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!
Yesterday, the Today Show, which every morning fools millions of sleep-deprived Americans that they are being informed, aired a report on how a Swedish college student is marketing technology that allows people to make purchases using the palm of their hand. When making purchases at 15 stores in and around the student’s campus, customers don’t have to pull out plastic. Instead they simply type in four digits of their phone number and place a palm on the register to complete the transaction. The veins in the palm are apparently all unique-Who knew?- and this information authenticates the purchase.
Have we found the Holy Grail of consumer transactions that enables customers to quickly complete fraud-free purchases without the fear of forgetting their PIN or having to scribble on those lousy electronic signature lines? Don’t hold your breath, but the emergence of the technology is both noteworthy and instructive.
- In the aftermath of the Target data breach there are calls for merchants to finally make the transition to EMV technology and there should be. This technology, which has been widely used in many other countries for years now, replaces the magnetic strip on the back of cards with computer chips. Whereas the information on strips is static, information on computer chips can be changed making it more difficult for hackers to break into payment systems.
- The problem is, as this report demonstrates, that this technology is already outdated. If history is any guide, without a push from policymakers by the time merchants adopt biometric security measures my grandkids will be flying around in helicopters and scientists will have figured out what to do with Ted Williams cryogenically preserved head. In the meantime, credit unions and banks will continue to have to pick up the tab for preventable fraud.
- Biometrics is not something that is decades away. It is already being used. Just last week Samsung introduced its latest Smartphone, the Galaxy 5S. The new bells and whistles designed to make you want to trash your existing Smartphone include fingerprint authentication of PayPal transactions. Similar technology is also available on the latest Apple Smartphone.
- As someone who has been known to leave his wallet on the dresser and who is fed up with the number of passwords permeating my existence, the idea of scrapping all those passwords for an electronic handshake makes me about as happy as a tic on a hog, but no matter which technology is ultimately used to facilitate merchant transactions, bad guys will find a way to break whatever roadblocks are put in their way. For example, it took hackers four days to demonstrate how to foil Samsung’s fingerprint technology by making a replica of a person’s fingerprint. And, unlike good old-fashioned passwords that can be changed if compromised, a customer can’t change his or her palm print unless of course we encourage people to chop off compromised hands and replace them now that it’s so easy to make embryos.
- Data protection will always involve a trade-off between protection and convenience. If Congress or legislatures imposed obligations on merchants to take commercially reasonable efforts to guard against data theft then the courts could impose reasonable standards that evolve with technology. This is exactly the obligation the Court of Appeals for the First Circuit imposed on banks to protect business accounts under Article 4A of the UCC in Patco Construction Co. v. People’s United Bank.
On April 17, 1978, the Wall Street Journal wrote a seemingly obscure article in its Money Matters column describing a trend in which an increasing number of investors were using “so-called personal computers” to model investments in what the paper described as a movement of professional money managers to utilize quantitative measures when making investment decisions.
Fast forward to today and computers are now basically doing the investing for the money managers and investment banks are investing billions of dollars to ensure that they can feed the latest data to their computers before everyone else does. Times change.
Often it is the obscure event that ends up having the biggest consequences, so for me the most intriguing article so far this week was published in the Financial Times on Sunday. It reported that Facebook will soon be obtaining an e-banking license from the Irish government which will allow it to transfer money on its Facebook platform. No one knows for sure what precisely Facebook is planning to do, but when you consider that about one out of every six people in the world use the social network, it has the potential to implement a cooperative financial structure on an industrial scale.
For instance, let’s just say that Facebook simply wants to get a piece of the international remittance system. The World Bank estimates that in 2011 alone there were $350 billion in remittances to developing countries. Imagine how much money Facebook could make if it became the platform of choice for making these electronic payments? The model is already being used. In a previous blog, I talked about a mobile phone payments network, which is booming in Africa called M-PSA, which allows individuals to create electronic bank accounts on their phone and then transfer these funds. Its use has exploded in the developing world. It also enables individuals on the M-PSA network to make micro-loans to fellow network users.
Let’s speculate a little more. Your credit union does nothing more than act as a conduit for people who want to save money and people who want to borrow it. Which brings me to the second most intriguing article I read this week, courtesy of my wife. The article was about an 18-year-old woman who is starting a line of bras for young tweens and teens. She obtained the money for her new business not by going to a credit union, or bank for that matter, but by going to a cite called Kickstarter — a crowd funding organization — and with the help of a video she quickly raised $42,000 that she used to launch her line.
When Europe started the cooperative financial movement in the 19th Century, the idea of poor people leveraging their wealth outside of the traditional financial structure was a radical innovation. While the cooperative structure still has many benefits, society is now connected in one big network. Those credit unions that recognize that they are competing against not only banks but businesses, and have the willingness and foressight to organize and leverage that network are going to be around 36 years from now. In contrast, those of you who stubbornly refuse to recognize just how interconnected finance has become won’t be. In practical terms, this means the industry needs more cooperative ventures such as shared branching networks, not less. It also means that since everyone is already in a cooperative, albeit an electronically created one, maintaining the credit union brand is crucial if we are going to get the next generation to borrow money from a credit union instead of a social network platform.
The CFPB proposed a regulation yesterday to extend for five years, until July 2020, a rule permitting depository institutions, including credit unions, to estimate certain fees and taxes when making disclosures to members making international wire remittances.
Under the Dodd-Frank Act, the CFPB was required to promulgate regulations mandating that consumers be given detailed information about the cost of an international remittance. In implementing the rule, the CFPB exempted institutions that make 100 or fewer international remittances a year. Nevertheless, the regulation has been among the most closely watched by the credit union industry. Under the proposal, providers of remittances must, among other things, include prepayment disclosures that inform the sender of the transfer amount in the sender’s currency, transfer fees, the total amount of the transaction in the sender’s currency, and an estimate of the exchange rate.
They also must include other fees imposed by entities other than the remittance transfer provider that will be deducted from the amount transferred by the consumer. These fees are almost impossible for depository institutions to ascertain since many of them do not have pre-existing relationships with the institutions that will be receiving the remittances. As a result, depository institutions and credit unions were given the authority to estimate these fees (fees and exchange rates) until January 21, 2015. The most important part of yesterday’s proposed regulation is that it extends this exception for another five years until 2020.
Once again, remember that this rule only applies to institutions that make more than 100 international remittance transfers a year. Those of you who are impacted should take a look at the actual proposal since the exceptions granted by the CFPB while important are limited. One final note, for many credit unions the CFPB has become the institution they love to hate. But, yesterday’s change reflects the Bureau at its best, it considers arguments on their merits and does a better job of explaining its proposed regulations than any agency out there.
I have a sneaking suspicion that this morning’s blog will warm the hearts of many credit union employees responsible for collecting debts. It also provides useful instruction about the dos and don’ts of collection efforts once a member has declared bankruptcy and your credit union has notice of an automatic stay.
I know many of you already know this, but in case your second cup of coffee hasn’t kicked in, section 362(a)(6) of the bankruptcy code imposes an automatic stay applicable to all entities prohibiting any act to collect, assess or recover a claim against a debtor that arose before the bankruptcy filing. A willful violation of this provision occurs anytime a creditor is put on notice of an automatic stay and continues to try to collect a debt. Violations can result in damages and payment of a debtor’s attorney fees.
The case I am talking about, which was recently highlighted in an article in the New York Law Journal, is called In Re: Beth M. Squire, 13-62070 and is currently being appealed to the district court. The facts are straight forward enough. Consumer took out an unsecured loan with Berkshire Bank, which she was paying off using automatic ACH withdrawals from her account at Citizens Bank. That money was pulled on the 30th of each month. No one denies that Berkshire received notice of the Chapter 7 bankruptcy filing on January 3, 2014 or that two weeks later, the bank reached out to the debtor’s attorney James Selbach to see if his client wanted to continue to make the ACH payments. Mr. Selbach acknowledged receiving the phone call but never called the bank back. In the meantime, Berkshire Bank never cancelled the ACH payment and on January 30th it attempted to transfer $199.53 from the debtor’s Citizens bank account. This account was empty and the debtor was charged $35 due to insufficient funds.
The case gets interesting for our purposes because on the same day that the bank made the ACH transaction, Mr. Selbach filed what the bankruptcy court described as a “boiler plate” motion claiming that Berkshire Bank violated the automatic stay and seeking not only damages but attorney fees.
Northern District Bankruptcy Judge Margaret Cangilos-Ruiz limited damages in the case to the amount of the ACH payment, $199.5, and wrote a decision critical of what she clearly feels is the excessive use of motions claiming violations of automatic stays. Most importantly, she admonished the attorney that the bankruptcy code “was not designed to encourage a debtor or her counsel to lay in wait until a violation occurs and then pounce upon the creditor. It is the opinion of the court that litigation over this violation which caused minimal damage should have ended before it started.”
The court also expressed that while a debtor’s attorney is under no obligation to return phone calls the creditor does not violate the automatic stay provisions of the bankruptcy code simply by reaching out to an attorney and seeing if a debtor wishes to continue making payment on a debt.
Mr. Selbach is appealing the court’s ruling. He unabashedly told the New York Law Journal that he has brought hundreds of motions alleging automatic stay violations. He argues that such motions are precisely what Congress intended to happen when it authorized debtors to recoup attorney fees.
Here are some interesting take-aways from this case. First, even though the court is clearly exasperated by the debtor-attorney conduct, no one disputes that the bank violated the automatic stay provision. As a result, while it is perfectly appropriate to reach out to opposing counsel, you should never do so in lieu of cancelling ACH withdrawals once you have been put on notice of an automatic stay. Second, this case dealt with an automatic stay involving an unsecured loan so the bank could have ended the ACH payment as soon as it received notice but chose not to. The court indicated that it would have expected the bank to act more quickly had it the case involved a garnishment of the debtors’ wages.
Is NCUA and, by extension, the credit union industry important enough to have a seat at the table when it comes to deciding issues that impact the financial structure of the Country? Now, even if I didn’t get paid by the industry, I would still say the answer is yes. Credit unions represent more than 90 million account holders and influence the banking industry as a whole by providing needed competition to the for-profit banking model.
Nevertheless, yesterday, the Washington-based Bipartisan Policy Center released a report detailing recommended changes to the financial industry. The report, the outgrowth of a Task Force co-chaired by former New York State Banking Superintendent Richard Neiman, contains some ideas that should be seriously considered. It argues correctly that Dodd-Frank represents a missed opportunity for needed financial reform in this Country. It also argues that the Country should consolidate financial regulations and examiner training. The really good news is that this Task Force, unlike so many others, recognizes that credit unions are unique financial institutions and that NCUA should continue to exist to oversee their regulation.
Now for the part of the report that irks me. In lieu of calling for the creation of a single regulator, Dodd-Frank created a Financial Stability Oversight Council (FSOC). The purpose of the council is to create a framework for financial regulators to identify risk posed not only by large banks but by non-banks as well (think AIG before the meltdown). NCUA was given a seat on the council as a voting member. The Task Force recommends that this power be taken away from NCUA. It explains that “credit unions are an important part of the U.S. financial system, but they generally are small and do not figure into macro-prudential discussions. To the extent they do a credit union voice will still be represented on the FSOC, though without a vote.” This is bureaucratese for patting credit unions on the head and sending them to the corner with crayons while the adults do all the important work.
Since the Bipartisan Policy Center is dedicated to getting knowledgeable people together to come up with serious recommendations about serious problems facing the nation, its ideas have absolutely no chance of getting anywhere in today’s Washington. Nevertheless, this recommendation is irksome for several reasons. First, credit unions may not be as big as the behemoth banks that have the ability to bring the Country to its knees, but they certainly are impacted by the conduct of these institutions. Making credit unions comply with almost all of the Dodd-Frank inspired regulations but not giving them any ability to influence the conduct of the institutions responsible for Dodd-Frank in the first place is a lot like telling a teenager to get a driver’s license but then not letting him drive. More importantly, the proposal reflects the continued arrogance of the banking elite. Even after the masters of the universe engaged in policies and practices that have caused millions of people to lose their jobs and homes, we are still told that only a relative handful of self-proclaimed geniuses truly have the skills and knowledge necessary to oversee the Country’s financial system. What hubris.
Have a good weekend, I will be off Monday enjoying what I hope will be spectacular weather, but back Tuesday.
Good things come to those who wait. . .and wait. . .and wait. Nearly four years after deciding not to appeal federal court rulings holding that the IRS wrongly tried to tax certain state chartered credit union activities, the IRS has finally gotten around to issuing a memorandum to its examiners confirming that state chartered credit unions are exempt from most UBIT taxes.
It’s been a while since UBIT was a big issue, so here’s a quick refresher. The Unrelated Business Income Tax (UBIT) taxes the activities of not-for-profit tax-exempt organizations which are not substantially related to the activities for which an organzation was given tax exempt status. Federal credit unions are explicitly exempt from this tax. In two cases brought in federal district court and decided in 2009 and 2010, credit unions successfully argued that contrary to the IRS’s opinion, most of the products and services commonly offered by state chartered credit unions are exempt from the UBIT tax.including the sale of credit life and credit disability insurance, GAP auto insurance, ATM “per-transaction fees FROM MEMBERS,” interest on loans and the sale of checks from a check printing company to members.
The decisions and the recently released memorandum are not a complete victory for state-chartered credit unions. For instance, the sale of automobile warranties, accidental death and dismemberment insurance, life insurance and ATM “per-transaction fees FROM NON MEMBERS” are subject to UBIT. I’ve included a link to the IRS memorandum so you can take a look at the entire list. All in all, though, this is the biggest victory for credit unions in the last decade.
Credit unions are mainly concerned with the enormous power the CFPB has to promulgate consumer regulations. But to really get a feel for just how powerful the Bureau is, you should keep in mind that it also has the authority to take legal action against financial institutions engaging in deceptive financial practices. The latest institution to run afoul of the CFPB is Bank of America, which has agreed to pay approximately $727 million in refunds and $20 million in fines in relation to allegations that it engaged in deceptive practices when selling 1.4 customers credit cards and so-called “add-on services.” A separate agreement was reached with the OCC.
Among the sins highlighted by the Bureau were the fact that some consumers were led to wrongly believe that the first 30 days of coverage for certain add-on credit card services were free and aggressive enrollment practices which led consumers to believe that they were simply obtaining additional information about a product when in fact they were agreeing to buy it. These enforcement actions provide a pretty good signal of where the CFPB thinks additional regulation is necessary, so even though Bank of America’s misdeeds may not affect you today, they may impact the work load of your compliance officer tomorrow.
Just how bad is it for mortgage lenders out there? According to the Wall Street Journal, mortgage originations in February “fell to their lowest level in 14 years due to the months long plunge in refinancing activity and weak demand for loans to purchase new homes.” The Journal also reports that the share of mortgage applications for refinances hit their lowest level since 2009. Remember, this is all taking place as the FED is winding down its bond buying program and tougher lending regulations are taking effect. Unless we see a huge surge of consumer confidence and economic growth in the near future, this is shaping up as one heck of a depressing year for the mortgage market.
On that happy note, have a nice day!
I’m exaggerating only slightly this morning. In written testimony before the House Financial Services Committee yesterday NCUA General Counsel Michael McKenna stated that 70% of NCUA’s final rules over the last two years have provided regulatory relief or greater clarity without imposing new compliance costs. That’s a relief, here I thought credit unions were being overburdened by excessive regulation. I guess all those credit unions that have hired additional compliance staff over the last few years can rest easy.
As both NAFCU and CUNA were quick to point out, when it comes to assessing the impact of regulations, it’s not so much the quantity but the quality of the regulations that has to be assessed. In truth, the whole premise of yesterday’s hearing was a little silly. Regulators are responsible for regulating and they wouldn’t be doing their job if the industries they oversee reported to Congress that they loved the job they are doing. Instead of holding hearings, Congress should remind itself that regulations are, by definition, the outgrowth of laws it passes. Since that is unlikely to happen, however, NCUA can’t simply point to statistics to get around the fact that credit unions face burdens today that they didn’t have to deal with five years ago. For example, in recent years, NCUA has:
- blurred the distinction between federal and state oversight of credit unions by passing regulations giving it more direct control over state chartered credit unions;
- clamped down on CUSOs by making them report more information directly to the NCUA;
- and, of course, joined other regulators in imposing numerous regulatory requirements, euphemistically referred to as guidance, on credit unions. For example, just last week NCUA joined other regulators in emphasizing the need for small and mid-sized credit unions to take steps to guard against theft of debit card information.
(Incidentally, regulators try to have it both ways when it comes to issuing “Guidance”. On the one hand, they’re never referred to as regulations, but on the other examiners consider them just as binding on an institution as a promulgated rule).
Now, to be fair to NCUA, the agency has taken steps to minimize the regulatory burden by, for example, raising to $50 million the threshold for what is considered a complex credit union. In addition, NCUA’s regulatory streamlining of the Low Income Credit Union designation process was a master stroke in using regulatory powers to benefit the industry. Think about it. Without getting a bill passed, NCUA gave thousands of credit unions the opportunity to seek out secondary capital and take in member business loans without having to be concerned about a cap.
In the end, what is really going on here can’t be quantified. On the one hand, at its best NCUA has demonstrated a recognition that, given the huge divergence in the size and sophistication of credit unions, regulators should strive to avoid one-size fits all requirements. On the other hand, at its worst, NCUA myopically views almost everything through the lens of the Share Insurance Fund with the result that it demonstrates a cavalier disregard of the right of state chartered credit unions to be regulated primarily by state regulators and often seeks to impose safety and soundness requirements that impinge on the right of credit unions to run their credit unions in the way that best benefits their members.