Posts filed under ‘Compliance’

What Is the True Cost of Fraud?

How much is cyber theft costing us? The question is crucial because, to simple country lawyers like me, we are facing the electronic equivalent of a man-made Ebola virus. Is it possible that fraud is a manageable cost of doing business? I don’t think so, but I’m afraid many policy makers, merchants and large financial institutions might.

One place to look for the answer is in the Fed’s biannual report on the cost of debit card interchange costs mandated by the Durbin Amendment. The latest installment was issued September 18th.  Fraud resulted in $1.57 billion in losses in 2013. Furthermore: “. . . the majority of fraud losses were absorbed by issuers and merchants (61 percent and 36 percent respectively); cardholders absorbed only 3 percent of losses.”

Most importantly, the cost of fraud is rising.  “Although overall fraud losses as a percentage of transaction value did not change much between 2011 and 2013, there were substantial changes in the incidence of fraud, as well as in average losses per fraudulent transaction.”

But since overall transaction costs are going down, the Fed won’t be proposing a change to the existing cap, which is currently 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, for institutions that take mandated fraud prevention measures.

Something doesn’t quite past the smell test. In the same week, Home Depot concludes that a mere 56 million consumers had their credit and debit card information stolen by malware imbedded onto its card readers, the Federal Reserve concludes that there is no need to recommend raising the cap on interchange fees for institutions with $10 billion or more in assets.   We may have one of those situations where economists can tell us the price of fraud but not its true cost. Remember the cap just applies to institutions with $10 billion or more in assets.

Why should credit unions care? Because, while cyber fraud may be an acceptable cost of doing business for the big guys who can absorb the costs, it’s not for your smaller institution. Furthermore, the Fed can’t monetize consumer anger and mistrust. Your average consumer is going to get fed up sooner or later. They will turn to the larger, more sophisticated institutions that they believe are better able to protect them – a trend that will be accelerated by our good friends at Apple.

September 19, 2014 at 9:06 am Leave a comment

NYS: Dot I’s and cross T’s when collecting Zombie Debt

I was surprise by how much attention  news that New York’s Office Of Court Administration has finalized new debt collection requirements got in yesterday’s papers. I was also kind of embarrassed that I missed all these articles, since I try to bring you the news and information most relevant to your work day. So with an embarrassed “My bad” here is what you need to know about New York’s new debt collection procedures.

Most importantly the new requirements only apply to a narrow but important part of debt collection process. Specifically it applies to creditors seeking default judgments on delinquent open-ended consumer loans pursuant to New York’s CPLR 3215. They do not apply to medical services, student loans, auto loans or retail installment contracts. The way this regulation is drafted it’s possible that courts will expand the type of debt excluded from the new  requirements as they begin to interpret the requirements

If a debtor simply refuses to pay a debt, can’t pay a debt or has gone AWOL and the credit union sues her the first step is filing a summons and complaint putting the debtor on notice that they are being sued for the money. Often debtors don’t respond and the next step in the process is to go to court and get a “default judgment”- basically a legal ruling that the debtor owes the credit union. These new requirements are in response to concerns that default judgments are being granted based on inaccurate or incomplete information.

Starting on October 1st,  “Original creditors”-that’s you- will have to submit two affidavits when seeking default judgments.  The first must be sworn to by someone with knowledge of the facts surrounding the delinquency-i.e. that an open-ended consumer loan was entered into for “X” amount and is now in default. Credit unions should use the “original debtor” affidavit included in the link to the regulations I am providing at the end of this analysis. You will also have to file an additional affidavit attesting to the fact that the statute of limitations has not run out for collecting the debt. These affidavits can’t be combined.

If you sell your debt to third parties, or put third-party collectors in charge of delinquencies headed for court these third parties are required to fill out different affidavits and the effective date for these requirements vary.  Give your debt collector a call and make sure he knows about these requirements  and how he plans to comply with them…

Here is a link to the regulation and a previous blog I did on the proposal

No news is good news from the Fed

No big news came at of the two day meeting of the Fed’s Open Market Committee and that means that the Grand Mufti’s of the economy have concluded that, since the economy is not going gangbusters, they don’t expect the  type of surprises that could cause a sudden spike in interest rates no matter what NCUA is saying.

The Fed is reducing to $5 billion its purchases of mortgage backed securities. At the same time it led its statement on the meeting with its assessment that “economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant under utilization of labor resources.” This is Fed speak for holding the line against interest rate rises anytime soon. There are still lots of room for economic growth before inflation kicks in.

For those of you who like watching the inside baseball a fissure is officially out in the open. Recently installed Vice Chairman Stanley Fisher voted against the Board’s statement on future economic growth. He believes that “the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation.”  

Here is the statement.


As Long Island goes so goes the state

Former Assemblyman and longtime state political observer Jerry Kramer has a nice analysis of the outsized part Long Islanders  will play in determining if Republicans maintain  a piece of control over the Legislature’s Senate Chamber this November or are relegated to the sidelines of state Government . All nine Long Island seats are controlled by Republicans but with two open seats and other competitive races Long Island is no longer a bastion of suburban Republicans.  it’s anyone’s  guess what the Long Island delegation is going to look like when the Senate shows up in January.

Here is the article.


September 18, 2014 at 9:06 am Leave a comment

Five Thursday Tidbits

Since I didn’t do a blog yesterday, I have too much to talk about today. So, with the caveat that you may see me expand on anyone of these subjects in the future, here are some tidbits to consider as you start your credit union day.

Greetings Congressman Nussle — I’m sure CUNA is relieved to know that I think they did a great job in hiring former Republican Congressman and Budget Director Jim Nussle. First, the political winds are blowing to the right and if the industry is to get big-ticket items done on a national level it needs a guy who can get Republicans listening. Plus, Nussle knows the budget as well as anyone, and given his bona fides as an advocate of deficit reduction he is well positioned to swat away tiresome complaints about the credit union tax exemption and keep Congress focused on issues that help credit unions help members. Welcome to the fight.

 How much should foreclosure’s cost? Earlier this week, Benjamin Lawsky, the Superintendent of the DFS, sent a letter to Melvin Watt, the head of the FHFA urging him to quash a proposal for Fannie Mae and Freddie Mac to charge more for buying NY mortgages. Specifically, the FHFA is considering increasing the guarantee fee  “g Fees” GSE  charge on New York mortgages as well as those of four other states by 25 basis points to account for increased foreclosure costs. The other impacted states would be Connecticut, Florida and New Jersey. The DFS argues that the FHFA is relying on data that negatively skew the cost of foreclosing in New York and that, by penalizing New York and others, it is penalizing states for providing enhanced protections for homeowners. Here is the thing: the GSEs have a point, as well-intentioned as some of NYs foreclosure laws are, every new procedural hurdle or mediation delay makes owning a house more expensive for everyone. There are real costs involved in keeping someone in a house they can’t afford. Conversely, is it fair to make New York homeowners, the vast majority of whom won’t default, pay an increased burden? The real solution is for the Legislature to reexamine some of the protections it has put in place and see what steps can be taken to make the foreclosure process more efficient. I’m not holding my breath. Here is a link to the letter:

The CFPB announced inflation adjusted thresholds after which Regulation Z will not apply to consumer transactions. Specifically, the Bureau that never sleeps announced, “[t]ruth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $54,600 or less in 2015 – an increase of $1,100 from 2014. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.“ Here is a link to the announcement:

Here is an earlier blog I did on the topic:

Judging by the interest generated by this topic at yesterday’s Legal and Compliance Conference, many of you are aware that even if your credit union is not unionized, your employers have a right to use social media to complain about workplace conditions where such   employees are deemed to be taking  taking concerted actions against work place conditions. Just how broadly this right can be interpreted is underscored by this blog post from Bond, Shoenick & King. It summarizes a recent administrative ruling by the NLRB in which it held that restaurant employees were wrongly terminated after complaining about sloppy paperwork by the owners that cost employees increased taxes. referring to your boss as an “Ass” on Facebook is not grounds for dismissal so long as other employees join in your complaints For more information on just how much employees can bad mouth their employers with impunity, here is the post.

Lost in all the hype about the new Apple product roll out was the tidbit that banks have agreed to pay Apple a fee for every transaction made on its Mobile Systems program. Apple’s technology may not be game changing, but its potential to change the payment system model is. The details are still sketchy. More on this in the future.





September 11, 2014 at 9:13 am Leave a comment

What the NFL the CFPB, and Regulation Z have in common

Every year the NFL gives its referees “points of emphasis”-violations of the rules that they want refs to impose more strictly with the hope of making the game better. For example, this year the NFL has decided that, in a sport where oversized men with above average speed crash into each other every 45 seconds, the game would be better if no one touches the wide receiver after five yards lest teams be able to play defense and people not enjoy playing fantasy football.

Just like the NFL has its points of emphasis and tells everyone exactly what they are so does the Bureau That Never Sleeps-the CFPB. Its latest point of emphasis comes in the form of a bulletin issued last week, is promotional credit card rates that don’t accurately disclose restrictions that companies place on offers. Given that the CFPB has the power to interpret the law, penalize what it deems to be deceptive practices and issue amendments to Regulation Z its best you double-check your own promotional material.

Under Regulation Z banks and credit unions can offer promotional rates which the regulation defines as “any annual percentage rate applicable to one or more balances or transactions on an open-end plan for a specified period of time that is lower than the annual percentage rate that will be in effect at the end of that period on such balances or transactions.”

For example, an offer of 0% interest on balance transfers. What has the Bureau concerned is that some card issuers do not “adequately convey in their marketing materials that a consumer who accepts such a promotional offer will lose his grace period on new purchases if he does not pay the entire statement balance, including the total amount subject to the promotional APR, by the payment due date.”

Unlike old-fashioned regulators that would have to wait to build a consensus for a new regulation, the CFPB goes onto remind lenders that it has the power to go after deceptive practices and is not afraid to use it. As a result credit card issuers should also be aware of the possibility that, “depending on all of the facts and circumstances, they may be at risk of engaging in an abusive practice if they fail to provide adequate information alerting consumers that they will be unable to maintain a grace period on new purchases if they do not repay their entire balance, including any promotional balance and any new purchase balance, by the statement due date.”

By the way another Regulation Z issue caught my attention yesterday. A lawsuit has been filed against American Express in Federal District Court in Manhattan alleging that the bank illegally made the minimum payment of cardholders due on September 2nd,  2013, a federal holiday. The lawsuit is a putative class action graciously offering to represent all persons similarly aggrieved by AmEx throughout the nation.

A company as big as American Express is going to get sued more often than Eli Manning throws an interception, but this news still got me rereading the regulations because this is an area that isn’t ambiguous. Under 12 CFR 1026.10 if a creditor does not receive or accept payments by mail on the due date for payments, the creditor may generally not treat a payment received the next business day as late for any purpose. The “next business day” means the next day on which the creditor accepts or receives payments by mail.

However-there is always an however with Regulation Z which is why it should be blown up and rebuilt from scratch- “If a creditor accepts or receives payments made on the due date by a method other than mail, such as electronic or telephone payments, the creditor is not required to treat a payment made by that method on the next business day as timely, even if it does not accept mailed payments on the due date.”

Whenever I deal with Regulation Z I remind people that, with certain exceptions, it is nothing more or less than a disclosure requirement. Disclose your terms and conditions clearly and there is very little you can’t do; fail to explain to your members what they are in store for and you may find yourself in trouble. Make sure your marketing department doesn’t have the final say on what is said in your advertisements.

By the way am I the only Giant fan counting the days to spring training after last night’s game?


Here is a link to the CFPB bulletin if you haven’t already looked at it.




September 9, 2014 at 8:35 am Leave a comment

Why We All Need To Know More About Mortgages

The SEC was literally asleep at the switch during the early days of the mortgage meltdown. Although it has made some marked improvements in its oversight of the financial industry, its glacial movement in implementing Dodd-Frank mandated reforms makes it quite clear that it is as reluctant to impose requirements on its regulated entities as the CFPB is zealous in dreaming up new and creative ways to protect the American consumer from himself.

So it’s big news whenever the SEC finally gets around to implementing Dodd-Frank requirements and even bigger news when, on balance, the proposal is one that makes a lot of sense. In fact, at the risk of insulting the CFPB, the proposal the SEC is reportedly finalizing today should nudge the CFPB to take a second look at its proposed revisions to HMDA regulations. Humor me a little bit and you will see where I am going on this one.

Asset-backed securities are a broad categorization of bonds comprised of pools of assets ranging from student loans to car loans to everyone’s personal favorite in the industry — mortgage backed securities. Purchases of these bonds are repaid with the revenue from consumer loan payments. These bonds are typically broken into tranches with more conservative investors getting less of a return but being first in line to get paid in the event that the loans start going delinquent.

As credit unions are painfully aware, in the pre-financial crisis days regulations permitted institutions like the corporate credit unions to rely on ratings agencies when deciding whether or not it was safe to buy an asset backed security like one comprised of mortgage loans. With 20-20 hindsight, we all know that this assumption was dangerously naïve. For the last several years, the question has been with what should the old system be replaced? New regulations require that institutions, including credit unions, no longer rely exclusively on rating agency determinations when buying securities, but as I have complained in previous blogs, it is unrealistic to think that most institutions have the expertise or access to information necessary to make the type of decisions for which they relied on the rating agencies. In addition, remember that all this is taking place against the backdrop of litigation in which credit unions have billions of dollars at stake in which the primary issue is the extent to which the bundlers and underwriters of mortgage-backed securities knowingly provided inaccurate information when selling securities that faded quicker than the Yankee’s playoff hopes. (Hey, at least we have the Jets and Giants to look forward to…Right?).

According to several news reports, the SEC will be finalizing regulations mandated by Dodd-Frank that require the issuers of asset-backed securities to provide more loan-level data about the assets that are being bundled and sold into securities. As a result, before an institution purchases a mortgage-backed security, for example, it will be able to examine the individual mortgage loans comprising the security.

Similar proposals have been floating around since 2010. So why the holdup? According to press reports, privacy groups have been concerned about how regulators planned on protecting such a huge treasure trove of personal financial data and a way that protects the individual homeowner. These are, of course, legitimate concerns, particularly since hackers have demonstrated on an almost daily basis that it is about as easy to steal computer-protected data as it is to find a first-term Senator who thinks he should be President. As legitimate as this concern is, the benefits of the proposal far outweigh its harms. By putting buyers on notice that the information is available to assess a loan’s quality, we’re creating a mechanism to improve credit quality before bonds go bad as opposed to trying to deter recklessness almost exclusively with after-the-fact law suits.

So where does HMDA and the CFPB come in? Currently, the agency that never sleeps called a Bureau has out for public comment proposed revisions to Regulation C, which implements HMDA. These mandate that you log information about mortgage loans you provide. Dodd-Frank gives the Bureau the authority to mandate the creation of a truly universal loan identifier. In an ideal world, regulators and lenders could track every loan from its creation to its payoff.  This would benefit housing advocates who believe that, with just a little more information, they can prove that lenders are somehow to blame for every mortgage not given to anyone who wants one and every foreclosure that takes place. It would also benefit lenders, many of whom already have to comply with unique loan identifier requirements if they participate in the MERS system. But the Bureau notes in the preamble that it isn’t planning a formal universal identifier proposal at this time. It should reconsider.

Given the nationalization of mortgage finance and the benefit to the financial system of insuring that all parties to complicated financial transactions have as much information to perform adequate due diligence as possible, the CFPB should consider speeding up its timeline for implementation of a universal loan identifier system. I understand that this process won’t be quick but the sooner a mortgage tracking system is implemented the sooner consumers and lenders can benefit from a more transparent lending system and resulting efficiencies.

On that note enjoy your day and, if you are in the Albany area, I’m giving you permission to leave early and take advantage of this beautiful weather while it is still around.







August 27, 2014 at 9:31 am Leave a comment

Where is the Line Compliance Officers Must Not Cross?

Monday, New York State’s Department of Financial Services (DFS) announced that it was banning Price-Waterhouse-Cooper from providing financial consulting services to financial institutions for two years and imposing a $25 million fine.  The settlement resulted from charges that PWC helped a Japanese bank evade BSA and OFAC requirements to facilitate wire transfers through American branches to sanctioned countries.

In zeroing in not only on illegal bank activity but the consultants who provide them legal advice, DFS’s actions may amount to a watershed moment in bank regulation that impacts compliance officers not only at the biggest banks but the smallest credit unions.  If you think I’m exaggerating, you’re wrong.  Here’s why.

The documents released by the DFS on Monday included an amendment made to a report tracking the bank’s wire transfer activities.  The PWC consultant correctly highlighted the transaction in a report to the bank.  But the bank successfully pressured PWC to remove the offending finding since it directly contradicted what the bank was telling the DFS.  Now, don’t get me wrong.  This is a particularly egregious example and the DFS was right to take the action it did, but the kind of pressures placed on the consultant are the type that are placed on lawyers and compliance officers every day.  We live in a world of regulations and every time a regulation in interpreted in a given way, it could restrict the actions a credit union can take.  Not every one of these decisions should be fodder for increased regulatory scrutiny.

At its core, the responsibility of the person who handles compliance at your credit union is to lay out a plan for translating regulations and laws into an operational framework.  By definition, this means that banks and credit unions are confronted with legal barriers between what they want to do and what the law says they should do.

I think it is perfectly legitimate for boards and CEOs to weigh legal and compliance advice and decide that the cost of compliance outweighs its benefits.  What isn’t legitimate is for any organization to create an environment where people are rewarded not for providing the best legal advice they can, but for providing the legal advice that the boss most wants to hear.  Ultimately, the line that shouldn’t be crossed is almost never going to be as clear as the case highlighted by DFS this week. 

What we need is a robust discussion about creating a codified set of ethical rules that apply to compliance officers,  What we also need is to clarify the distinction between the responsibilities of compliance officers and attorneys.  Regulators like to think that regulations are so clear cut that any institution that doesn’t interpret them the way regulators intended is clearly violating the law.  But I would hate to see regulators scrutinize legal memoranda in which retained and in-house counsels creatively analyze defensible interpretations of regulations for evidence that institutions chose not to adhere to the “correct” answer. 



August 20, 2014 at 8:32 am Leave a comment

No More Zombies on the Jersey Shore?

Late last week , the State that gave us Bruce Springsteen and a politically inspired traffic jam took another step in clamping down on so-called zombie property when Governor Chris Christie approved legislation authorizing municipalities to mandate that foreclosing lenders take more responsibility for vacant and abandoned property even before they have legal possession of the homes in question. The legislation is the latest – and what I believe to be misguided – attempt to deal with properties that have effectively been abandoned by delinquent homeowners but for which a foreclosure process has not been completed.

Municipalities in New Jersey have had authority to mandate that a foreclosing lender take steps to maintain vacant property since 2008, but this first section of New Jersey’s latest legislation gives you a feel for how much more expansive the law is:

   (New section) a. The governing body of any municipality may [make, amend, repeal and enforce] adopt ordinances to regulate the care, maintenance, security, and upkeep of the exterior of vacant and abandoned residential properties on which a summons and complaint in an action to foreclose has been filed. 

In addition, the law deals extensively with the regulation of out-of-state mortgagees commencing foreclosures.  Read between the lines and you have a state with a glut of abandoned property and a lot of frustration working with out-of-state lenders.

Not all the news is bad.  In 2012, New Jersey passed a law permitting lenders to put foreclosures on the fast track when they could prove that property is vacant and abandoned. Residential property is considered “vacant and abandoned” if a court finds that the mortgaged property is not occupied by a mortgagor or tenant, and at least two of more than a dozen conditions exist such as:

(1) overgrown or neglected vegetation;

(2) the accumulation of newspapers, circulars, flyers or mail on the property; and

(3) disconnected gas, electric, or water utility services to the property.  See N.J. Stat. Ann. § 2A:50-73 (West).

By the way, having just reread the list, it’s a good thing I don’t live in New Jersey since I rarely remember to cancel the paper when I am out of town and mowing the lawn is not my favorite activity.

Those of you with mortgages in New Jersey should certainly run this by your attorney and compliance people and everyone should pay attention to these latest developments.  New York is also taking a look at the zombie property problem and this legislation will certainly give greater impetus to proponents of a similar approach.


August 19, 2014 at 9:20 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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