, many of the abuses of the foreclosure crisis came from the mortgages securitized and forced into collection in unprecedented volumes.  Often the “client” in those cases was little more than a clerk and no control of attorney conduct and fees came from the client.  In my experience, the local New Mexico banks pay close attention to the costs of legal representation in foreclosure cases.  Deficiency judgments are seldom collected in any substantial amount. 

Second, currently New Mexico residential lenders cannot use deeds of trust for non-judicial foreclosure.  Texas, Arizona, Utah and Oklahoma permit residential deed of trust foreclosure.  The New Mexico Home Protection Act blocks deed of trust relief in residential lending.  Forcing every lender to judicial   foreclosure with its inherent court delays, e-filing requirements and pre-judgment mediation (in some districts) necessarily adds to the attorney fees and other costs.  New Mexico should get on board with neighboring states and permit full relief by deed of trust. 

Third, although some states--although not a majority-- do not permit deficiency judgments in residential judicial  foreclosure cases.  The ban on deficiency judgments is usually limited to non-judicial foreclosures.  In many states a lender has the choice to seek a deficiency judgment after a judicial foreclosure or proceed under a deed of trust and forego a deficiency judgment. 

In an enlightened New Mexico the answer to the foreclosure attorney fee and deficiency crisis (if one exists) is to legalize deed of trust relief in residential foreclosures and bar deficiency judgments in such cases.  If a lender wants a deficiency judgment the lender should go the judicial route. 

Do Good, 

Marshall G. Martin

Lawyer

505-228-8506

Things You Should Know and May Not Ever Need (We Hope)

"A government which robs Peter to pay Paul can always depend on the support of Paul."  George Bernard Shaw

We are into the Fall and getting ready for the election and then for the 2015 legislative session.  Not much is happening except for the NFL scandals and the deteriorating world situation in the Middle-East and Ukraine--all beyond this Blog's subject matter.

I wanted to cover several items which I hope you will never have to think about, but  of which you should be aware .  Plus, even though your bank is not unionized, the National Labor Relations Board and its chief counsel continue to raise questions about personnel matters that we used to take for granted.

Pac-Man Insurance Policy Language.  Your personal automobile and homeowners liability policies cover  certain risk associated with your ownership and use of your automobile and home.  If you have an accident and are sued by another driver you  are protected from an adverse result up to the limits of your policy.  Important benefit:  your insurance company also pays your attorney fees and costs as an added part of your coverage package.   Coverage is not reduced by the attorney fees and costs.  What about your bank or company's insurance policies--do they include payment of attorney fees on top of your liability limits?  With the exception of automobile and general liability, maybe  not.  If you have not done so you should check  the high risk, high legal cost coverage you have.   It is increasingly common for insurance companies writing Directors & Officers insurance , employment insurance, professional liability  and errors or omission type coverage to include Pac-Man provisions in those policies, usually without telling the insured.  Under the typical Pac-Man type policy the bank's or business' coverage is reduced by attorney fees and costs.  Like the Pac-Man game your attorneys gobble up the coverage.   For example, you have $1 million in coverage for employment disputes. The EEOC files suit against your bank for sexual harassment and retaliation and claims damages which might result in damages of $1.5  million.  Employment litigation is very expensive and attorney fees and costs in excess of $100,000 are common.  You may think you have $1 million in coverage to settle or pay an adverse result.  You don't.  Every dollar of legal expense billed to your insurance company reduces your coverage by an equal amount.  New Mexico has a strong insurance commission regulations dealing with Pac-Man type insurance clauses.  Arguably the insurance company owes you a complete disclosure of the Pac-Man provisions.  However, the  N.M. insurance regulations have never been tested in court.  You should try to get your insurer to remove the Pac-Man terms so that your attorneys fees in high stakes litigation does not affect your total coverage.  If you are unsuccessful consider raising your coverage limits.

Demand Settlement Within Policy Coverage Limits.  If you are unfortunate enough to be embroiled in high-stakes litigation of the type described above, you should be aware of the New Mexico case law that may compel your insurance company to settle a dangerous case within policy limits.  In the case above, you may have a strong defense case.  Your insurance company wants to settle the case for the smallest sum possible and may want to try the case and take the risk. However, the EEOC has made an offer of settlement of $400,000. The insurance company does not want to consider the offer or negotiate starting at that sum.  At $1 million coverage your insurance company is risking your financial standing  in the event an unpredictable jury finds against your bank after the settlement offer is not pursued.  If you have a Pac-Man provision in your policy future attorney fees may reduce your coverage.  The attorney representing you and  paid by the insurance company may feel that he or she cannot evaluate the case and, if necessary, demand of the insurance company that the insurance company settle the case within the $1 million policy limits--although facts will dictate whether there is a conflict of your interests and the insurance companies', what is your next step?  Hire an independent attorney to evaluate the case and recommend settlement within policy limits.  You will bear the cost of the advice but you minimize your risk of an adverse result above your policy coverage of $1 million.

The National Labor Relations Board has stepped up its attack on any company policy, handbook or employment agreement which tends to restrict an employee's right to communicate concerning wages or working conditions.  Previously this Blog has discussed the NLRB general counsel's position that a company's social media policies can violate the National Labor Relations Act if the policies purport to restrict employee comments on the employee's work or workplace or wages.  You don't have to be unionized for the NLRA to apply to you.  Bob Tinnin, a leading employment lawyer in New Mexico, has pointed out that the NLRB's restrictive position is now being extended to confidentiality and non-disparagement clauses in handbooks and employment agreements.  One prominent mortgage banker's confidentiality and non-disparagement clauses were invalidated in a recent NLRB decision.  The EEOC has now joined the fight alleging broad confidentiality and non-disparagement clauses in a severance agreement were an attempt to silence an employee about violations of non-discrimination laws.

Although the chances of your bank or company being involved in high stakes litigation may be remote,  prudence requires that you do a review of your D&O, employment and other high risk insurance for their including the Pac-Man provision.  If your insurance has such a clause try to get it removed at the next renewal and, if not possible, consider whether your policy coverage limits should be increased.  On the duty to settle within policy limits, just remember that your attorney paid by the insurance company may feel that she or he cannot even tell you about this aspect of New Mexico law because of her dual relationship; however, the attorney should tell you to consult independent counsel on the insurance issues.  On your employment handbooks and agreements, look for the possibly offending provisions and change them, seeking expert advice if needed.

Do good,

MARSHALL G MARTIN

Tinnin Law Firm

505-228-8506 (cell)

505-768-1500 (office)

Preemption: Confusion and Uncertainty?

“The handwriting on the wall may be a forgery”  Ralph Hodgson (1871-1962)

Federal preemption of state banking and financial services law and regulation is important to state regulators and state attorney generals.  It becomes important to banks when preemption rules are different between state and federally chartered institutions. 

Justice Daniels, speaking for the New Mexico Supreme Court in the February 2014 case of Bank of New York v. Romero , stated “[a]ny entity that makes home loans in New Mexico must follow the HLPA [Home Loan Protection Act], regardless of whether the lender is a state or nationally chartered bank”. Justice Daniels held that Dodd-Frank and 2011 final OCC preemption regulations significantly changed the federal preemption standards and “the OCC corrected its 2004 blanket preemption rule to conform to the [Dodd-Frank] legislative clarifications”.  He concluded that the sweeping 2004 OCC preemptions were no longer applicable.  Although Justice Daniel’s view looked well researched at first reading of the Bank of New York opinion, it appears that things are not as simple as Justice Daniels thought.

The Dodd-Frank Act’s general principles are that any preemption of state law is limited to the inconsistency and a state law is not inconsistent “if the protection that [it] affords to consumers is greater than the provisions under this Title.”  (emphasis added)  Consequently, the Consumer Federal Protection Bureau follows Dodd-Frank and considers only state law that is more lenient than CFPB’s regulations to be preempted.  CFPB has only challenged a few state laws on preemption grounds and it has focused on state laws that reduce consumer rights. 

The final 2011 OCC preemption regulation was controversial from its inception.  The title of an American Bankers Association article by a prominent law professor says it all: OCC Gets It Wrong On Preemption, Again.  The article criticizes the OCC’ s failure to follow Dodd Frank ‘s guide for preemption.   The article states, contrary to Justice Daniel’s view,  that  the final rules also violate Dodd-Frank by “re-adopting three blanket preemption rules issued in 2004. Those rules proclaim nationwide preemptions of broad categories of state law — including state disclosure laws and other consumer protections — with respect to deposit-taking, real estate and other lending by national banks.” For the full article see, www.americanbanker.com/.../OCC-preemption-Dodd-Frank.  Not only did some banking circles object to the final OCC rule, the final rule was passed over the Treasury Department’s strong objections with only minor changes. One change was to codify a U.S. Supreme Court case which permits state attorney generals to sue national banks to enforce certain consumer protection laws.  

 The potential conflict between the CFPB and OCC with their differing views of state consumer law preemption stands waiting in the wings. 

Since the OCC enacted its final rule,  federal courts in Florida, Iowa and elsewhere have held that Dodd-Frank did not materially change the preemption standards to be applied to national banks--effectively endorsing the OCC approach.  Contrary decisions have come from West Virginia, South Dakota and a few other federal district courts.  More rulings will come.  The final word may have to await a ruling by the U.S. Supreme Court.

 It appears that the OCC’s 2004 preemption rules remain basically unchanged, with some deference given to actions by state attorney generals.   Justice Daniels' view that the OCC had "corrected its 2004 blanket preemption rule to conform to the [Dodd-Frank] legislative clarifications” is open to serious question.  

Do Good,

MARSHALL G. MARTIN

Tinnin Law Firm

505-228-8506 (cell)

505-768-1500 (office)505-2

mgm@marshallgmartin.com

Technology: Really Good and Really Bad

“Internet”. The term is derived from ARPANET, a U.S. Government information network created in 1968 to track Soviet advances in space and science.  Claimed to have been invented by retired politician, Al Gore.

The Internet and electronic communication are two of the most wondrous things of late 20^th and 21^st Century.   Internet and computer use have exploded in the past 20 years.  According to David Houle, Entering the Shift Age,  ( Sourcebooks, Inc. 2013)  in 1985 there were 25,270,000 computers in use in the U.S.  In 2005 there were 203,700,000 computers in use in the U.S.  Internet users for the same period jumped from 190,000 users to 205,327,000 users.  There is reason to think that the last nine years have been more explosive.

Although the benefits of technology may have increased, the dangers of misuse or careless use have also increased.  There are two dangerous tools of technology that can come back to bite you:  emails and social media.

Emails.  I have warned about the danger of emails in the past.  For some bizarre reason people will say things in emails that they would never say in a personal or telephone conversation.  They will also send an email without the normal review and re-reading that most people use in writing letters. The result is legally dangerous.  Examples follow:

·      A close golfing buddy of a male bank senior executive sends an email containing a sexually explicit joke to the executive.  The executive then sends the email on to three other bank employees.  This is not the first or only such email. A female assistant to one of the three employees intercepts the email.  About a month later she is fired.  She claims sexual discrimination and a pattern and practice of sexual harassment and discrimination.  The EEOC starts its investigation and asks for the email and any others like it.  Although the bank has a policy against engaging in, sending or transmitting inappropriate emails the policy has never been monitored or enforced.  The email and others like it are produced to the EEOC.

Possible Solution:  There are no easy ways to enforce policies on inappropriate email or transmitting offensive emails.  Having Information Technology (“IT”) personnel “police” emails is probably ineffective and distasteful to everyone .    Education of management and key personnel is the best option.  Regular training concerning the policy and other IT policies would be helpful and could be combined with sexual harassment training—an important educational and defensive legal  tool.

·     

         Change  the example above slightly.  It is three years later. The EEOC drops its investigation.  The fired employee takes a severance payment and admits she had no other evidence but the emails. The golfing senior executive attends the regular IT/HR training on inappropriate emails.  When he receives an email from his golfing buddy he labels it as junk or otherwise deletes it without a sign that it has been sent on or even read.   After the three years has elapsed a clerical employee then complains that a supervisory employee in her branch has inappropriately touched her, made sexually inappropriate comments to her and otherwise harassed  her.  The supervisory employee is one of the employees who was sent the sexually explicit email three years ago by the golfing senior executive.  The complaining employee has heard about the old emails.  She files suit.  Her attorney asks for the email and all others like it from five years back.  The bank has no “retention” policy under which classes of documents, such as old emails, are removed from the computer system and from archives after a certain time.  The bank has to produce the old damaging emails.

Possible Solution.  Approve a good “retention” policy for emails which permits  the bank to destroy old email records, provided that litigation is not threatened or pending which will call for their production. Banks, or any business, are permitted to destroy or delete old documents, records and emails when they are not needed or regulatory requirements permit.  The production of damaging emails kept too long and for no business purpose has damaged many well-known businesses.  Old emails drafted in haste or without thought, can be very damaging and easily misconstrued.  Twenty years ago  Bill Gates’ old emails proved invaluable to the U.S. Government in its antitrust action against Microsoft.   Although the retention policies in automobile manufacturing are different from most business,  the recent GM recall history and those responsible for it, were pieced together from GM engineering department and legal department emails dating back to 2002. 

  

Federal and New Mexico regulations do not set email retention guidelines, except the OCC has said that some emails which are important to a transaction should be retained.   A good email retention policy should include the following, or variants :  (1) computer users’ emails should be  deleted or removed from computer hard drives after six months; (2) the deleted emails are then archived for a period of not more than two years from creation, and computer users can retrieve them upon request ; (3) after two years they are deleted or destroyed from the archive; (4) if a lawsuit is threatened or brought during the two year period, a “hold” is put on all emails concerning the threatened litigation, but all other emails in archive are deleted or destroyed.  I understand that most email records that are deleted or destroyed from the archive do not really “disappear”, but the cost of retrieval and the difficulty of retrieval is great. The burden and cost is usually always borne by the requesting party.  From experience I prefer the shorter times I have outlined  but within reason the periods are within management discretion.  Robert Childs is Chief Operating Officer of CAaNES, a New Mexico company offering nationwide security services to banks and others.  He has years of experience with retention systems.  When asked about the ease of retrieval of taped archived emails, Childs stated that “restoring is not necessarily difficult, though it can be time consuming.  One would need to know the dates / date ranges to look for, find the correct backup tape for that time period, and search for the emails in question, and restore the email files to a restore location…”.   The process is not expensive, aside from the time expended, and the difficulty increases with the age of the emails sought, Childs added.

·      In the renewal of a  complex loan with an impending due date, a bank’s loan officer sends numerous emails to the borrower.  The emails discuss the bank’s many unsettled terms for the renewal, including potential interest rates, term of the renewed loan to value ratios, additional real estate collateral, etc.  The negotiations are not entirely cordial because the customer is in a business threatened by reductions in government contracts.  Negotiations break down.  The bank reluctantly has to notify the customer that although it will give the business 30 days after the due date to find a new loan, the bank will move to collect and foreclose if the  loan is not paid.  The customer’s lawyer writes the loan officer.  The lawyer states that from the loan officer’s emails the bank agreed to a renewal of the loan on terms favorable to the customer.  The lawyer says that unless the bank agrees to the terms set forth in the lawyer’s letter (based upon the emails) she will file suit within ten days.    The renewed loan terms were never approved by the bank’s loan committee or President and there was no written loan commitment signed by the bank and customer.

Possible Solution.  I recommend that all bank loan personnel emails bear a standard end-of-email sentence similar to the standard statement most businesses use concerning the email recipient’s getting an email in error.  The standard loan personnel end-of-email statement should recite in “plain English” that nothing in the email message is binding on the bank or is a contract unless approved by  a loan committee, appropriate senior executive management, the Board or by a signed commitment letter.  In my experience, not all banks use such a simple precaution.  Some of the large national banks appear not to use such precautionary measures.  In New Mexico First American Bank uses a workable standard statement concerning its loan officers not binding the bank unless certain conditions are met.  My experience my be incomplete, but I think First American may be in the minority in using such precautionary statements in their loan officer’s emails communications. 

Social Media.   Social Media can be as dangerous as emails but the experience is limited, but growing.  Some dangerous  legal areas for social media are now clear.  First, any company policy that purports to set how employees can use their personal social media accounts runs the strong risk that the National Labor Relations Board will find that policy to be an unfair labor practice.  You do not have to be unionized since the National Labor Relations Act applies generally to all employers.  The NLRB has prosecuted several companies for having policies which appear generally benign because they might interfere with “protected concerted activity.”  Second, using social media for screening prospective job applicants has hidden dangers.  Bob Tinnin, a New Mexico expert in employment law, warns in the June 24 edition of hero© line (HRHero.com), that using social media may have serious legal consequences.  For example, if you use social media do not be selective.  If you are too selective you risk charges of discrimination under state and federal law.  If you have the social media searches done by a contractor, you will probably be subject to the FCRA and may have to notify rejected applicants of the use of the social media, furnish a copy of the media on which you relied and a statement of FCRA rights.  You may also violate state law.  A  2013 New Mexico statute prohibits employers from requesting social media passwords for job purposes.  Again, under certain circumstances you might run afoul of the National Labor Relations Act, depending on how you use the social media.  In short, given the risks and problems, Tinnin advises against using social media in employment  screening.   [The reader should be aware that Bob Tinnin is the founder and senior partner of Tinnin Law Firm, a firm with which I am associated.] 

Do Good,

MARSHALL G MARTIN

Tinnin Law Firm

505-228-8506 (cell)

505-768-1500 (office)