If NY's AG Is Right, Then We Are All Doing Something Seriously Wrong

There’s been a lot of national news lately about pending court cases in New York City, but you may not have heard about the one that is important for credit unions on a national level.

In January, New York Attorney General Letitia James filed a lawsuit generally alleging that CitiBank was engaging in illegal and deceptive practices by refusing to extend protections of the Electronic Funds Transfer Act (EFTA) to consumers victimized by unauthorized wire transfers. See People of the State of New York v. CitiBank, S.D.N.Y., Case No. 24 Civ. 0659).

Late last week, CitiBank filed a motion to dismiss the lawsuit. It makes a compelling argument that the AG’s argument amounts to a radical reinterpretation of existing law that would expose financial institutions to billions of dollars in losses and make the existing framework for wire transfers obsolete overnight. Although this decision would only apply to the Second Circuit, you don’t have to be Nostradamus to see that it would end up being litigated across the country.

In 1978, Congress passed the EFTA. Most importantly, the statute caps liability for unauthorized transfers involving a consumer account. However, even as it passed the law, Congress created a distinction between wire transfers, which are generally transfers using the Fed wire system and similar networks, and transactions covered by the EFTA. This distinction was absolutely critical since financial institutions did not want to be on the hook for the huge amount of money facilitated by the Fed on a daily basis. See 15 USC §1693a(7)(B).

Article 4A of the UCC, which was adopted in the 1990s, was drafted, in part, to further delineate the distinction between wire transfers and EFTA protections. Under Article 4A, financial institutions are not subject to strict liability for unauthorized fund transfers. They must, however, adopt procedures agreed to by customers designed to confirm that wire transfer requests are authorized. There is no strict liability for unauthorized transfers. Today, this distinction is so well established that virtually every account agreement contains separate sections for wire transfers and EFTA disclosures.

This background explains why the AG’s argument is so important. The AG’s argument is that financial institutions interpret the EFTA exemptions too broadly. The AG argues that while a wire transfer between banks using the Fed system is not subject to EFTA protections, the subsequent transfer of that money by the receiving bank into a consumer’s account is covered.

For this and other reasons, I am cautiously optimistic that the AG’s argument is a bridge too far and will be rejected. If it is not, credit unions in New York State will be on the hook for billions of dollars in additional unauthorized transfer costs and credit unions across the country will have to deal with similar lawsuits sprouting up in a courthouse near them sooner than later.

In fairness to the AG, however, the more I delve into issues relating to liability in EFT transfers, the more I have to concede that this is a statutory framework that is woefully antiquated. Wire transfers used to be primarily for facilitating fund transfers by large companies and wealthy individuals (remember George Wainwright used a wire transfer to quickly send money to the Bailey’s Saving and Loan on that fateful Christmas Eve).

But times have changed. Today, many banks and credit unions provide consumers easy online access to wire transfers. While this is a boon for convenience, it is also a boon for hackers who can transfer a member’s life savings out of their account within seconds.

The premise of existing law is that wire transfers would be used to transfer a large amount of money between sophisticated actors, while the EFTA would be used to protect consumer transactions. While the lawyer in me agrees with and supports this crystal clear distinction, the policy wonk in me thinks it is inevitable that as the distinction between wire transfers and EFTA transactions becomes harder and harder to recognize, you will see Congress, Legislatures and if need be, the courts bend over backwards to place more liability on financial institutions, not because they have done something wrong, but because they will feel that the consumer needs their protection.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.