Posts filed under ‘Compliance’

When it comes to prepaid cards, if you can beat em join em

That is my most important takeaway from the FDIC’s biannual survey of unbanked and under-banked households that was released yesterday. If you are interested in getting these potential members into your branches-as credit unions  you have an ethical and legal obligation to try to do so-you better find a way of competing with the prepaid card.

“The survey results suggest that sizeable proportions of unbanked households and, to a lesser degree, under-banked households, relied on prepaid cards for many of the same purposes that households associate with checking accounts” Its authors conclude.

According to the report 7% of US households are unbanked   but a staggering 20 percent of households are under-banked meaning they have an account but have obtained services from nonbank alternative financial service providers in the last 12 months. The unbanked rate is down from 8.2%.

The survey reveals that  nearly 8% of all households use prepaid cards and 22.3% of unbanked households have used prepaid cards in the last year. Clearly this is a growing market and it’s going to get bigger but the report underscores just how difficult it is to break into this market. On the one hand almost half of unbanked prepaid card users plan to open up an account in the next year but here is the catch: Only 10% of all households obtained their prepaid cards from branches and among the unbanked, where distrust of banks is higher, only 4% do. It will be interesting to see how many of the unbanked really do open up accounts. I have my doubts because as prepaid cards offer more of the conveniences and consumer protections of traditional accounts many people won’t see the need to make that first visit to the bank or credit union.

I have always been squeamish about prepaid cards because people at the bottom rung of the financial climb need to open up accounts to climb to financial security. But prepaid cards are here to stay and if these survey results are accurate offering them may be a great way of exposing the unbanked to your credit union. Based on this survey if I was putting together a prepaid marketing plan here are the key points that I would want to get across to consumers looking for a Prepaid Card: Credit Unions are (1)Trusted partners that can (2) Offer you the convenience of prepaid cards and are (3) backed up with the safety and security that comes from belonging to  a financial institution protected by your friends and neighbors.

The report is a great resource. Here is a link.

RIP Quantitative Easing

With the Fed’s announcement yesterday that it was no longer going to make additional purchases of long term treasury bonds and mortgage backed securities it means that the most aggressive long-term intervention by the Fed into the broader economy will be coming to an end almost. Remember that the Fed will still be rolling over its existing bond purchases so it will be continuing to exercise downward pressure on long-term interest rates. Yesterday’s FOMC statement also indicates that the fed is not concerned that the recent downturn in the global economy, which played such a big part in Wall Street’s recent gyrations, fundamentally alters the outlook for US economic growth. If the conventional wisdom is correct expect short-term rates to rise the middle of next year.

They Might Be Giants

With their third world series win in five years the Giants must now be considered the most dominant team in baseball.  They can’t be considered one of baseball’s great flukes anymore. They win when it matters the most.

I like it when good teams consistently win championships because championships should be difficult to win. The Royals lost this year but their lose will make their eventual World Series victory that much sweeter. My only question is: Why is it that when the Yankees win four World Series in the 90’s with strong starters, dominant relievers and a solid lineup of great defensive players its considered bad for baseballs, but everyone celebrates the resurgence of the game when the Giants win with the same formula?

October 30, 2014 at 9:12 am Leave a comment

Is Too Much HMDA A Bad Thing?

Imagine if every decision you make could be scrutinized not just by your supervisor but by any stranger with an interest in knowing what you are doing. These strangers would not only be able to look at what decisions you made but the information you analyzed to make it. If they had the time, they could compare the decisions you made to the decisions made by your counterpart down the street. Would this type of scrutiny influence your decision-making process for the better? Would you be more cautious or more aggressive? Would you feel as if your privacy had been violated?

If you do mortgage underwriting for a living, these are not hypothetical questions. Tomorrow is the last day to submit comments on the CFPB’s proposal amending Regulation C. Regulation C requires all financial institutions with $43 million or more in assets to record key mortgage application information in a LAR. The information is available to the public and regulators. If the CFPB goes forward with its plans, we are about to make a dramatic shift in banking. You will be making your underwriting decisions in a fish bowl. Look at your underwriting file, strip away the applicant names and social security numbers and you pretty much have your new LAR. Think I’m exaggerating? I lost count, but I believe there are 25 additional data points that the CFPB is proposing to collect, the majority of which aren’t mandated by Congress but proposed by the Bureau that Never Sleeps. The drive for transparency could help bring about a more mature debate about this nation’s housing policies but, ultimately, it will provide more data for opposing sides to cherry pick and limit your business judgment along the way.

First, some clarification with apologies to those of you for whom this is basic stuff. HMDA was passed in 1975 for the purpose of giving the public, regulators, and policy makers access to data about banking activity in urban areas. Congress was investing big money into urban revitalization efforts and highly suspicious of bank red lining activities. By making sure that larger banks reported information about their lending decisions, Congress could see what impact its policies were having on banking commitments and whether more need to be done. The statute was never applied to all financial institutions and wasn’t intended to enable the tracking of individual loans. Information is broken down by census tract, which is more than sufficient to identify distinct lending patterns, particularly in urban areas. Today, unless you make the aforementioned $43 million dollars you don’t have to comply with Regulation C. Furthermore, the Bureau is proposing a threshold of 25 mortgages below which financial institutions wouldn’t have to comply with Regulation C, regardless of their size.

What regulators and, to a lesser extent, Congress are seeking with these proposed regulations is something quite different. Mortgages would be reported by property address as opposed to census tract and the Bureau wants to be able to track all loans at every stage of the lending process. Both an applicant’s credit score and the “scoring system” used by the financial institution in making the lending decision will be reported, and the reasons for a denial would be included in the LAR. (Currently, members have a right to know the reasons a loan is denied but it isn’t included in data collected and ultimately aggregated under HMDA). These are just a few examples of a much more expansive list. The majority of this information is not required by Congress, but by the CFPB.

What’s wrong with a little underwriting sunshine? First, as one commenter has already pointed out to the CFPB, the information it is seeking is so detailed that private information is at risk of being exposed to the general public. Considering that the Bureau has already been criticized for its data protection safeguards, this is not a minor concern.

But let’s look at the big picture. There has always been distrust between banks and poor people, particularly minorities and immigrant groups. Credit unions are able to bridge that divide and banks have made tremendous strides in ending biased lending practices, but the distrust is still there and it profoundly impacts policy. Banks used to be accused of redlining — refusing to lend to people in certain areas because of its racial makeup. Today the industry is accused – I believe unfairly — of exacerbating the Mortgage Meltdown by lending to those same communities but with sub- prime loans that borrowers couldn’t repay. Was there reckless underwriting? Absolutely. Are there individuals more than willing to discriminate against other individuals? Absolutely. But was the Mortgage Meltdown and subprime lending motivated by systemic racism on the part of large groups of lenders looking to rip off minorities? No.

Behind the push to expand HMDA is a belief that with enough data, housing advocates can prove that we can have a housing system that provides reasonably priced loans and a house to everyone who wants one. I believe that what more data will show is that, in an age of computer generated lending decisions, systemic racism is extremely rare.

Many of the problems that HMDA was designed to assess are still around today, but it is dangerously simplistic and counterproductive to believe that financial institutions could solve all of the nation’s housing problems if only they would implement fairer lending policies.  

It’s a shame that credit unions have to get caught in the crossfire of this counterproductive, unending debate. In the meantime get ready for life in a fishbowl.

Does Uber threaten the value of Medallions?

Anyone with a medallion loan or a participation interest in one should read this article in this morning CU Times.


October 28, 2014 at 9:13 am Leave a comment

Two Really Boring but Important Compliance Tidbits

Sometimes  people there is no way  to make this stuff interesting but you should pay attention nevertheless,

Reg. Relief on Privacy Notices

Our good friends at the Bureau That Never Sleeps (The CFPB) finalized regulations  giving financial institutions greater flexibility when providing members those meaningless privacy notices required under federal law.  

Your credit union is required to send out  annual privacy notices informing members of their privacy rights in relation  to the sharing of information with third parties. These  notices can be confusing to members and worthless since they have to be sent out even when there have been no changes to a credit union’s third party relationships or privacy obligations. The CFPB has finalized regulations permitting you to post the required notices online in lieu of mailing them provided certain conditions are met.

It’s a win-win. Members get less confusing junk mail and credit unions get to save time money and a whole bunch of trees. Here is a link to the final regulation… On the downside, with the nights now getting cold I personally find that snail mail is a great way to spark a fire.

 There are  requirements to satisfy before you can begin online posting so read the regulation before you put away the stamps.

When is a restructuring a Troubled Debt Restructuring for accounting purposes? That is the question or at least the question that has vexed NCUA and other regulators since 2012. On the one hand they want to encourage institutions to provide a lifeline to members who can stay above water with a little help; on the other hand they don’t want to encourage credit unions to rearrange the deck chairs on the titanic.  

As explained in a 2012 Supervisory Guidance” The credit union must provide the examiner an analysis to support its determination the extension, renewal, deferral or rewrite is, or is not, a TDR. The credit union must provide a well-documented analysis that illustrates (1) whether the borrower is experiencing financial difficulty and (2) whether the credit union granted a concession it would not otherwise consider except for the borrower’s financial difficulty. The credit union’s conclusion and rationale must be clearly stated in supporting documents.”

If this sounds like a highly subjective standard it is. The key take away is that your TDR determinations should be made in a systematic way. (By the way I love the fact that accountants are perceived as buttoned down, straight-laced Black-And-White guys and gals while  attorneys get pegged as the rule benders. Accounting lends itself to more creative interpretation than a Picasso painting).

A September 30th Accounting Bulletin released by the NCUA provides further TDR clarification. The good news is that just because a loan workout has been classified as a TDR doesn’t mean it must  remain so   Specifically if a TDR is restructured and, “If at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted by the institution to the borrower” the loan no longer has to be treated as a TDR.

Here is a link to the bulletin and a useful Supervisor Guidance is the link to the bulletin

October 21, 2014 at 9:12 am Leave a comment

Chip and PIN: The Next Big Compliance Deadline?

When a President has to react to a serious problem but doesn’t know what more he can do to solve it   he appoints a “Czar” as in a “Drug Czar” or “Ebola Czar.“ When a President has ideas about how to solve a problem but can’t get anyone to agree to his solution, he holds a summit.

The President is a smart guy who knows that cybersecurity is a major issue about which Congress has failed to act. Last year, 100 million consumers were victims of data breaches. So this past Friday, the President announced that he would be hosting a cybersecurity summit.

While the bully pulpit only goes so far, the actions announced by the President and major retailers on Friday underscore that, for card issuing credit unions, October 2015 looms as one of the biggest compliance deadlines. As you probably already know, October 2015 is when that liability shifts for card issuers and merchants accepting Visa and MasterCard that don’t have chip-and-pin technology.

Starting in October of 2015 a merchant with a payment terminal that doesn’t use chip-and-pin technology will be liable for the costs of any unauthorized Point of Sale transactions involving a member with a chip-and-pin card. Conversely, if a card issuer can’t process EMV transactions, it is on the hook for the liability. The shift was first unveiled in 2012 to give everyone more than adequate time to adopt the new technology but, until recently, I was skeptical of just how important the deadline would be. Making the shift costs money. Issuing chip embedded plastic isn’t cheap compared to the erstwhile magnetic strip and retrofitting payment terminals isn’t cheap for merchants.

But the days of mutually assured indifference are over. Speaking before employees at the CFPB on Friday, the President unveiled an Executive Order mandating that credit cards and credit-card readers issued by the United States government come equipped with chip-and-pin technology starting next year.  The President also announced that he was ordering federal law enforcement to share more information with the private sector when they discover identity theft rings.

Finally, the President announced that “a group of retailers that include some of our largest — Home Depot, Target, Walgreens, Walmart — and representing more than 15,000 stores across the country, all of them are pledging to adopt chip-and-pin technology by the beginning of next year.”

Now, I have said it before and I will say it again. Industry-wide adoption of chip-and -pin is no panacea. The technology is already old and does nothing to prevent online fraud. But the events of Friday underscore that it is time to get moving on adopting this technology if you haven’t done so already.

Here are some links for additional information:

October 20, 2014 at 8:46 am Leave a comment

In defense of the CFPB


In today’s blog I come not to criticize the CFPB, but to praise it.

Earlier this week, it proposed further amendments to its Integrated Disclosure requirements that take effect August 2015. These Dodd-Frank mandated amendments replace the erstwhile Good Faith Estimate with a Loan Estimate.  The amendments proposed this week are not big deals. They are tweaks that won’t keep you from cursing Dodd- Frank; but the very fact that the amendments are being proposed speaks volumes about the good side of the CFPB.

Does the CFPB have too much power? You bet It does. Does the Bureau That Never Sleeps pay too little attention to the burdens it is imposing on industry? Absolutely. But a good regulator is like a good umpire: You might disagree with the dimensions of his strike zone but a good umpire like a good regulator approaches regulations and their enforcement in a consistent manner so that everyone knows when they have missed the strike zone. By this standard, the CFPB is doing a great job.

Under the integrated disclosure requirements that take effect in August 2015-remember, they combine the separate disclosures currently mandated under TILA and RESPA-lenders are permitted to redisclose Loan Estimates when a mortgage interest rate is locked. For the redisclosure to be valid, the regulation currently provides that it has to be made “on the day the interest rate is locked.”

When the integrated mortgage proposal was put forward the rate-lock provision did not get all that much attention; the Bureau assumed that requiring same day redisclosure was not a big deal for lenders because they knew the rate they were going to charge. The CFPB could have obstinately refused to reconsider the regulation after it issued them in final form. Instead, it continued to listen to affected industry participants, was convinced that the requirement would be more difficult for lenders to comply with than it originally assumed and is now proposing to amend the final regulation to authorize a revised Loan Estimate to be issued no later than the next business day after the rate is locked.

A second proposed revision announced this week is targeted towards new construction loans. It permits creditors who reasonably expect settlements to occur more than 60 calendar days after initial disclosures have been issued to state on Loan Estimates that they may issue new disclosures.

The political environment is so weighed down with justified cynicism that  the CFPB often catches the institutions it regulates off guard by remaining true to its mission. Before it changes a regulation its primary question is: will the change  benefit, or at least not diminish, consumer protections? For example, in the preamble to these proposed amendments the CFPB argues that giving lenders until the next business day to redisclose loan estimates will benefit consumers by giving them more time to accept loan offers.

Then there is the intangible benefit of dealing with a regulator that writes and explains regulations more clearly than any other. You may not agree with its mortgage regulations but it has provided material designed to help even the smallest lender comply with them.

I apologize but I am still thinking about the Kansas City Royals crashing into over and under walls to make catches and I can’t get baseball metaphors out of my head. The bottom line is that the CFPB has a consistent strike zone. Its overriding mission is to protect consumers. When commenting on one of its proposals, it is incumbent on industry participants to quantify regulatory burdens with concrete operational examples and to suggest alternatives that will not diminish consumer protections. I will continue to disagree with the parameters of the Bureau’s strike zone but also give it much-deserved credit for the consistency and diligence with which it is carrying out its mission.   Here is a link to the proposal which also includes other technical changes..

October 16, 2014 at 10:08 am Leave a comment

4 Cases This Term That Will Impact Your Credit Union Operations

Well, it’s opening day for legal junkies.  The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June.  With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.

Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).

This case is important to credit unions for two reasons.  First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act.  Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week.  However, there are several exceptions to this requirement.  In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement.  In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.

In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period.  As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.

For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.

EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).

Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business.  This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code.  However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation?  This is the question that the Court will grapple with in this case.  It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people.  What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons.  Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.

Jesinoski v. Countrywide Home Loans, 13-604.

We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions.  Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage.  This case deals with a narrow but important question:  does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction?  This may not seem like a big deal, but the Circuit courts have been all over the map on this one.

Young v. United Parcel Service, 12-1226.

Federal law prohibits discrimination against employees because they are pregnant.  But, are you discriminating against a pregnant employee by refusing to provide her an accommodation?  In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages.  This case isn’t as clear cut as it sounds.  Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.

I will, of course, be keeping an eye on this and other cases in the coming months.  In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.

October 6, 2014 at 8:49 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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