Posts filed under ‘Compliance’
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.
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.
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.
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.
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.
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.
The CFPB continued its incredibly frenzied pace yesterday. In the same day, it proposed federal regulations on prepaid cards and fined Franklin Loan Corporartion, a California-based mortgage banker for illegally compensating its loan originators. In the pre-Dodd-Frank days, either one of these would have been among the biggest news of the year for one of our federal regulators. But for our good friends at the Bureau that Never Sleeps, it’s all in a day’s work.
First, let’s talk about the illegal compensation settlement. In 2010, the Federal Reserve Board imposed restrictions on the way loan originators could be compensated. Specifically, the Federal Reserve Board promulgated regulations prohibiting compensating originators based on a term or condition of a mortgage loan. The CFPB is now responsible for enforcing this provision and to avoid making this discussion any more complicated than it has to be, my references are to the re-codified regulation. Before the Board’s prohibition, Franklin had a straightforward compensation system in which originators would get a percentage of each mortgage loan they closed. The compensation would be based on the total cost of the loan, which included an originating fee, discount points and the retained cash rebate associated with the loan. As a result, loans with higher interest rates generated higher commissions. After the Board passed it prohibition in 2010, Franklin instituted a new system. All loan officers were given an upfront commission for each loan they closed. However, on a quarterly basis, they would receive the difference, if any, between the adjusted total commission, which was based in part on the interest rate of the mortgage, and the upfront commission. In other words, the higher the interest rate the more a Franklin originator would be compensated.
The originator clearly crossed the line with its compensation structure. But remember, the regulation isn’t as clear cut as it first appears. Take a look at the official staff commentary accompanying 12 CFR 1026.36(d)(1)(I):
- Permissible methods of compensation. Compensation based on the following factors is not compensation based on a term of a transaction or a proxy for a term of a transaction:
- The loan originator’s overall dollar volume (i.e., total dollar amount of credit extended or total number of transactions originated), delivered to the creditor. See comment 36(d)(1)–9 discussing variations of compensation based on the amount of credit extended.
- The long-term performance of the originator’s loans.
- An hourly rate of pay to compensate the originator for the actual number of hours worked.
- Whether the consumer is an existing customer of the creditor or a new customer,
Whether or not the way you compensate your originators is acceptable is a fact-specific analysis. The bottom line is this: in trying to comply with this prohibition it is best to keep in mind what the CFPB is seeking to prevent. It doesn’t want to create an incentive for originators to provide mortgages with higher interest rates and transaction costs than a member needs to pay in order to get an appropriate mortgage.
As for the CFPB’s proposed regulation of prepaid cards, in concept anyway, this is a proposal that is long overdue. More than a decade ago, legislation was introduced in the NYS Assembly that placed restrictions on prepaid cards which were increasingly being used by employers. At the time, one of the primary arguments against the proposal was that regulation of prepaid cards should be done on the federal and not the state level. Prepaid cards are increasingly being used as de facto bank accounts, particularly for the poor and young. It makes sense both from a competition standpoint and from a consumer protection standpoint that consumers that choose to use these cards get basic protections. I will undoubtedly have more to say about this regulation as a I read through its specific provisions. I know you can’t wait.
In the meantime, have a great weekend.
A day after the CU Times reported that NACUSO issued a call-to-arms urging credit unions to help fund regulatory and potential legal actions designed to protect CUSOs against regulatory encroachments by the NCUA, it is being reported that Home Depot’s data theft was much more serious than initially reported. Not only were a mere 56 million credit card accounts compromised, but 53 million email addresses were also stolen. It now appears that access to the system came from a password stolen from one of the company’s vendors. Just how many issues does this raise? Let me count them.
- Look to you left, look to your right. Then look down the hallway. Think about the most technologically incompetent person you have working for your credit union. Realize that your data security is only as safe as that employee can make it. Data security starts with your employees. Only give access to databases to those who truly need it. The hackers are so sophisticated now that once they have access to a password, they can virtually sneak around your system and find more and more vulnerabilities.
- I’ve said it once and I’ll say it again, and I expect NCUA will be saying it to you shortly: your vendor contracts are absolutely crucial. Given the explosion of technology, it is only natural that credit unions are going to turn to vendors. If they don’t they won’t be able to provide the type of services that members expect. But turning to the vendor doesn’t absolve the credit union of ultimate responsibility for the services the vendor is providing or the continuing need to protect member information. Consequently, just like Warren Buffet never invests in a business he doesn’t understand, your credit union should never contract for technology it doesn’t comprehend. Your vendor relationships must include ongoing monitoring by knowledgeable employees on your staff. You should make sure that your vendors document on an ongoing basis that they are compliant with the latest data security standards.
- CUSOs provide a crucial mechanism for credit unions to pool resources. Given the importance of vendor management, is it really that unreasonable for NCUA to seek a more holistic view of the CUSO industry? Personally, I don’t think so. The problem is that NCUA has sought to exercise powers it doesn’t yet have. Mandating that credit unions force their CUSOs to agree to NCUA audits is a blatant attempt to boot strap its jurisdiction. But at the end of the day, it makes sense for NCUA to have a clear picture of what a CUSO is doing, Not only are these organizations providing services for credit unions, but their financial success or failure directly impacts credit unions’ bottom line. The middle ground is for everyone to be a lot less dogmatic and a lot more pragmatic. NCUA should seek specific legislative authority to regulate CUSOs. But it should only exercise enhanced oversight over those CUSOs that represent a truly systemic risk to the industry. This means that NCUA should base its enhanced auditing not on the type of services the CUSO provides, but on how many credit unions use its services. In addition, NCUA should reduce its proposed risk rating for CUSOs. Credit unions should be encouraged to use CUSOs as opposed to third-party vendors with no connection to the industry.