Credit Union Litigation Issues Involving Nationwide Industry Standard Practices and Procedures

Credit Union Litigation runs the gamut of financial institution litigation issues from director and officer oversight responsibilities to deposit, lending, management, employment, and training matters. All can have a severe financial impact on the credit union and possibly on the individuals involved as well, and should be taken very seriously.

Institutional Failure due to Director & Officer Mismanagement Issues

The most serious litigation that a credit union can face is director and officer mismanagement charges leveled by the National Credit Union Association (“NCUA”), often after or around the same

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time as the failure of the credit union.

The typical process is that the NCUA makes a determination that it needs to initiate a legal case against a credit union’s directors and officers, and then files a notice of claim with the credit union’s professional liability insurance carrier in order to preserve the federal regulator’s right to the full amount of coverage provided under the directors and officers liability insurance policy..

Along with the notice to the insurance carrier, the typical claim process involves the NCUA also sending demand letters to the credit union’s directors and officers. The demand letters typically allege whatever failures the NCUA feels the directors or officers have committed, such as breaches of fiduciary duties of care and loyalty, and may include breaches of good faith, fair dealing, ordinary care, honesty in fact, and failure to observe reasonable commercial standards.

This process preserves the NCUA’s right, typically as conservator of the credit union, to seek recovery under the directors and officers liability insurance policy.

Director and officer liability policies state strict deadlines by which these filings must be initiated by the NCUA in order to preserve their right to claim a loss.

Then the NCUA completes an investigation and later decides whether or not to initiate civil litigation against any individual directors or officers.

The important overriding issue is did the actions of the directors and officers conform to nationwide industry standard practices?

Deposit Issues

● Signature card issues are common areas of controversy at all financial institutions since they basically dictate who has access to a particular bank account and who does not.

When having customers sign a signature card for a new account, it is important to make sure that their intentions are clearly reflected on the signature card.

For example, a typical married couple will usually want their account to read “Bill Jones or Mary Jones” so that either one has equal access to the account. Either Bill or Mary can take all of the money out of the account.

The cumbersome alternative would be to structure the account to read “Bill and Mary Jones” which would mean that both would have to sign a check in order to withdraw funds from the account. While clunky for a couple to use, this “and” account structure is often used as a check and balance for corporate or other business accounts so that there will be two parties reviewing all outgoing payments.

● It is not unusual for a person who is not a signer or owner on a particular checking account to make regular deposits into the account; but it is improper to allow that person to withdraw money as if they were a signer or owner of the account.

● Checks that are payable to a corporation should never be cashed or allowed to be deposited “less cash” but rather should be deposited into the checking account of the corporation and then a corporate check written for the amount desired as “cash back.”

In setting up a corporate bank account, a corporate resolution from the corporation is required authorizing the establishment of the account. This corporate resolution should be attached to the signature card as evidence of the authenticity of the account.

All account holders should be encouraged to regularly review their bank statements and promptly report any discrepancies to the credit union.

Lending Issues

● Lender Liability is when a lender can be held liable for actions such as failing to honor a loan commitment, making a loan in bad faith, interfering with a borrower’s business, foreclosing without proper notice, and similar actions or inactions. Credit unions have to be careful to abide by all agreements made with borrowers and to adhere to all details of all loan documents.

● Construction loans sometimes turn into problems due to mismatches between the amount of loan proceeds that have been funded compared to the actual amount of work that has been completed. Credit unions making construction loans should inspect construction progress before funding each construction draw, and then only fund the appropriate amount of loan funds based upon the level of completed work. Letting the funding get ahead of the actual construction is asking for trouble.

● Applying mortgage loan payments and assessing late charges is another area that often leads to litigation. Every promissory note states what the payment provisions are and when late charges are due; and it is critical that credit unions incorporate these payment parameters into their loan management IT systems and strictly adhere to them in servicing each loan.

A common payment problem is that a borrower will miss one payment and owe a late charge on that payment but not pay the late charge the following month, causing that month’s payment to be classified late as well as the original late payment. In this case, the borrower only owes one late charge. It is now viewed as improper to charge a borrower a second late charge simply because they missed one monthly payment, even when they failed to pay the late charge in the second month.

● Wrongful foreclosure is probably the largest lending problem that a credit union can encounter is a claim of wrongful foreclosure. These wrongful foreclosure claims can be based upon a failure to notify the borrower in a timely manner, disagreements over the payment status, disagreements over the insurance coverage status, disputed foreclosure documentation issues, missing loan file documents, and many other reasons.

It is imperative that the credit union address up front whatever the issue is that has been propounded in the wrongful foreclosure before proceeding through the foreclosure stage or else the credit union risks jeopardizing their foreclosure and getting entangled in costly and time-consuming litigation whose cost is unlikely to be recovered from the litigation.

Management, Employment and Training Issues

● All credit union personnel should receive initial training to properly do their job. I have encountered credit union personnel that had no concept what their job entailed and even a co-president (whatever that is) who could not even perform multiplication without a calculator. This is unacceptable, and underscores that only qualified personnel should be hired; and they should be thoroughly trained in the specifics of their particular job.

● And since most credit unions are relatively small operations with lean staffing, it is important to keep in mind that staff members should be cross-trained so that they can handle more than one function.

● Recommended effective methods and procedures for performing all jobs in a credit union should be codified in policy and procedure manuals that are used in training new personnel and that are available for reference by personnel while they are on the job. Policy and procedure manuals may be in a hardcopy written format usually contained in three-ring binders so that they can be updated; or else they are available online through a company’s intranet.

● In addition to adequate training for new employees and later training as new products or systems are introduced, the credit union must provide supervisory oversight of all officers and employees in order to make sure that they understand their job function and are carrying it out in accordance with the credit union’s policies and procedures.

Conclusion

● This article contains highlights of many of the areas in which credit unions can become involved in litigation.

● One of the most important issues to examine in litigation that is aimed at a credit union is if the credit union’s actions or inactions conformed to nationwide industry standard practices for other similarly situated financial institutions?

● Usually, that answer is not to be found in any particular book, treatise, regulatory document or in any other formal written source; but rather must be provided by an experienced independent professional who has observed how other institutions have handled the particular issue at hand.

● Please refer to additional articles that I have posted on this http://www.hg.org website to read more detailed methodologies for handling various banking and lending litigation problems encountered by credit unions and other financial institutions.

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ABOUT THE AUTHOR: Banking Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ. Clients have included numerous individuals, 60 banks, and governmental clients such as the IRS, FDIC.

Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.