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Texas Court Enjoins Salary Test For Exempt Employees

On November 22, 2016, Judge Mazzant from the Eastern District of Texas, issued a preliminary injunction, stopping the December 1 application of a huge increase in the salary test for FLSA exemptions for executive, administrative, and professional employees.  Here is the rest of the story.

Background. Both business interests (through Plano Chamber of Commerce and others) as well as a number of state AGs (including Texas) sued the Department of Labor (DOL) to enjoin the revised rules relating to executive, administrative, and professional (EAP) exemptions in the Fair Labor Standards Act (FLSA). The cases were combined by Judge Mazzant, who has issued a preliminary nationwide injunction, stopping the December 1 implementation of the significantly increased salary test. The next step will be a determination as to whether or not the FLSA supports the use of a salary test at all. A change in leadership at the DOL and US Attorney General could result in a decision to not defend the regulation.

The Memorandum Opinion and Order by Mazzant notes that the FLSA delegates to DOL the authority to define the terms “bona fide executive, administrative, or professional capacity.” However, he has concluded that this exemption can and should be defined by referencing duties without also imposing a minimum salary level. The ultimate result may be that the rule will be amended as a result of the judicial determination that only a duties test is authorized under FLSA with no minimum salary requirement to be imposed.

By the way, a minimum salary test has been in the rules since 1949! By bumping up the minimum salary so significantly (almost doubling) without a phase-in, DOL virtually guaranteed push back.

So, this still leaves you with the question of what do in response to this order. My hunch is that in January with a new administration, the salary test issue could be resolved with a decision to NOT DEFEND the rule. But that is only a hunch.  Here is a possible response:

Restore prior treatment of EAP.  For many employers, the major issue is keeping these individuals on a salary basis rather than hourly. Also, the record keeping rules do not apply to exempt employees. Many previously exempt employees are unhappy with this perceived “demotion” as well as the need to punch a clock (figuratively) and keep time records. Employers may wish to indefinitely defer changes with the understanding that these may need to be made in the future. However, if you have already increased salaries, you may not be able to put that genii back in the bottle.

No change to MLOs. But please note that this case is about the salary part of the EAP rule. That would not affect the prior rules relating to the duties test for mortgage loan officers (MLOs). According to DOL, MLOs don’t meet either the administrative or the outside sales exemptions in the FLSA based on an analysis of their duties.

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

Kennedy Sutherland Named a 2017 'Best Law Firm' by U.S. News-Best Lawyers

Kennedy Sutherland LLP is pleased to announce that it has been named a “Best Law Firm” by U.S. News – Best Lawyers for 2017, achieving national Tier 1 rankings in the practice area of Financial Services Regulation Law.

“Kennedy Sutherland LLP has taken great pride in advising financial institutions on regulatory compliance and enforcement, complex transactions and other expansion activities and banking laws for over 30 years. It’s an honor to have our clients and peers include us in this distinguished group for the work we’ve done” said Patrick J. Kennedy, Jr.

Firms included on the “Best Law Firms” list are recognized for professional excellence with persistently impressive ratings from clients and peers. Inclusion in the rankings signals a quality law practice and breadth of legal experience and knowledge.

About “Best Law Firms”: The U.S. News – Best Lawyers® “Best Law Firms” rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field, and review of additional information provided by law firms as part of the formal submission process. To be eligible for a ranking, a law firm must have at least one lawyer listed in 23rd Edition of The Best Lawyers in America© list for that particular location and specialty.

About U.S News & Best Lawyers: U.S. News Media Group publishes the monthly U.S. News & World Report magazine and its signature franchises include its “America’s Best” series of consumer guides that include rankings of colleges, graduate schools, hospitals, health plans and more. Best Lawyers is the oldest peer-review publication in the legal profession. For over a quarter century, the company has helped lawyers and clients find legal counsel in distant jurisdictions or unfamiliar specialties.

 

PHH Corporation v. CFPB

If you are like me, you have probably read several very brief articles about the eagerly anticipated appellate decision from the DC Court of Appeals in PHH Corporation v. Consumer Financial Protection Bureau (CFPB), considering whether or not the CFPB is an unconstitutionally created behemoth. As important as the future of the CFPB is, there were really critical issues addressed by this decision. So, I have put on my reading glasses and now read the entire 110 pages of the opinion.

Constitutional Issue. The first 69 pages of the opinion dealt with the constitutionality issue as to the structure of the CFPB. The court concluded that, in order to appropriately maintain the effect of the Executive Branch, an independent agency must either have a multi-member board or the president must have the authority to remove the director at will rather than only “for cause.” The remedy put into place by this court is to conclude that the CFPB director must be dismissible at will by the president.

FYI, there are three agencies that don’t fit the analysis including the Social Security Administration, FHFA, and the Office of Special Counsel. Another single executive agency, the Office of Comptroller of the Currency, is safe as the comptroller is removable at will.  Therefore, that agency’s constitutional validity should not be at question. And the court found appropriate protections or limitations as to the other three.

RESPA. The court then totally struck the CFPB’s interpretation of the anti-kickback provisions in RESPA. The law and the rule have an explicit exception for “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” HUD had long standing letters and interpretations explicitly permitting the reinsurance scenario. The only issue in this case, then, is whether the reinsurance premiums were at “reasonable market value.” According to the court, “the basic statutory question in this case is not a close call.

This part of the opinion is very important to community bankers as I believe it strikes at the heart of the guidance published last year by the CFPB on marketing services agreements. If the contracts provide for services that are actually performed and the payment is at reasonable market value, then these agreements should be valid.

Statute of Limitations. Cordray held in his administrative opinion that the statute of limitations in RESPA did not apply to him. He concluded that the Dodd Frank Act’s enforcement authority granted to the CFPB authorized administrative actions that were not bound by other statutes and their specific limitations provisions. The court disagreed and concluded that the CFPB’s enforcement authority is in fact limited by the “statutes of limitations of the various federal consumer protection laws it is charged with enforcing.” RESPA has a one year limitation period for court actions and a three year period for administrative ones. Thus, the three years applies here. This is just not ambiguous in RESPA, and the Dodd Frank Act doesn’t override this. This part of the opinion also means that the CFPB can’t ignore the clear statutes of limitation in the other 18 laws assigned by DFA to it.

There is a very good discussion of the core American jurisprudence concept of due process in this part of the opinion. I particularly like this quote from Satellite Broadcasting Co. v. FCC: “Traditional concepts of due process…preclude an agency from penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule…Otherwise the practice of administrative law would come to resemble ‘Russian Roulette.'” I would argue that the current ADA application to private websites-without any rulemaking on the part of the Department of Justice-would also fall within this prohibition!

For more information contact: Karen M. Neeley.

Advisory to Financial Institutions on E-Mail Compromise Fraud Schemes

The Financial Crimes Enforcement Network (FinCEN) today issued an advisory to help financial institutions guard against a growing number of e-mail fraud schemes in which criminals misappropriate funds by deceiving financial institutions and their customers into conducting wire transfers. This advisory also provides red flags—developed in consultation with the Federal Bureau of Investigation and the U.S. Secret Service—that financial institutions may use to identify and prevent such e-mail fraud schemes. Business E-mail Compromise (BEC) and E-mail Account Compromise (EAC) schemes are among the growing trend of cyber-enabled crime adversely affecting financial institutions. Since 2013, there have been approximately 22,000 reported cases of BEC and EAC fraud involving $3.1 billion.

Advisory:  https://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2016-A003.pdf

Advisory Issued on FATF-Identified Jurisdictions with AML/CFT Deficiencies

The Financial Crimes Enforcement Network (FinCEN) today issued an advisory to financial institutions regarding the Financial Action Task Force’s (FATF) updated list of jurisdictions with strategic anti-money laundering/counter-terrorist financing (AML/CFT) deficiencies. These changes may affect U.S. financial institutions’ obligations and risk-based approaches regarding relevant jurisdictions. FinCEN’s advisory can be viewed at https://www.fincen.gov/resources/advisories/fincen-advisory-fin-2016-a004

Advisory Notice

Attorneys Recognized by Best Lawyers in America©

Kennedy Sutherland LLP is pleased to announce two attorneys have been named to the 2017 edition of The Best Lawyers in America©. Best Lawyers is an annual ranking designed to capture the opinion of leading lawyers about the professional abilities of their colleagues within the same geographical and legal practice areas.

The following lawyers were recognized by Best Lawyers as leaders in their field in the 2017 edition:

Each year, only a single lawyer in each specialty in each community is honored as the “Lawyer of the Year.” Kennedy Sutherland’s senior attorney, Karen M. Neeley, was selected Best Lawyers® 2017 Banking and Finance Law “Lawyer of the Year” in San Antonio, Texas.

Mr. Kennedy’s practice focuses on the representation of banks, bank holding companies and other financial intermediaries. For over 34 years Kennedy has represented these entities and their shareholders, directors and officers in a broad range of matters, including mergers and acquisitions,  S corp elections, ESOP and bank holding company formations, Community Reinvestment Act strategy, strategic planning, corporate governance and  state and federal banking law compliance. In addition, Mr. Kennedy’s practice includes representation of banks as well as project sponsors utilizing state and federal  tax credit  programs  including Historic Tax Credits, New Market Tax Credits, Renewable Energy Tax Credits and low income housing tax credits.

Ms. Neeley has provided legal services to community banks throughout Texas and beyond for over 30 years. In addition to serving as General Counsel for the Independent Bankers of Texas, she is an advisory director for the Texas Association of Bank Counsel. Routinely, Neeley advises banks on regulatory compliance, examination preparation, policies and procedures and has special expertise in Bank Secrecy Act, fair lending and consumer compliance matters.

First published in 1983, Best Lawyers® lists are compiled based on an exhaustive peer-review evaluation. Lawyers on The Best Lawyers in America list are divided by geographic region and practice areas. They are reviewed by their peers on the basis of professional expertise, and undergo an authentication process to make sure they are in current practice and in good standing. For the 2017 Edition 7.3 million votes were analyzed.

Extended Comment Period on Third-Party Lending Guidance

The Federal Deposit Insurance Corporation (FDIC) is extending the comment period for proposed guidance on third-party lending. Comments on the proposed guidance, which was published on July 29, now must be received on or before October 27. The 45-day extension was made in response to requests from interested parties who asked for additional time to consider the proposal.

The proposed third-party lending guidance outlines the risks that may be associated with third-party lending as well as the expectations for a risk-management program, supervisory considerations, and examination procedures related to third-party lending.

Comments should be sent to thirdpartylending@fdic.gov and will be posted on the FDIC’s website at https://www.fdic.gov/regulations/laws/publiccomments/.

Examination Guidance for Third Party Lending

Crafting the Historic Tax Credit Deal

Kennedy Sutherland attorney, Patrick J. Kennedy, Jr., is honored to present at the “Crafting the Historic Tax Credit Deal” seminar on June 23, 2016 from 8am – 10am at the St. Anthony Hotel in downtown San Antonio, Texas.

With the new Texas Historic Preservation Tax Credit program enacted in 2015 (worth 25% of eligible rehabilitation costs for building listed on the National Register of Historic Places), historic and rehabilitation tax credits are increasingly part of the capital stack providing the equity gap between real construction costs and the value of the building once complete. There are a multitude of strategies being used to bring life back to underutilized properties.

Kennedy Sutherland will join other panelist in the field and walk through the basics of the federal and state historic rehabilitation tax credits and structuring deals as well as use a regional case study to highlight the process and important issues to consider when using this financing tool.

Speakers for this forum include:

  • Moderator: Albert Rex – Partner | MacRostie Historic Advisors LLC (Boston, MA)
  • Historic Consultant: Bill MacRostie – Senior Partner | MacRostie Historic Advisors LLC (Washington, DC)
  • Tax Attorney: Patrick Kennedy, Jr. – Managing Partner | Kennedy Sutherland LLP (San Antonio, TX)
  • Tax Syndicator: Scot Butcher – Principal | Tax Incentive Finance (Providence, RI)
  • Developer: Brandon Raney – Founding Principal | BC Lynd Hospitality (San Antonio, TX)

EVENT COST:
ULI Members: $25
Non-Members: $35
ULI Young Leaders (U35) & Students: $20
ULI Non-Member (U35) & Students: $30

Register Now

Government Contracts - Texas Banks

If your bank provides public fund depository accounts, investments to governmental units, or finance leases (e.g. school buses, fire trucks), then you need to be aware of a change to Texas law that took effect as to contracts entered into beginning January 1, 2016. Although the Texas Ethics Commission reviewed possible rule changes on June 1, those proposals will not significantly change the requirements outlined below.
Scope. Business entities like banks that contract with governmental entities must file a certificate of interested parties. This applies to any government contract over $1MM or which is acted on by the governing board of an entity (e.g. city council, county commissioners, school board, MUD board). Thus, it applies to public fund depository contracts, investment contracts and finance leases. Typical governmental entities include cities, counties, school, water and hospital districts, and MUDs. Because most of these vote on all contracts, the $1MM threshold is largely irrelevant.
Content of Certificate. The certificate must list the names of controlling parties. This includes shareholders with more than 10% ownership and directors for entities with boards of ten or fewer. Finally, the four most highly compensated officers must be listed. Proposed rule changes will exempt publicly traded companies from listing these officers. The certificate requires the name, city, state, and country. In addition to controlling parties, “intermediaries” must be listed. This includes a person who actively participates in facilitating a contract or negotiating the terms, including a broker, intermediary, adviser or attorney who receives compensation from the entity for the person’s participation, who communicates directly with the governmental entity on behalf of the business, and is not an employee of the business. So, an operations officer who negotiated a public fund contract but is not on the board and is not a controlling shareholder would not be listed; however, your attorney who reviewed the contract and gave comments directly to the governmental entity would be required to be listed on the disclosure form.
Form Completion Process. The certificate form is on the Texas Ethics Commission web site at https://www.ethics.state.tx.us/whatsnew/elf_info_form1295.htm. The bank must complete the form online. The Texas Ethics Commission (“TEC”) will provide a certification of filing that contains a unique certification number. This form must then be printed out. Then an authorized agent of the bank must sign the printed copy of the form and have it notarized.  This completed form with the certification must then be filed with the governmental body with which the business is contracting.
The governmental entity will notify the TEC, using the filing application, of the receipt of the filed Form 1295 with the certification of filing not later than the 30th day after the contract binds all parties. Then the TEC will post the form to its website within seven business days after receiving notice. Without this filing process, the governmental entity is forbidden to enter into the contract! However, there is no enforcement mechanism in the law. The TEC was authorized to promulgate rules, but it was not given authority to enforce.
Impact on Existing Contracts. The rules apply as to Texas government contracts entered into after January 1, 2016. However, the TEC has defined “contract” to include an amended, extended, or renewed contract.
For more information, contact Karen Neeley.