Groundbreaking legislation. Political intrigue. Indecipherable regulations. If you get chills of excitement just thinking about these topics, this is the blog for you! Henry Meier is taking on the latest laws, regulations and political issues that impact New York credit unions, so read often and join the conversation!
One of the trickiest questions facing businesses of all sizes, regulators, lawyers and policy makers is how to draw a line between encouraging the disclosure of information in an age when a smart phone gives an employee access to more information than imaginable just five years ago but the need for confidentiality is as important as ever.
Example 1: credit unions are justifiably concerned over NCUA’s decision to give the public access to a risk-based net worth calculator designed to give credit unions a snapshot of how they would fare under the agency’s proposed RBNW framework. NCUA justifies its decision to make the calculator publicly available by stressing the need to have an informed public debate on this important issue.
Given the agency’s steadfast commitment to public discourse, I find it odd that it takes the agency two weeks to make an online video of its monthly board meetings available. If you want to take a look at NCUA’s February 20th board meeting, it is available now. There are people like myself for whom real time access to NCUA’s decisions and explanations as to why they are making the proposals they are making would be invaluable.
NCUA should take its commitment to openness to the next logical level and start offering real time broadcasts of its monthly meetings. If the NCUA truly believes that the public deserves real time access to an individual credit union’s potential net worth then surely that same public deserves timely information about NCUA’s latest regulatory initiatives.
Example 2: We’ve all been there. You’re sitting around the dinner table talking to your wife about the day’s events when you realize that your kids are listening to your every word. You explain to them that there is some stuff that just stays within the family. Do you really think this warning works? I once talked to a pre-school teacher who told me that she knows more intimate details about her school kids’ parents than she would ever want.
Many of you have probably already heard about a recent case in Florida in which a father successfully sued his ex-employer claiming age discrimination. As is common in these cases, $80,000 of the settlement was contingent on the father neither “directly or indirectly” disclosing the terms of the agreement to third parties. No one bothered explaining this to the ex-employee’s 20-year old daugter, who proudly reported her father’s victory to her 1,200 Facebook friends, replete with the admonition that the ex-employer should “SUCK IT.” What I didn’t realize until I read the case was that the court’s ruling ostensibly had nothing to do with the Facebook post. The father violated the agreement as soon as he talked about the settlement with his daughter. However, on a practical level it is doubtful that the father’s indiscretion would have cost him $80,000 in the pre-Facebook era. As for the 20-year old daughter with 1,200 friends, perhaps they can offer her some extra summer jobs as she may very well be paying for her own college education from here on in.
Many of you have to sign off on confidentiality agreements either as part of your employment contracts or legal settlements. This case underscores the importance of well-drafted confidentiality clauses in the age of social media. Whereas contracts typically use somewhat generic language prohibiting both direct and indirect disclosures, I wouldn’t be surprised if lawyers start seeking greater flexibility on behalf of executives entering into contracts.
Example 3: Merchants in Texas, Florida and California recently filed lawsuits to invalidate state level laws banning surcharges on credit card purchases. A group of merchants already won a similar lawsuit invalidating New York’s credit card surcharge prohibition (518 NY General Business Law). That case is currently being appealed.
In the New York case, the plaintiffs successfully argued that the credit card surcharge prohibition violated their first amendment rights.
Today is not a good day for America and it is certainly not a good day for an industry like credit unions, which are dependent on a consistent legal backdrop upon which to grow their businesses and provide needed services to members.
Just so you understand where I am coming from with this, I personally am in favor of universal health care. Over the years, I’ve come to believe that there is something distinctly un-American about people like my wife and I being fortunate enough to get the healthcare we need when we need it while fellow citizens have to choose between paying the rent or taking their kids to the doctor.
But it is becoming increasingly clear that the implementation of the Affordable Care Act (ACA) is driven less by the law than by political considerations. Yesterday, Health and Human Services Secretary Kathleen Sebelius announced the latest in a growing list of de facto amendments to the law when she announced that individuals with policies that don’t meet the baseline standards of adequate health insurance mandated under the ACA (aka Obamacare) will be able to maintain these policies for an additional two years. What really caught my eye about the announcement was how open the administration was in explaining the political motivation behind the latest amendments. For instance, in announcing these changes, Kathleen Sebelius stated, “[t]hese policies implement the health-care law in a common-sense way by continuing to smooth the transition for consumers and stakeholders and fixing problems wherever the law provides flexibility.” Translation: the law is written so vaguely that the Executive Branch’s election-year definition of common sense trumps any language actually passed by Congress.
It would be bad enough if this approach was being taken with just one law. But in fact it reflects a troubling trend where our elected representatives pick and choose what laws to enforce and write legislation so broadly that legislative responsibilities are being delegated to unelected regulators. Let’s be honest, a Qualified Mortgage is what Director Cordray decides it is. If you think that marijuana possession should be legal even though it is clearly illegal at the federal level, simply pass a state law legalizing it and then lobby the Department of Justice to publicly state what federal laws it doesn’t think are worthy of enforcement.
Is there any way to reverse this trend? The most practical thing would be for the courts to step in and dust off the long forgotten constitutional principle of non-delegable duties. As the Supreme Court has explained, it “has long insisted that the integrity and maintenance of the system of government ordained by the Constitution mandates that Congress generally cannot delegate its legislative power to another branch.” See Mistretta v. U.S., 1 Fed.Sent.R. 377, 1989. The Court has, over the years, implemented this mandate more flexibly to permit cooperation between the branches in implementing increasingly complicated regulatory schemes with the result that Congress has become all too willing to delegate its powers to regulators.
Laws are nothing more than pieces of paper if they aren’t actually implemented. We justifiably cringe when we see Vladimir Putin throwing out nonsensical “legal” justification for invading another country. We cringe because we understand the importance of being a nation of laws. President Obama does, as well, but I am afraid that he is letting his understandable frustration with a gridlocked political system taint his judgment and his legacy.
It took a little longer than anticipated but the House of Representatives passed legislation on Tuesday delaying flood insurance rate increases previously mandated by bipartisan legislation passed in 2012. The legislation, which passed with Democratic support, was a nice victory for New York’s Staten island Congressman Michael Grimm.
As I explained in a recent blog, the 2012 reforms have resulted in sharp increases in flood insurance rates and Congressmen were justifiably concerned that without delaying these rate increases many homeowners in flood zones would find it unaffordable to live in these communities. As Representative Shelley Moore Caputo (R-West Virginia) said during last evening’s debate: in some cases, the choice of homeowners “was to either spend life savings on their flood insurance bills or walk away from their house, ruining their credit.”
However, the bill still leaves credit unions in compliance limbo. Specifically, the federal agencies have proposed regulations mandated by the 2012 bill requiring that institutions with $1 billion or more in assets establish escrow accounts for the payment of flood insurance premiums (12 U.S.C.A 4012a). The NCUA and other regulators issued a joint guidance opining that the escrow provision doesn’t take effect until the regulations are promulgated, which they anticipate will be finalized in sufficient time to allow lenders to implement them prior to July 2014.
Based on my reading of the bill passed by the House, the escrow requirement, as well as other mandates regarding the acceptance of private flood insurance, remain intact. But we won’t know this for sure until the Senate acts on the House bill, which it is expected to do shortly. I would hope that at that point federal regulators would issue a subsequent guidance to clarify the status of flood insurance regulations.
Today brings further evidence that credit unions not only talk the talk when it comes to member value, but walk the walk.
According to an annual survey conducted by BankRate.com about 72% of the 50 largest credit unions offer free checking accounts with no strings attached. An additional 24% of these institutions have free accounts for customers who meet certain conditions. In contrast, according to the survey, only 38% of the largest banks offer free checking accounts, a big drop from the 65% that offered them in 2010.
You want some more good news? Fees at credit unions are a lot lower than those at banks. Overdraft fees are a little less than $6 cheaper and our charges for using an out-of-network ATM are $0.50 to $1.00 cheaper on average.
Banks love to argue that as credit unions grow larger they become indistinguishable not-for-profit competitors. But these statistics show yet again that simply isn’t the case.
On Balance Another Positive Year For Credit Unions
NCUA released statistics for credit union growth in the fourth quarter of 2013 and grudgingly admitted that credit unions ended the year with positive economic returns, even as it continued to warn of interest rate risk. Among the most noteworthy achievements were that loans grew nearly 8% in 2013 compared to 2012. In fact, loan products ranging from auto loans to pay day lending alternatives posted impressive gains last year. As a result, the industry loan to share ratio of 70.9% reached its highest level since 2010.
Now for the bad news. The return on assets stood at 78 basis points, down from 80 basis points at the end of the third quarter and 85 basis points at the end of 2012. NCUA also noted with alarm what it describes as a long-term investment surge.
NCUA has been warning of impending interest rate risk for almost five years now. With the exception of a brief spike in mortgage interest caused by confusion over when the FED would start tamping down its bond buying program, interest rates have remained near historically low levels. In addition, the Fed has given no indication that it plans on raising interest rates any time soon. Eventually, interest rates will rise but every time I hear NCUA warning credit unions of this impending risk, I wonder what NCUA’s alternative investment strategy is for credit unions.
The great Boston Celtic Center Bill Russell once commented that fans don’t think they react. All too often I think the same can be said of our elected representatives.
If you make mortgages in New Jersey, you should take a look at .A347, which overwhelmingly passed that state’s assembly late last week. The bill is the latest attempt to deal with the serious problem of so-called zombie property. This is property which has been abandoned following the commencement of a foreclosure but for which no foreclosure has been completed. Localities not only in New Jersey but New York have been advocating for the authority to make the foreclosing lender maintain the property during the foreclosure process. Attorney General Eric Schneiderman is seeking a similar approach for New York.
The legislation passed by New Jersey’s Assembly mandates that a creditor that files a notice to foreclose on residential property that subsequently becomes vacant may force the lender to cure any violations regarding state or local housing codes. Keep in mind the views I express are mine and do not necessarily reflect those of the Association, let alone the good credit unions of New Jersey. The most troubling aspect of this approach is that the lender is being asked to take responsibility for property it does not own. Secondly, by mandating that the abandoned property be brought up to code the lender is not being required to simply maintain property but improve it. Finally, what is the NJ Legislature going to do in those situations where a home owner seeks to reclaim property for which the foreclosure process is yet to be completed.
According to the National Association of Realtors, as of 2013, there were 300,000 zombie properties across the U.S. I would bet you that those properties are disproportionately in states with drawn out foreclosure processes. Rather than make lenders responsible for property they do not own, housing advocates should take a look in the mirror and realize that so-call foreclosure protections needlessly delay the transfer of property to lenders and indirectly drive up the cost of homeownership for everyone.
My compromise position for the good people of New Jersey is to couple any requirement for lender foreclosure maintenance with an expedited foreclosure process for the affected property.
It’s an exciting day at the Meier homestead. The bad news is that there is a swamp soon to be an ice rink in front of my driveway and my wife just looked out the upstairs window to see Town employees tearing up the front lawn of my new house.
The good news is that because the pipe broke under the street, the expense of this demolition is on the Town. (Sorry fellow taxpayers) However, with the water in my house about to be turned off any second a whole bunch of great news will have to wait until Monday.
I did want to highlight one Supreme Court argument that took place earlier this week involving the standard to be used by courts in determining when to make Patent Troll Attorneys pay a defendant’s legal bills when they bring unsuccessful legal claims based on — euphemistically speaking — aggressive interpretations of a patent’s scope. See Octane Fitness, Inc. v. Icon Health and Fitness, Inc. (2014).
Right now, a defendant in a patent case is only entitled to attorney fees in exceptional cases. The patent defendant in this case argued that fees should be shifting any time a lawsuit is objectively unreasonable.” Many credit unions feel they have been shaken down by attorneys who threaten lawsuits if the credit union doesn’t agree to start paying a license for the continued use of its ATMs, for example. That’s why this case offers the potential of a modicum of relief from patent trolls.
In fact, the conundrum caused by these fellas was captured nicely by Justice Breyer in Wednesday’s argument. Referring to a hypothetical in which a company gets a letter from a law firm accusing it of violating a broad-based patent claim, he said:
. . ., all they did was say:
We don’t want to go to court and cost you $2 million.
Please sen[d] us a check for a thousand, we’ll license it
for you. They do that to 40,000 people, and when
someone challenges it and goes to court, it costs them
about 2 million because every discovery in sight. Okay?
You see where I’m going?
litigation. What you’ve described. . .
MR. PHILLIPS: Yes.
JUSTICE BREYER: And so I do not see why you
couldn’t have an exceptional case where attorneys’ fees
should be shifted. But if I’m honest about it, I cannot
say it’s objectively baseless. I can just say it’s
pretty close to whatever that line is, which I can’t
describe and look at all this other stuff. Are you
going to say that I can’t shift?
MR. PHILLIPS: I think the problem with the
approach you propose there, Justice Breyer, is you’re
trying to deal with a very small slice of the problem of
JUSTICE BREYER: I know, but I of course
it may be a small slice of litigation, but it is a slice
that costs a lot of people a lot of money.
The Justice is right. Currently, there simply is no downside to casting a patent net as far and wide as possible. In fact, an attorney representing a patent holder isn’t doing her job properly if she doesn’t take this approach.
The ultimate solution is for Congress to mandate that patents be more narrowly and clearly drawn in the first place but that would require Congress to tackle complicated, controversial issues and that is asking way too much of our elected representatives.
This is a story about Jack and Diane; two American kids who lost touch after a sordid affair in High School. Each of them go to college, get a job, and are now ready to claim their piece of suburbia by buying their first house.
Jack gets his mortgage from a credit union with assets over $2 billion dollars. Diane gets hers from a small credit union with assets over $25 million. Both of the credit unions make qualified mortgages (QM) to enthusiastic first time homebuyers. This means, among other things, that Jack’s mortgage doesn’t exceed a 43% debt- to-income ratio and his credit union adhered to the prescribed underwriting requirements mandated by Appendix Q. Jack’s credit union had its mortgage department document the borrowers information (remember, the days of the liar loan are over).
Our small credit union gives a QM mortgage to Diane. It also does everything right. It’s a lot easier for it to make a QM loan. For example, Diane had a debt to income ratio around 50%, but the D-T-I cap doesn’t apply to small lenders. Student loans for a Masters in Acting can pile up, but the credit union knows Diane and has made similar loans in the past. Besides, the credit union’s “mortgage department” consists of Bill, a 30 year veteran of making mortgages in the area who has internalized the credit union’s lending parameters but has never had the time or seen the need to translate this knowledge into policies or procedures.
Eighteen months go by and both credit unions have had to start foreclosures. Dodd-Frank has made foreclosure defense a profitable legal specialty, so both Jack and Diane have retained counsel. Both borrowers claim that they have a valid defense to foreclosure because both credit Unions violated Dodd-Frank in being foolish enough to give either of them a loan.
If the law works as envisioned, neither credit union will have anything to worry about. Once they prove they have made Qualified Mortgages the foreclosure defenses fail, right? In theory, yes, but here is my concern. Given the more stringent requirements imposed on larger credit unions, it may actually be easier for larger credit unions to get QM protections than smaller credit unions. The idea behind the safe harbor is that a judge can see by the terms of the mortgage and the mortgage file that a member had the ability to repay a mortgage loan. Given the more stringent limitations placed on our larger credit union, it will be obvious by the terms of the mortgage and the underwriting in the file that Jack had the Ability to Repay the loan when it was made.
In contrast, the same can’t be said of our smaller credit union. For example, was the 50% D-T-I ratio reasonable? Diane’s credit union says it was consistent with past practice, but its underwriting policy simply says it will underwrite to secondary market standards and there is nothing in the file to indicate why an exception was made in this case.
Don’t get me wrong, our small credit union did make a QM loan, but it didn’t have (a) the documentation to prove it and (b) policies explaining its underwriting standards. QM mortgage or not, judges are going to want proof and defense lawyers are going to raise as many questions about the credit union’s policies as they can.
As explained by an extremely smart lawyer in September 2012: “Even a safe harbor isn’t safe. You can always be sued for whether you meet the criteria or not to get into the safe harbor. It’s a bit of a marketing concept there. The more important point is, are we drawing bright lines? If someone were to say to me safe harbor or anything else, I would go with a safe harbor. But I don’t think safe harbor is truly safe. And I think it oversimplifies the issue.” I couldn’t agree more, Mr. Cordray.
The comment period on the Risk Based Net Worth proposal officially kicks in today with the regulation’s posting in today’s Federal Register. I’ll have more on this tomorrow.