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!
There are some issues that represent such an important shift in the way the broader financial sector operates that they are important to know about even if they don’t impact credit unions directly. Besides, they are just interesting.
One of these developments comes in the form of news that Argentina is on the verge of defaulting on its government bonds. This is no run of the mill default as it could be precedent-setting by giving U.S. courts the upper hand in enforcing judgments against nations. Not only that, it underscores just how powerful those information subpoenas you receive are, provided they are valid.
There is a long history of foreign governments refusing to enforce judicial rulings by U.S. courts seeking to enforce money judgments. As far back as 1832 when Chief Justice John Marshall ruled that the federal government and not the states had authority to negotiate with tribes to purchase land owned by Indian tribes in Georgia (Worcester v. Georgia (1832), President Jackson allegedly responded with his famous retort, Marshall made his ruling, now let him try to enforce it.
Similarly, when it comes to bonds issued by a foreign nation the conventional wisdom has been that there is only so much bondholders can do to redeem assets to pay off bond defaults. So when the Argentinian government defaulted on its bonds in the first years of this century, the vast majority of bondholders took the reduced payouts reasoning that it’s better to get half a loaf than no bread at all. However, a handful of bondholders held out for full payment. With the aid of some of the best lawyering you are ever going to see, these holdouts have backed the Government of Argentina into a corner.
Typically, Argentina would pay the American bondholders who accepted the modified payouts independent of what it owes to the hold outs. However, Judge Gleason of the Federal Court for the Southern District of New York issued an order mandating that, as explained by the New York Law Journal, “the next time the ‘exchange’ debt holders are paid by Argentina, and the country is expected to pay them $900 million, the country must pay one of the hold outs $1.3 billion, plus interest, or about $1.5 billion.” Presumably, if Argentina chooses to ignore this order, the holdouts could attach any payouts to other bondholders.
In addition, the legal wrangling underscores just how powerful those third-party information subpoenas are. In a 2012 case before the Second Circuit, which has jurisdiction over New York credit unions, The holdouts argued that subpoenas against third-party banks holding assets in a foreign country are valid-even if the money sought is ultimately out of the creditors reach. Why does this matter? Because as the Court explained, “New York State’s post-judgment discovery procedures, made applicable to proceedings in aid of execution by Federal Rule 69(a)(1), have a similarly broad sweep. The New York Civil Practice Law and Rules provides that a “judgment creditor may compel disclosure of all matter relevant to the satisfaction of the judgment.” N.Y. C.P.L.R. § 5223; see David D. Siegel, New York Practice § 509 (5th ed. 2011) (describing § 5223 as “a broad criterion authorizing investigation through any person shown to have any light to shed on the subject of the judgment debtor’s [**6] assets or their whereabouts”).
But remember, an information subpoena under NY law is only valid if it is properly issued and that includes mandating that the creditor have a good faith reason for thinking that money may be stowed away in your accounts.
By the way, I would still bet that the issue will be resolved sometime today short of default, but no matter what happens the power of U.S. courts and creditor subpoenas have been given a big shot in the arm. Can you imagine if Europe had to negotiate with New York judges before restructuring Greek debt? This is the type of power we are talking about. As former Presidential Advisor James Carville once quipped, when he comes back to life he wants it to be as the bond market.
I’m here to tell you this morning that you will be breached and if you have been already, you will be again. Cybercriminals are chameleons and they have the money to quickly adjust to the latest techniques meant to stop them.
For example, remember when “dual authentication” of your customer accounts was all the rage in IT security circles? The FFEIC even came out with a guidance mandating that depository institutions implement systems that demonstrate two forms of identification. It was originally updated in 2005 and updated again in 2012 to emphasize the need to “layer” your IT security.
To what do I owe my gloomy morning forecast? Two informative posts, one by the CU Times and the other by the Information Technology Website underscored just how fast moving the game of cyber security cat and mouse is and unfortunately the bad guys win fairly often. Specifically, hackers have broken into 34 banks in Asia and Europe by bypassing a dual authentication system developed by Android and used for online banking. Check with your IT people to get the technical details, but the basic idea is that they used email requests to lure customers to a fake website. Marks opened the door to hackers by opening the email and going to the site through which the hackers could steal all the information they needed to get by the dual authentication system. What is astounding the experts is that the banks used SMS technology, which requires a customer to enter a new password every time they access an account. This is above and beyond what most U.S. credit unions and banks require.
So, is there anything you can do to mitigate the risk beyond making sure that you have a good computer person on speed dial? In looking at cases examining the liability of financial institutions for data breaches, here are some of the points I would keep in mind. Although many of them are most relevant to those of you who offer business accounts, NCUA regulations require all of you to identify and monitor the “red flags” of identity theft on an ongoing basis.
- Member and staff education is key. Your security is only as effective as your most careless employee or technologically “savvy” member.
- In assessing commercial reasonableness of online business accounts, which are regulated by Article 4A of the UCC, courts consider (1) security measures that the credit union and customer agree to implement, and (2) security measures that the credit union offers to the customer but the customer declines. Make sure this is in writing and, if possible, attached to the contract.
- You must respond to changing threats by offering new mitigation techniques. For example, remember now that hackers can electronically impersonate an employee, dual control and not dual authentication is becoming the baseline standard. This way, hackers have to obtain the login information for two employees before transferring money.
- Here is the good news. Commercially reasonable and regulatory standards vary depending the size and sophistication of your credit union. However, this means that the policies and procedures you adopt must be unique to your credit union based on its resources and risk profile. This is one area where cutting and pasting a colleague’s policies the day before the examiner comes calling won’t cut it in the long run.
- Similarly, the vendor contract really matters. Most of you will use vendors to implement your cyber banking. How much must the vendor indemnify you if its negligence causes a breach? Are both parties legally obligated to monitor developments in cybercrime and update protocols when appropriate? Are these changes integrated into your security procedures? These are all questions that, if asked, can help mitigate losses and maintain member confidence in your electronic banking.
Second Quarter GDP Growth Stronger Than Expected
A few minutes ago, news came out that second quarter GDP growth grew at a 4% rate, beating the expectations of economists. In addition, the Government is reporting that household spending increased by 2.5%.
There are some issues that are hanging over the industry like a sword of Damocles. This morning an article in the Wall Street Journal provides further evidence for those who feel that the CFPB should do more to regulate overdraft fees.
According to a survey conducted by the paper, hundreds of small, regional banks, and credit unions are “clinging to the practice” of processing checks on a high to low basis. The paper’s survey revealed that smaller depository institutions are continuing this practice even as larger institutions are backing away from it.
What exactly to do about overdraft fees has been debated for more than a decade now. In 2010, the Federal Reserve promulgated regulations requiring that members opt in to bank payment on debit card overdrafts. I was silly enough to think that this would put the issue to a close, but it hasn’t. For example, in a statement accompanying a 2013 report on overdraft processing, CFPB warned that if “policies and practices do not protect consumers in accordance with consumer protection law, it will use it authorities to provide such protection.”
The more I look at the issue, the more I feel that overdraft fees are the most misunderstood practices engaged in by depository institutions. Do they represent an important source of income for many banks and credit unions? Absolutely, but I bet if you asked your average consumer if they are willing to pay more to make sure that their mortgage or car payment doesn’t bounce, they’d agree. In other words, overdraft fees are a product that some consumers want and need.
I’ve been AWOL for a couple of days and based the volume of work that regulators pumped out over the last week it’s obvious that many of our regulatory overlords intend on being AWOL for most of August. Here are a couple of regulatory proposals to review in preparation for Fall.
CFPB’s HMDA Proposal Empowered by the Dodd-Frank Act , the Bureau that never sleeps is proposing revisions to the Home Mortgage Disclosure Act. It may not sound like a page turner, but for those credit unions that have to comply with it, properly reporting mortgage loan information can be one of the great compliance headaches. If the regulation goes forward as proposed the types of mortgages subject to reporting requirements will be expanded to include “all mortgage loans secured by a dwelling, regardless of the purpose of the loan” including HELOCS and commercial loans secured by a home. Here is a link.
NYS moves to regulate Bitcoin New York State’s Department of Financial Services is rushing ahead of federal and state regulators by proposing licensing requirements and a comprehensive regulatory framework for institutions that buy, sell, transfer or store virtual currencies. Here’s a link to NYS’s proposal.
I have a potpourri of newsworthy tidbits to start your credit union day.
Viva Las Vegas – I would have gladly wagered money yesterday that NCUA Chairwoman Debbie Matz could get nothing more than polite applause out of the attendees of NAFCU’s annual convention, but that was before I knew that the Chairwoman would be using her appearance to outline some regulatory relief proposals that NCUA plans to propose at its July meeting. According to the Chairwoman, NCUA will propose “effectively eliminating” the fixed asset rule. Currently, NCUA regulation caps at 5% of a credit union’s shares and returned earnings the amount that can be spent on fixed assets absent a waiver from NCUA. As CUNA pointed out in a comment letter last year advocating for scrapping the cap “The rule restricts investments not only in real property, but also in technology and systems that are increasingly central to the success of all financial institutions. Overly restricting investments in these items—or subjecting the relevant decisions to a slow and unpredictable process — does not facilitate credit unions’ use of online and mobile banking technologies even though the utilization of such technologies is more important now than ever.”
Two other mandate relief proposals will deal with member business lending and updating appraisal provisions. The proposals aren’t out yet and the devil is in the details; but it’s nice to be able to compliment NCUA again. It wasn’t all that long ago that it was aggressively pushing mandate relief reforms such as the streamlining of low-income credit union designations. Maybe the Chairman should spend more time in Sin City.
Having “The Talk” – What’s the single most uncomfortable talk that parents have with their kids? It’s not about the Birds and the Bees, it’s about money. Great article in MarketWatch reporting that a recent survey indicates that “[p]arents in their 50s and 60s think they’ve done a bang-up job talking with their adult kids about their estate and retirement plans. Their kids think just the opposite. It’s the new Generation Gap. Specifically, nearly two-thirds of parents and adult kids (64%) disagree on the best time to start talking about things like wills, estate planning, eldercare and covering retirement expenses. Many credit unions do a great job providing financial education to their members and this might be one more area to highlight. Making sure everyone is on the same page when it comes to maximizing retirement assets can save a lot of heart ache down the road and is a great way of stretching those retirement savings. Besides, like the World’s Most Interesting Man, you really can give your father The Talk.
Just where does all that settlement money go anyway? Billion dollar settlements with major banks are becoming about as commonplace as low scoring baseball games. (Maybe they really are laying off the steroids after all). This morning’s article from Reuters paints a not too flattering picture of how at least some of the money – which is ostensibly sought for mortgage and foreclosure relief – is actually being spent by state and federal officials. Reuters reports that since May alone there has been $18.5 billion in settlements – $5 billion of which goes to New York. It suggests that the guidelines on how this money is to be allocated are so broad that at least some people are concerned that there are perverse incentives to drive up the size of settlements. Personally, any incentive Government has to crack down on blatantly illegal activity is OK with me.
As I explained in my blog the other day, for banking compliance geeks FinCEN’s annual compilation of SAR filings is a big deal that gets noticed. So when it uses this publication to highlight issues related to the filing of Suspicious Activity Reports in relation to virtual currency in general and the Bitcoin specifically, it can be assumed that this is an issue of particular importance to individuals who work at the intersection of law enforcement and banking regulation. According to its SAR Narrative Spotlight Column, “FinCEN is observing a rise in the number of SARs flagging virtual currencies as a component of suspicious activity. Like all emerging payment methods, understanding virtual currencies is key to insightful SAR preparation and filing.”
According to FinCEN useful narrative information accompanying a SAR bitcoin filing may include:
• Information on users of crypto-currency (even when their participation in the transaction is not considered suspicious). If possible, such information should be supplemented with the ACH or wire data related to transactions conducted to or from known virtual currency exchanger. An exchanger is one of a handful of platforms, one of which filed for bankruptcy, which will exchange the Bitcoin into currency.
• Information related to Bitcoin speculation. Specifically, FinCEN reminds depository institutions that the value of a Bitcoin is highly volatile and “following a rapid rise in the relative value of crypto-currency to the dollar an institution may see high value deposits originating from foreign or domestic virtual currency exchangers.” FinCEN goes on to note that speculation is not criminal activity, however, “speculation can share a transaction footprint with other activities that might be suspicious.”
Depository institutions should be mindful that virtual currencies can be used to hide the source of funds stolen by hackers and identity thieves.
I’ve used more quotes than I like to in writing this blog today because I am not sure I completely understand where FinCEN is heading when it comes to the regulation of virtual currencies. It seems to be suggesting that virtually any time a member uses funds derived from a Bitcoin or other virtual currency, a SAR filing is appropriate. The concern I have is that very little of the account activity highlighted by FinCEN is necessarily suspicious. If and when virtual currencies become more commonly used, FinCEN is going to have to issue more formal guidance clarifying when member use of virtual currency is truly worthy of a SAR.
The way my father explained it to me, people have been getting pregnant for quite some time. In addition, since 1978, federal law has banned discrimination in the workplace on the basis of pregnancy. So you may find it odd that pregnancy is a hot topic in legal circles these days. However, recent developments have brought the issue of pregnancy discrimination to the forefront of HR law.
First, the Supreme Court has decided to review a case next term, Young v. United Parcel Service, in which it will clarify what accommodations, if any, must be provided to a pregnant employee. Not coincidentally, the EEOC recently released an updated guidance on this issue for the first time in more than two decades.
The issues involved are not as clear cut as you might think. First, let’s start with the basics. We all should know that you can’t discriminate against someone just because she is pregnant. The Pregnancy Discrimination Act provides that pregnant women “shall be treated the same for all employment purposes. . .as other persons.” It seems simple enough, but the case the Supreme Court is going to hear involved a driver whose job required her to lift up to 70 lbs. The company’s policy excused drivers from this requirement if they were disabled or if they lost their license, but not if they were pregnant. The company argued that it was required to treat her equally with all other employees and it would not be doing that if it excused her from the weight restrictions just because she was pregnant.
When I first read this decision I wondered why she couldn’t be treated as disabled under the ADA. But the Fourth Circuit, which heard the case being decided by the Supreme Court, ruled that the ADA doesn’t apply to pregnant women. As a result, the Fourth Circuit ruled that the company acted legally despite the fact that her request to lift lighter packages could have been easily accommodated.
Undoubtedly with an eye toward weighing in on the Supreme Court’s decision, the EEOC’s recently updated pregnancy guidance argues that there may be circumstances in which pregnant women are protected under the ADA. As I like to say, this is one of those cases that are going to be worth keeping an eye on. With my usual caveat that I am not an HR attorney but I like to play one occasionally writing this blog, this is one area where it seems a bit of common sense goes an awfully long way. UPS has provided us a great case to consider, but had it not been so stubborn in adhering to its policy, an employee could easily have been accommodated and millions of dollars in legal fees could have been avoided.
That’s the question posed by the New York Times in an article yesterday in which it seeks to sound the alarm: in a nutshell it argues that, just like the mortgage meltdown, major banks are loosening lending standards in an effort to ensure they have enough automobiles to meet Wall Street’s growing demand for securities comprised of auto loan pools. This is one of those times where I am glad that credit unions aren’t mentioned alongside the banks.
This is the type of article that gets regulators thinking that more needs to be done, so you may want to take a quick look to see how appropriate your underwriting standards are for auto lending. Here are some things to keep in mind.
The NCUA deserves credit for raising concerns about indirect auto lending long before it was trendy. The banks highlighted in the article are accused of hiding behind dealer practices when asked about questionable sales techniques and underwriting standards. But remember “the dealer made me do it” is no defense. This is particularly true for credit unions that have the added requirement of ensuring that any person taking out a car loan is a qualified member. As summarized succinctly in this indirect lending guidance from the NCUA from 2011:
Indirect lending standards should be consistent with the credit union’s direct (internal) loan underwriting standards. The standards should be reviewed at least annually or more often if risk levels increase or if negative trends begin to surface. Exceptions to the indirect loan policy should be infrequent. All exceptions should be approved by credit union personnel responsible for administering the indirect lending program and reported to the board of directors for their review.
One other quick point about the article. Not all securitization is bad. Financial institutions, and especially smaller ones, need a vibrant secondary market to sell off loans and make new ones to members. The Times is right to highlight the negative influence that demand for higher yielding securities may be having on auto lending standards, but I just hope that regulators don’t overreact and throw the baby out with the bath water.
I’ve done this blog long enough now that every so often I feel like Steve Martin in The Lonely Guy. When the new phone book is delivered, he runs down the street yelling: I’m in the book, I’m in the book. I was excited to find out this morning that the Annual Review of SAR Filings had been published by FinCEN. California and New York lead the way when it comes to depository institutions filing Suspicious Activity Reports.
On that note, have a nice day.