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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!

September 6, 2011 at 9:13 am 14 comments

Why legalize pot banking?

With snow coming the Meier family has decided to head over the river and through the woods to Grand Ma’s house on Long Island a little earlier than originally planned (I can hear someone in Buffalo saying “Snow! They call six inches Snow!”). There is a fair amount I want to tell you about before my hiatus so here goes.

Will NCUA approve a pot CU?

Now that Colorado has approved a state charter for a credit union dedicated to providing financing for the state’s nascent marijuana industry NCUA will have to decide whether or not to federally insure the institution. I’ve written several blogs about the legal difficulties of providing pot financing. Marijuana remains illegal as a matter of federal law and even though federal prosecutors have indicated that they would turn a blind eye to institutions providing banking services in states where pot use is legal, finding financial institutions willing to open up businesses for ganja related businesses has proven to be difficult.

I have no idea what NCUA’s ultimate decision will be but I would love to see it deny federal insurance for credit unions created to circumvent federal law.

There is a huge disconnect going on here. Heroin use is on the rise and a culture that glorifies pot use inevitably contributes to that rise by making drug use that much more acceptable. To those who extol pot’s  medical benefits I would point out that few of the states that have legalized pot limit its possession to medical uses and one that has ostensibly done so-California-has made a mockery of these limits (Maybe New York will be the exception).

Let’s be honest, national groundswells for improved healthcare don’t catch fire just because some people want better healthcare-if they did than President Obama would be the most popular President in history.

To my peers who think that pot use is no big deal I say grow up and think about your kids. College is over. Here is a link to a’s CU Times article and some previous blogs I’ve done on the subject.

http://newyorksstateofmind.wordpress.com/2014/01/14/compliance-haze-surrounds-legal-pot/

http://newyorksstateofmind.wordpress.com/2014/07/08/new-york-goes-to-pot/

http://www.cutimes.com/2014/11/24/credit-union-gets-charter-to-serve-marijuana-indus

 

New York classifies application of it sub prime loan statute

In 2013 the Federal Housing Finance Administration changed its policies to mandate that insurance premiums on FHA insured loans be collected over for the entire length of a mortgage. This change meant that some loans would be considered subprime loans under New York law making them all but impossible to sell in the secondary market. Legislation signed by the governor establishes a separate formula for calculating sub- prime loans insured by the FHA. The law is an important amendment for mortgage lenders but it does mean that there is now an additional formula that has to be calculated when determining how a mortgage loan should be classified under the state and federal Law. Chapter 469 of 2014 takes effect immediately.

Speaking of New York laws, in the same batch of legislation the Governor also approved a bill clarifying the authority of parents guardians to request that credit reporting agencies preemptively place security freezes on the credit reports of persons 16 years or younger. Most importantly the bill authorizes parents to request that a freeze be placed on a child’s credit information even if the child has no file. This means that it will be more difficult for identity thieves to use a stolen social security card to create an alternate identity with which they can take out loans and sign up for credit cards for example.  The legislation is Chapter 441 of 2014.

FHFA maintains Confirming loan limits

The FHFA, which oversees Fannie Mae and Freddie Mac announced yesterday that it was maintaining confirming loan limit at $417,000. The confirming loan limit is the maximum price above which a residential property will not be purchased by the GSE’s. For my downstate brethren who think that this is a pretty low number remember that conforming house values are higher in certain parts of the country, including much of the downstate area. Here is a link to the announcement and a link to a list of conforming value limits.

http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-2015-Conforming-Loan-Limits-Unchanged-in-Most-of-the-U-S.aspx

http://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/FullCountyLoanLimitList2015_HERA-BASED_FINAL.pdf

 

November 25, 2014 at 9:53 am 1 comment

Member Divorced or Deceased? Now What?

Statistics indicate that approximately half of all marriages end in divorce. What’s more, according to the Center for Disease Control in Atlanta, one hundred percent of your members are going to die someday. In spite of these facts, the procedures used by financial institution when dealing with a “successor in interest,” someone who obtains property by operation of law, varies widely. Some credit unions know that Mrs. Jones has been dead for years without trying to figure out who is making her mortgage payments, while others stop accepting payments once they hear of a member’s death.

The CFPB has heard these stories too and wants to waive its magic consumer wand to establish national standards that mortgage servicers must adhere to when dealing with successors in interest to real property. This proposal is just one of several substantive amendments the CFPB proposed last week with regard to the Servicing regulations that took effect last January. The successor in interest proposal is what I am most interested in because I think the general approach taken by the CFPB is a good one with or without additional regulations. You don’t have to wait until these amendments have been finalized to make sure you have policies in place that are consistent with existing law.

First of all, do you think the death of a borrower constitutes a default of the mortgage? If you said the answer is yes, think again. Since 1982, federal law has preempted mortgage contracts that apply “due on sale” provisions to property transfers that result from a bequest in a will, the death of a joint tenant, transfer to a relative upon death, or a transfer resulting from a divorce or legal separation agreement, among other things. A key component of the CFPB’s servicer regulations is to require lenders to provide delinquent borrowers with prompt information about loss mitigation possibilities. Even before its mortgage servicing rules took effect in 2014, the CFPB has been concerned about how its loss mitigation requirements would be applied to successors in interest. As a result, in October of 2013 it released a guidance to its final RESPA and mortgage servicing rules imposing procedures that servicers must maintain regarding the identification and communication with any successor in interest of a deceased borrower with respect to mortgage loans he or she held. The CFPB’s proposal released last week would extend this guidance to all types of successors in interest.

Most importantly, a new section, 1024.36(i), stipulates that when a financial institution receives a written request from a person that indicates that the person “may be a successor in interest,” a servicer is mandated to respond to this written notification “by providing the potential successor in interest with information regarding the documents the servicer requires to confirm the person’s identity and ownership interest in the property.”

As the English commentators on the Soccer matches I like to watch on Saturday mornings like to say, I think the CFPB is “spot on” on this one. By extending a servicer’s obligation to communicate with potential successors in interest, the regulations would empower financial institutions to communicate with ex-spouses and children, for example, without running afoul of privacy concerns. In addition, by making it clear to everyone what papers a person claiming to have an ownership interest in property must provide, the regulation will ideally facilitate the resolution of potentially complicated estate issues in a more expedient manner.

One thing to keep in mind: whether or not a person is a valid successor in interest, the mortgage lien that your credit union has on the property remains valid and enforceable. As a result, just because a deceased mother legally transferred ownership of her home to her son doesn’t mean that any delinquencies owing on the mortgage are wiped out. All this regulation does is help ensure that there are procedures in place to help clarify what parties ultimately remain responsible for a mortgage.

November 24, 2014 at 8:40 am Leave a comment

How Immigration Reform May Impact Your Credit Union

President Obama’s decision to grant resident status to more than 4 million undocumented aliens may well have a direct impact on your credit union’s operations and procedures. Specifically, you may want to take a look at your credit union’s BSA customer identification policies and procedures.

The ability of credit unions and banks to open accounts for undocumented aliens is one of the few compliance issues that gets the non-compliance geek fired up. Read this 2007 article from the Wall Street Journal and you’ll see what I mean. Under existing customer identification program requirements, credit unions must have policies and procedures in place to verify a customer’s identity. As explained in a FinCEN guidance, the CIP regulations do not provide a definitive list of the type of documents that banks and credit unions must use to verify the identity of an account holder. Instead, the ultimate requirement is that whatever forms of identification your credit union uses enables it to “form a reasonable belief that it knows the true identity of the customer.” The regulation provides that for a non-U.S Citizen an acceptable form of identification could include a government issued document evidencing nationality or residence so long as it has a photograph. See 31 CFR 1020.220. This flexibility in the regulation is what makes it acceptable for some financial institutions to accept consular identification cards while others do not. My guess is that with the President’s Executive Order you will see many states pass laws requiring financial institutions to accept specific types of identification.

The second stumbling block to opening accounts for undocumented persons involves tax-payer identification numbers. The regulations are unequivocal in requiring that persons opening accounts must either have or be applying for a tax-payer identification number. 31 CFR 1020.220. Since many undocumented aliens work off the books, this has been one of the biggest challenges to opening an account. The President’s Executive Order will allow qualifying individuals to legally have jobs and start paying taxes. I would hope that FinCEN will provide guidance to financial institutions explaining the type of documentation that may be available to individuals eligible for legal protections under the President’s Executive Action.

Whether or not you agree with the President’s Executive Action it is not the role of your credit union to get involved with the immigration debate. If you disagree with what the President did last night, write your Congressman, but don’t make it more difficult than it has to be for a person to go into a credit union and open an account. As for the argument that doing so is aiding lawbreakers, let’s make a common sense distinction between individuals who come into the country to earn a living and individuals who earn a living by breaking the law.

November 21, 2014 at 8:40 am Leave a comment

One more example of how the big banks threaten the economy

Before the mortgage meltdown I was a proud free market extremist who would patiently explain to a misguided dinner guest how the Free-Market was a better regulator of businesses and the financial system than government ever could be. Then I watched as the Captains of Capitalism were bailed just out as the Free Market was about to punish them for their mistakes. When it comes to Wall Street’s behemoths we have a “Heads I win tails you lose” system in which the American taxpayer\consumer is the looser. Still there are those who continue to believe that if only Government didn’t regulate Wall Street so much all would be better in the world.

If anyone still questions the need for regulation they need look no further than our present day banking system. Credit unions and smaller banks struggle to comply with a host of regulations designed in reaction to the last financial crisis while the behemoths that got us into this mess brazenly flout regulations and distort legitimate banking activities in the name of “liquidity.”

The latest example that we increasingly have a financial system that Vladimir Putin would be proud of comes courtesy of a 396 page report released yesterday by the Senate’s Permanent Subcommittee On Investigations. It investigated the purchase of physical commodities by JP Morgan Chase, Goldman Sachs and Morgan Stanley.  In a bipartisan report it concluded that Wall Street banks have become so heavily involved with the physical commodities market that their activities pose risks for the markets, consumers and the financial system.

Just how involved in the commodities market are the behemoths? According to the report

“Until recently, Morgan Stanley controlled over 55 million barrels of oil

storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JP Morgan built a copper

inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of

copper, comprising nearly 60% of the available physical copper on the world’s premier copper

trading exchange, the London Metal Exchange (LME). In 2012, Goldman owned 1.5 million

metric tons of aluminum worth $3 billion, about 25% of the entire U.S. annual consumption.

Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage

business in the United States. Those large holdings illustrate the significant increase in

participation and power of the financial holding companies active in physical commodity

markets.”

That’s right, at the same time credit unions were trying to figure out how to provide Qualified Mortgages and were being badgered about building plans (apparently because examiners were certain credit unions had  top-secret plans to become landlords), these institutions were buying huge amounts of commodities and regulators were too timid to act.

This country has to do something about our financial system and quick. Whether you are a Democrat or Republican, libertarian or communist a system in which banks are too big to fail, too big to prosecute, too big to regulate and apparently too big to keep from buying and selling goods that have nothing to do with traditional banking activities is bad for a country of laws ultimately governed by its citizens as opposed to financial oligarchs.

Here is a link to the report:

http://www.hsgac.senate.gov/subcommittees/investigations/media/subcommittee-finds-wall-street-commodities-actions-add-risk-to-economy-businesses-consumers

If your compliance person is still struggling with the Ability to Repay and Qualified Mortgage Rules the FDIC wants to help. Yesterday it released the first of what it promises will be three videos for persons charged with complying with the mortgage regulations. I will be watching the video as soon as I am done with this blog. I really am a wild and crazy guy. Here is the link.

https://www.fdic.gov/news/news/press/2014/pr14100.html

….

November 20, 2014 at 8:41 am Leave a comment

Supreme Court To Rule on Stripping

Good morning, if this headline got your attention, get your mind out of the gutter.  Think in bankruptcy parlance.  A “strip off” occurs when a court cancels a lien that is wholly unsecured.

On Monday, the Supreme Court decided to hear an important case to answer this question:  can a court overseeing a Chapter 7 Bankruptcy cancel a junior lien on a residential mortgage where the value of the property is so low that there is no equity with which to pay back the subordinate lien holder?  The Supreme Court decided to consolidate two cases from the 11th Circuit (Bank of America v. Caulkett and Bank of America v. Toledo-Cardona).  Both cases deal with residential mortgages that tumbled in value once the Great Recession hit.  The homes tumbled so much in value, in fact, that there wasn’t enough money in either house to pay back the holder of the principle mortgage, let alone the holders of home equity lines of credit taken out on the properties.

Most courts that have addressed this issue in other jurisdictions have concluded that a subordinate lien survives bankruptcy regardless of the amount of equity left in the residential property.  In New York, for example, the leading case is Wachovia Mortgage v. Smoot, 478 B.R. 555 (E.D. NY 2012).  The court provided an excellent explanation of why subordinate liens survive Chapter 7 Bankruptcy.  In addition, at least three other circuit courts have reached the same conclusion.

In contrast, the 11th Circuit, which includes Florida, has reached the opposite conclusion.  In the consolidated cases to be decided by the Supreme Court, the Florida homeowners were successful in getting their subordinate liens cancelled.  Why does this matter?  In depressed housing markets, it may not make much of a difference, but in states like New York, where it may take several years to foreclose on a property, a homeowner could see a sharp rise in their property values between the time when they declare bankruptcy and the time a house is foreclosed on.  They would end up pocketing money to which the subordinate lien holder would otherwise be entitled.  The Court will be issuing a decision in this case by June.

November 19, 2014 at 8:17 am Leave a comment

Are you asking these questions about EMV conversion?

In the immortal words of Elaine from Seinfeld is it time for you to attempt conversion?

Right now card issuers are liable for the costs of POS fraud involving both credit and debit cards. In October 2015 Visa and MasterCard shift this liability to merchants that can’t process chip based EMV transactions. This creates a huge incentive for merchants to invest in new terminals but the benefits aren’t quite as clear-cut for your credit union. After all if the vast majority of merchants can accept EMV by next October than you will be as liable  as you are right now  for card fraud.

To find out more about conversion issues yesterday I attended an excellent conference on EMV technology hosted by Covera. (Full disclosure: Covera is an affiliate of the Association).    The most important  lesson  I learned is  that, if you start planning today, credit unions have more flexibility than I thought they did in deciding when and how to make the migration to EMV. Deciding on how much of a push your credit union should make is ultimately an individual decision unique to each credit union’s circumstances. The more time you give yourself the better off you will be. Here are some of the key questions I would ask after attending the conference.

What is your timeframe for migrating to EMV? It’s going to take more than six months (optimistically) to roll out chip based cards. If you aren’t planning now than your plan is not to convert anytime soon.

How much card fraud do you have?

The switch to EMV is only helpful if data theft is an issue for your credit union. You are at no greater risk legally after October of next year if you choose not to go forward with an EMV conversion unless you think that the merchants your members shop with won’t be ready to accept EMV cards or you feel that the lack of EMV will make your CU more of a target.

Should you take a piece meal approach or integrate EMV all at once? One of the real interesting realizations for me was that credit unions have more flexibility in introducing EMV cards than the October 2015 date suggests. A credit union could start with a conversion to EMV credit cards, for example, see how the conversion goes, and then convert their debit cards.

How much money do you have to budget? These cards are estimated to be 2.5 times more expensive than traditional cards. That is a lot of money for technology that won’t prevent all fraud and that the bad guys will eventually make obsolete. In addition, there is a lot of staff training and member outreach that is involved in introducing EMV. All of this costs money.

Do you have a lot of international travelers in your field of membership? EMV technology is the industry standard in most other parts of the world.

Having read my list you may think that I am telling you not to go forward with EMV. Not at all. My Personal opinion is that consumers will eventually demand that financial institutions use the safest technology available. In addition legislators and regulators may eventually mandate that you adopt the technology whether you want to or not.

November 18, 2014 at 8:51 am Leave a comment

New York State Should Make Merchants Do More To Prevent Data Breaches

My challenge today is to see if I can write this blog in less time than Eli Manning takes on average to throw an interception.  No easy task, but here goes.

There are two basic reasons to hold a hearing in Albany.  The first reason is to react to an issue without actually doing anything about it.  Typically you’ll see these hearings later in a legislative year when there simply isn’t enough time to get something accomplished.  The second reason is to actually lay the groundwork for key issues the Legislature will deal with in an upcoming session.

On Friday, the Assembly’s Consumer Affairs and Protection Committee and its chairman Jeffrey Dinowitz held a hearing on legislation he proposed (A.10190) mandating that businesses in New York develop policies and procedures to deter data breaches.  Given the controversy surrounding the issue, I wouldn’t concentrate too much on the specifics of the legislation at this point.  But the mere fact that the Assemblyman has decided to hold a hearing on the issue demonstrates that the question of what to do about data breaches is sure to be a high profile issue in the upcoming legislative session.

The hearing featured the testimony of Ted Potrikus, the President of the Retail Council,. and an erstwhile Albany veteran.  The way retailers tell the story, there really is no need for data breach mandates.  The reputational risk to retailers from data breaches is more than enough to get them to put the necessary precautions in place.

However, data breaches are not a new phenomenon and merchants have so far been unwilling to invest the resources necessary to guard against data breaches.  Every year, a survey is done assessing PCI compliance.  As I explained in a previous blog, the most recent survey results indicate that businesses are still not making the commitment to guard against data breaches.  Home Depot’s top executive recently conceded as much.

A second argument advanced by retailers is that they are as much victims of data breaches as are financial institutions.  Again, this is not entirely accurate.  First, it is banks and credit unions that have to bear the cost of replacing compromised debit and credit cards.  Secondly, it is extremely difficult to make merchants legally responsible for their negligence in handling customer data.  For example, many retailers contract with third-party processors. These companies aggregate plastic transactions on behalf of merchants and process their payments. Litigation involving Heartland has underscored just how difficult it is for card issuers to make these processes responsible for the cost of their negligence.

Don’t get me wrong, no retailer wants to see their business victimized by data breaches. But as the law stands right now, they simply don’t have enough skin in the game to incentivize the creation and implementation of the policies and procedures Assemblyman Dinowitz wants to mandate. Finally, the retailers correctly argue that the battle against data breach is a constantly shifting one. A business may invest in the best technology possible today only to find that the bad guys have made it obsolete tomorrow. But this argument misses the point. Precisely because there is no magic bullet technology that will prevent all data breaches, legislators need to ensure that merchants are legally obligated to take baseline steps to protect against data breaches.

It could, of course, be argued that a national problem such as data breaches should best be dealt with on a federal level. I would love to see national legislation addressing this problem. But a state as large and important as New York has the authority and the ability to finally impose baseline responsibilities on all businesses. After all, credit unions and banks, for that matter, have already been required to have regulations and policies in place for years now, but without the help of merchants they are fighting with one hand tied behind their back.

November 17, 2014 at 8:10 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, Credit Union Association of New York

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