Bank Lawyer's Blog

Gigging Sharks For Christmas

As a client alert issued by the law firm bearing my favorite acronym (MoFo) put it so well, last week "Congress gave banks and other ATM operators an early holiday present."

On December 11, the Senate unanimously passed S. 3204, which eliminates the external fee notice requirement in the Electronic Fund Transfer Act, 15 U.S.C. § 1693, et seq. (“EFTA”). The House passed an identical bill, H. 4367, last July. The President is expected to sign the measure into law.

I'm not sure which holiday they were discussing, but I assume it was either Christmas, Hanukkah, or Kwanzaa. I doubt MoFo celebrates Festivus.

Once the law goes into effect, ATM operators will be required to give only the on-screen notice of transaction fees. The additional external notice that's currently required will go the way of the TAG.

As MoFo notes, this law will do away with the plethora of "frivolous lawsuits" that bottom-feeders and their shark enablers have been using to squeeze settlements out of banks and credit unions whose only offense was, in many cases, not having the external signs booby-trapped with claymore mines to discourage "unknown perpetrators" from stealing them shortly before plaintiffs' lawyers photographed the absence of signage and used that absence as the basis of a lawsuit on behalf of plaintiffs who used the ATM shortly after the external signs disappeared. Sure, some of those plaintiffs gave us an occasional cause to grin, but, for the most part, they were as welcome as would be Charlie Sheen as the keynote speaker at the Sisters of Charity Federation annual convention.

Unfortunately, there remains plenty of ATM-related chum to attack the predators. The ADA, for example. Where there's a financial remedy tied to a solvent defendant, the plaintiffs' bar will always find the basis for a claim, no matter how far into the ionosphere they have to travel to find it.

Drive-Bys: Not Just For Gang-Bangers

Colorado attorney Jennifer Gokenbach sounds a warning of a phenomena we've seen not only in Colorado, but in other states, including Texas: the dreaded ADA Public Accommodation “Drive-By” Lawsuit. She alleges that "since April of this year, 20 lawsuits (and counting) have been filed against Denver area businesses by the same Plaintiff who is represented by the same two attorneys from Florida, for alleged violations of Title III of the ADA, including things like lack of ramps, narrow doorways, missing signage, doorknobs that can’t be opened by a closed fist, and misplaced soap dispensers and coat racks."

I should add that such ADA-related claims have also been filed against banks in a number of states, usually alleging that the bank's ATMs or branches don't comply with Title III of the Americans With Disabilities Act.

Ms. Gokenbach explains the gist of these lawsuits.

The problem with these cases is that the vast majority are not situations where a disabled individual truly felt discriminated against and sought out an attorney to help redress an injury due to a lack of accommodation. Instead, it is the lawyers who hire investigators to identify local businesses that are not in technical compliance with the ADA, and then recruit plaintiffs from disability advocacy groups to serve as the front person. The investigators take pictures and build the case while the plaintiffs merely “drive by” the establishment, without any honest intentions of ever servicing the establishment.

Once the boilerplate suit is filed, questionable litigation tactics are then employed, such as serving immediate discovery in violation of the rules, asking the courts to order the parties to a settlement conference to force a quick settlement, and refusing to accept agreements or assurances of ADA compliance without monetary payments, even though the ADA itself does not allow damages to be awarded to plaintiffs (the ADA allows only injunctive relief and attorneys’ fees).

Yes, that's right: "even though the ADA itself does not allow damages to be awarded to plaintiffs," the plaintiffs are trying to squeeze money out of the banks and other businesses. In many cases, defendants, looking at the matter strictly from a cost standpoint (since paying litigation attorneys to defend you can quickly cost more than paying off the plaintiff and his or her attorney) decide to close their eyes, hold their noses, and consider a relatively small monetary settlement a nuisance cost. However, other defendants decide they want to make the point that they're mad as hell and they're not going to take it anymore. After all, if you buckle under the wings of the first vulture to land on you, can others be far behind?

Ms. Gokenbach asserts that those businesses that decide to stand up to the shakedown have plenty of ammunition to bring to the gunfight. In addition to advising businesses to check with an insurance professional to determine whether they are covered against such claims (or, if not, if they can get coverage for future claims), she notes that "in some cases, where business owners decide to fight back, courts have dismissed the suits, sanctioned the plaintiff’s attorneys for unscrupulous litigation tactics, and/or awarded attorneys’ fees to prevailing business owners." Of course, each fight-or-flight decision has to be made on the facts of the individual case, as well as on the defendant's appetite for engaging in butt-kicking contests with butt-heads. Nevertheless, rolling over and forking over cash is not the only alternative when hit with a cookie cutter drive-by.

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I'm speaking at, and otherwise haunting, the annual NAFCU Regulatory Compliance Seminar this week in Seattle. Therefore, I'll be off the air until next week. If you're attending the conference, and aren't enraged by either of my presentations tomorrow, or otherwise offended by my blogging or the fact that I represent commercial banks, feel free to say hello. I generally don't engage in concealed carry when I travel, so chances are. I won't be strapped.

Wal-Mart's Latest Offering To The Underbanked

Last year, Wal-Mart rolled out a prepaid debit card product in league with Green Dot, designed to serve Wal-Mart's favorite targeted market: the unbanked and the underbanked. This week, the retail giant unveiled a partnership with an even bigger partner, American Express, to launch "The Bluebird Account."

The Bluebird accounts will have no minimum balance requirement and no monthly maintenance, annual or activation fee. Customers can access their money for free using one of 22,000 American Express MoneyPass ATMs, but will be hit with a $2 fee if they are not enrolled in direct deposit.

Walmart says the card was launched in response to consumers who say they are not getting the value they expect from traditional bank accounts with debit cards because of their increasingly higher fees.

According to the linked article by Fortune's Halah Touryalai, American Express is treating these transactions in the same manner it handles its traveler's checks and not as debit card transactions, which, according to bank analysts Dick Bove, permits Wal-Mart and Amex to avoid the Durbin Amendment's limit on interchange fees. The fact that it looks to the consumer like a debit card, and effectively works the same way, means that it's bound to attract some people who are put off by bank fees or otherwise wouldn't have a bank account.

The FDIC isn't keen on non-bank prepaid debit cards, which is no surprise. The FDIC claims that "[p]articipation in the banking system...protects households from theft and reduces their vulnerability to discriminatory or predatory lending practices."

Would those alleged "practices" by non-banks be akin to the alleged "discriminatory" practices in which the US Justice Department alleges that FDIC-insured banks engage? The kind of practices that have a "disparate impact" on minority groups? I'm not saying that such disparate impact allegations have any merit, but when it comes to finger pointing by the FDIC toward non-FDIC financial service providers, I'd suggest that the pot not be calling the kettle black. Wal-Mart and American Express don't seem to pose any more threat to prepaid card users than, say, Wells Fargo does to the FHA.

Wal-Mart scares the pants off of bankers. It should. As I asserted a few years ago, since it was effectively prevented by the FDIC from obtaining a bank charter, "Wal-Mart is using the avenue open to it (not ideal, but workable) to cement its relationship as a low-cost provider of financial services to working class Americans. The Beast of Bentonville refuses to be tamed."

Another point: if Wal-Mart has found a way around the Durbin Amendment, wouldn't financial institutions be advised to take a closer look?

A Modern-Day Diogenes, In Search Of One Honest ATM

One of the pleasures of writing a blog for the sheer hell of it is the connection I make with like-minded, off-kilter bankers and bank lawyers from all over the world, including, most prominently, South Park, Colorado. I recently received an email from a group of bank lawyers in a state south of the Mason-Dixon Line who have been running into one of my favorite Bête Noires: lawsuits over missing ATM external notices. It was too amusing not to share.

To protect them from the type of hate mail I receive on a regular basis, they'll remain anonymous. Here's their email, only slightly edited to protect the guilty.

Kevin,

I thought you would enjoy this one. We are involved in a number of ATM fee disclosure lawsuits for financial institution clients (you know “the sticker is not on the outside of the machine so you owe me damages and most importantly, attorney’s fees”).

We have now seen 7 identical complaints filed, three in [our state] this week. Same plaintiff, same lawyer. Apparently the plaintiff, who is a New Yorker (according to the pleadings), is on a summertime tour of southern ATMs.

As one of my partners said: “This guy is the Diogenes of ATMs—traveling the world looking for an ATM with a fee notice, but apparently unable to find one.” To which another replied, “Maybe it’s just a North-South thing, him being a New Yorker, sojourning through the South for some July heat . . . and suffering the pains of withdrawing money from at least seven different Southern ATMs, operated by 7 different banks, all of  which apparently  lack a notice to his satisfaction . . . .”

 As to how he is doing it, after some research we found this photo:

Finding one honest ATM appears to have taken its toll on Superman.

Fifty Shades of Grey

Dick Durbin, not content to shiv banks and credit unions in the back on debit card interchange fees (an act that prompted former FDIC Chairman Bill Isaac to label the Durbin amendment to the Dodd-Frank Act as ""pure and simple, special-interest politics" and "a terrible precedent") in order to serve his corporate masters, big box retailers like Wal-Mart and Target, now has his sights set on credit card companies. As reported at Forbes today by Halah Touryalai, Durbin is in full press conference mode and publicly blasting the $7.25 billion anti-trust settlement that Visa and MasterCard recently worked out.

“I believe this proposed settlement represents a capitulation to the Wall Street banks and credit card giants. It is a sweetheart deal for them and a bad deal for merchants and for consumers. The settlement was negotiated in secret between Visa, MasterCard, the big banks, and the attorneys representing a small number of merchants,” he said.

"Negotiated in secret." Like most of Dodd-Frank and nearly all of Obamacare.

Senator D-Bag Durbin would prefer that if there's going to be any capitulation by anybody, it needs to favor those who line his campaign coffers with lucre. Any other result is "unjust."

Halah points out an inconvenient truth: while Dick postures as the consumer's friend, Durbin is selling consumers down the river.

As I’ve said before, neither side is looking out for consumers in the battle over swipe-fees.

Just like with the Durbin Amendment where retailers argued the same points saying the fees banks charge them are so great that they’re forced to increase the price of goods they sell to consumers. Banks argued the fees are important and are used to protect customers from fraud.

Both sides used consumers in their argument but in the end consumers lost when retailers got their way and a cap was placed on the swipe fees. Banks starting looking for new ways to make up fort he lost fees by shifting their focus from retailers to the consumer.

Durbin says he’s making “sure that merchants and consumers do not get nickled and dimed to death with hidden and unreasonable fees” but it seems the only ones ever getting hurt here are indeed the consumers.

Halah might have added that the windfall received by retailers from an over 100% reduction in interchange fees on debit cards has yet to manifest itself in lower prices to consumers.

In the U.S. Senate, there are no "white knights," merely fifty shades of grey. Dirty grey.

No Notice? No Worries (Maybe)!

While the blogsphere is today ablaze with equal parts rage and glee over the decision of the SCOTUS to uphold (most of) Obamacare, some of us took note of the fact that a bill moved out of a House committee that could help squelch a rash of lawsuits, some legitimate and some questionable, arising out missing physical fee notices on ATMs. The ever-vigilant folks at the NAFCU are keeping their eyes peeled for progress on this score, since credit unions, as well as banks, are being targeted by attorneys who specialize in discovering missing notices on ATMs in all regions of the country.

The House Financial Services Committee voted [yesterday] morning to report out H.R. 4367, a bill sought by NAFCU to repeal the ATM placard requirement on fee disclosures under the Electronic Funds Transfer Act. The bill awaits House action.

[...]

As of Tuesday, H.R. 4367 has 130 cosponsors. A similar measure, S. 3204, has 18.

H.R. 4367, introduced by Reps. Blaine Luetkemeyer, R-Mo., and David Scott, D-Ga., had 130 cosponsors as of Tuesday. A similar Senate measure, S. 3204, has 18 cosponsors.

In a highly partisan year, it's nice to see that at least some legislation that could do banks some good isn't completely dead in the water. We'll see how this fares during the rest of this long, hot summer.

This is going to take a Congressional fix because it doesn't appear to be anywhere on the CFPB's agenda for a regulatory solution, notwithstanding some previous tongue-in-cheek "wishing" to the contrary.

ADA: Another Goldmine For Professional Plaintiffs

In an article in the American Banker last week (paid subscription required), reporter Jeremy Quittner revealed that notwithstanding the fact that banks were given two years to comply with regulatory requirements to make ATMs accessible to the visually impaired by March 15, 2012, a number of banks have failed to make the grade. As a result, class action plaintiffs' attorneys, likely eyeing the March 15th deadline like a bobcat eyes an unaware rabbit that's blissfully munching on your rosebushes, have been suing the bejeebers out of non-compliant banks in some parts of the country. One defendant had a 118 ATMs in compliance, but the two remaining non-compliant machines caused the bank a settlement (amount undisclosed) and, what's just as painful, ongoing monitoring of its progress to come into compliance. Much of that monitoring will be conducted by the plaintiffs' law firm. We expect that their approach will be as impartial as ours would be if we were monitoring a class action plaintiffs' firm for compliance with a consent order and the penalty for noncompliance was having a hungry ferret in a burlap sack tied to your right thigh.

While I'm usually reflexively sympathetic to banks and antithetic to trial lawyers, in this case I have to agree with the sentiments of many bankers who were interviewed by Quittner.

Some bankers agree that they had plenty of time to get into compliance.

"While the rules were just finalized recently, they've been the subject of debate for over 10 years," Jonathan Velline, executive vice president of ATM banking and store strategy for Wells Fargo (WFC), wrote in an email.

As Quitnner points out, it's easier for a Leviathan like Wells Fargo to throw a lot of money and talent at compliance, while smaller banks can often be stretched by the burden. In addition, the cost of upgrading, or even replacing, the machines, can be expensive. Nevertheless, these are the rules of the game, and if you want to play, you have to play by the rules.

In some respects, this reminds me of the failure of some banks to comply with the multifactor authentication in online banking guidance when it was first issued. Some of the smaller banks adopted a "What, Me Worry?" attitude and after the deadline passed, were caught in flagrente delicto, or, in more colloquial terms, with their compliance pants down around their ankles. While I have no love for the vultures members of the bar who specialize in suing banks, with respect to this issue, banks who are still non-compliant just need to buckle down and "get 'er done," and hope that, in the interim, they somehow escape the gaze of the wolves at their doorsteps.

Loaning To The Little Guys: A Dastardly Turn Of Events

Five years ago, when The Care Bair womanned the helm at the FDIC and was prodding banks to make payday-like loans to poor consumers, but to cap those loans at a 36 percent APR, most banks who experimented with the products were scratching their heads, trying to figure out how to make money on small loans made at those rates when the borrowers posed such a high default risk. These days, when banks of all sizes are strapped for income-yielding products and are dipping appendages bigger than than their pinky fingers into the icy waters of small loans, left-leaning propaganda rags main stream newspapers like The New York Times are aghast at how "big banks" are "preying" on "the little people."

An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers like Mr. Wegner with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees.

Predictably, consumer advocates, including the chart-topping consumer band "Recess Richie and The Jackboots," are threatening to inspect these products with a bias-detecting electron microscope of political correctness to ensure that banks don't actually provide a needed service to lower-income consumers at a price that permits the bank to make a profit.

The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products.

[...]

“We look at alternative financial products offered by both banks and nonbanks through the same lens — what is the risk posed to consumers?” said Richard Cordray, director of the bureau. “Practices that make it hard for consumers to anticipate and avoid costly fees would be cause for concern.”

Buried in the middle of the piece is this disconcerting news for Cordray and his fellow-travelers.

Still, in an April survey of prepaid cards, Consumers Union found that some banks’ prepaid cards come with lower fees than nonbank competitors.

Wait a minute! If banks are jumping into these products and offering them at rates that are lower than those offered by non-bank predatory payday lenders, wouldn't it be logical to expect that this might eventually force the non-bank small-loan lenders to lower their prices in order to compete? Given most banks' funding advantage over most of their non-bank competitors, isn't it likely that if the banks are able to find a pricing model that allows them to expand this business while lowering existing rates and fees, this would ultimately benefit low-income consumers? Therefore, shouldn't consumer advocates, including the "We're Just Here To Help You" crowd from the KGB CFPB, think that banks entering this business is a potentially good thing for consumers? Shouldn't they encourage, rather than discourage, this trend?

Personally, I think bankers are thinking about getting into this line of business need to have thick hides, because it's a business in which the more successful you are in offering the right type of products and services to your targeted customer base, the greater your chance of being determined to be a discriminatory thug, fit only for being stretched on the rack, then drawn anhd quartered.

Mr. Wegner, the U.S. Bank customer, said that once he mentioned that he needed a bank account, an employee started selling him prepaid cards, check cashing and short-term loan options. Mr. Wegner, who makes about $1,200 a month, said that he felt like a second-tier customer.

“It was clear that I was not getting the same pitches that wealthy clients would,” he said. Since that initial visit, Mr. Wegner said he avoided the branch so he was not approached with offers. “I go through the drive-through now,” he said.

Next year, Mr. Wegner will be complaining that the bank never offers him any credit options at any price. He'll moan about having become invisible.

Mr. Wegner, wealthy clients have high incomes and substantial assets to pledge as collateral and, therefore, pose much less repayment risk to the bank. Of course they're not going to be offered products and services they won't purchase, just as you won't be offered products and services for which you do not qualify under prudent underwriting standards, the kind mandated by safety and soundness standards that are imposed upon banks by law. This is called "living in the real world."

It's obvious that there's an element of the chattering classes that desires that banks be run as public utilities that parcel out credit as mandated by politicians and bureaucrats at rates and fees deemed "fair" by government committee. Until that system's in place, banks will be damned if they do and damned if they don't.

Ripping Down The Signs

Yesterday, a Republican from Missouri and a Democrat from Georgia reached across the aisle and instead of stabbing each other in the face, jointly introduced a bill in the US House of Representatives that would eliminate the requirement that banks post a notice of ATM fees on the outside of the ATM (instead, the electronic notice on the pop-up screen would be sufficient). There's been talk for some time that class action lawyers have been traveling the country ripping off the signs and then suing the banks because they're absent. If enacted, this law would shut down that robo-rip-off scheme.

The NAFCU's Steve Van Beek thinks the bill's a good thing, but only "a first step."

While the bill being introduced is a good first step, the unnecessarily confusing regulatory requirements remain in place.  In other words, the legal and compliance risks for credit unions do not change until this bill is passed (if it is passed). 

[...]

Think about the unnecessary burden this way:  The current legal and regulatory environment has financial institutions and ATM operators taking time away from serving their customers/members to go out and photograph their ATMs in order to provide defenses against class action lawsuits. 

Steve thinks the CFPB, if it's really interested in removing unnecessary regulatory burdens, ought to not only jawbone Congress in support of this bill, but "should take a good, hard look at their regulatory authority under the Electronic Funds Transfer Act and determine if they can remove this ridiculous requirement and get institutions back to providing services to their members rather than taking photos of their ATMs."

Dude, if that happens, I'll buy you a Hot Toddy to ward of the chill as we both do figure eights over an ice-covered Hell.

Ultimately, the overriding problem is that playing Whack-a-Mole with class action attorneys can wear you out. As soon as you put a bullet in the brain of one racket, they concoct another "claim" in order to feed their gaping maws. It's the American overlawyered way.

Cybercrooks Are Like Sharks: They Never Stop Feeding (Or Phishing)

Brian Krebs' latest horror story blog post about a new kind of corporate account takeover by cybercrooks contains many lessons for commercial bank customers. It also shows how the tactics of thieves are constantly evolving to take advantage of weaknesses of their victims and to close holes in their criminal schemes. While the initial "hook" of the story is the shift of criminals away from the use of "money mules" to the use of prepaid cards to funnel pilfered funds into their pockets, the details of the crime demonstrate a dishearteningly high level of technological sophistication, resourcefulness, intelligence, and effort by the thieves. These folks are, obviously, not Larry, Moe, and Curly.

Prepaid cards are more attractive to thieves than "money mules" because, as Krebs notes, many of these "mules" are so inept that they screw up the illegal transfers. Some even beat the thieves at their own game and keep the money for themselves. As Krebs wryly observes, "there are probably good reasons that a lot of these folks are unemployed."

Prepaid cards are a convenient alternative to mules because the crooks "have access to massive amounts of stolen data that can be used to fraudulently open up prepaid cards in the names of people whose identities and computers have already been hijacked. Once those cards are approved, the crooks can simply transfer funds to them from cyberheist victims, and extract the cash at ATMs. Alternatively, wire transfer locations like Western Union even allow senders to use their debit cards to execute a “debit spend,” thereby sending money overseas directly from the card." That's what happened in the case Krebs discusses.

That case involved a wholesale gasoline dealer, Alta East. "According to the firm’s comptroller Debbie Weeden, the thieves initiated 30 separate fraudulent transfers totaling more than $121,000. Half of those transfers went to prepaid cards issued by Metabank, a large prepaid card provider."

To make a long story somewhat shorter, here's the scheme:

• Crooks compromised the email account of an Alta East customer.
• They sent an email to a number of Alta East employees that asked about an Alta East invoice and attached a pdf file that was infected with a ZeusS Trojan-related Javascript element.
• Four Alta East employees clicked on the infected file, which downloaded the element, which in turn was used to gain access to information used to access Alta East's corporate bank accounts with Provident Bank. The element was so stealthy that it was not discovered by six different anti-virus products, but only by an outside consultant who eventually found it through an analysis of a hard drive conducted in an external environment.
• The thieves disguised their communications with the bank by using a proxy network of a nearby nonprofit business, whose system they'd also compromised, rather than Alta East's system.
• The thieves instructed the bank to transfer part of the funds to 15 prepaid cards and the rest to money mules scattered throughout the country.
• In accordance with its agreements with its customer, the bank notified Alta East by email the same day the transfers were ordered, but Alta East employees neglected to review the message until the next morning, by which time the transfers had been made.
• Alta East may recover $41,000 from the mules, but it stands to lose $80,000 and, apparently, has no way of recovering anything from the prepaid cards.

Krebs offers some valuable lessons, and I'd encourage banks and their customers to read them. One that I tell commercial bank customers constantly is the following: "Unlike consumers, businesses have basically no legal protection from their bank due to losses from cyber fraud. Yes, organizations should push their banks to do more on security. But for better or worse, small to mid-sized businesses who are counting on their banks to prevent this type of fraud are setting themselves up for disappointment and major financial losses."

Before banks take comfort from this advice, they should recall that one of the requirements of the new FFIEC Guidelines is to educate their customers about online banking security. Education programs were supposed to be in effect by the end of 2011. Krebs lessons for customers ought to be read by banks and incorporated into their educational materials or programs. After all, it's only a question of time before some enterprising plaintiff's attorney makes the failure to educate effectively the cause for a lawsuit against a bank the next time a customer suffers a loss in a scheme like this one.