Posts filed under ‘Compliance’
Yesterday’s Financial Institutions and Consumer Credit Subcommittee hearing on CFPB’s qualified mortgage regulations ended up being more than a cathartic exercise in bureau bashing. When you get bankers, supervisors, credit unions, brokers and politicians across the political spectrum agreeing that, as written, there is a real danger that fewer people will get mortgages than are actually qualified, that’s a huge step in the right direction. Now the question is will Congress step in and make the changes to its own statute in reaction to this broad based consensus?
- Most importantly, credit unions and banks will overwhelmingly underwrite their mortgages to the qualified mortgage standard in order to receive the maximum protection afforded under the law. This is not what CFPB wants to see happen. Its primary concern is that all lenders meet basic ability-to-repay underwriting standards.
- Under the regulations, in order for a mortgage to get the safe-harbor protection afforded to qualified mortgages, points and fees are generally capped at 3% of the mortgage. This cap is too restrictive, particularly since it doesn’t carve out an exception for affiliates of the mortgage lender. The argument of mortgage brokers, to which Congress seems very receptive, is that if Congress comes down too hard on title insurance providers, it may actually do more harm than good to the market place.
- The CFPB’s current exemption for institutions that have $2 billion or less in assets and that hold 500 or fewer mortgages in their portfolio is too restrictive. Several of the witnesses made a compelling case that so long as an institution is holding on to its mortgages, Congress shouldn’t be as concerned about dangers of default. Simply put, an institution is not going to put itself at risk by underwriting mortgages that are nothing more than ticking time bombs in their portfolios.
- Game 6 of the NBA finals last night, which was ultimately won by the Miami Heat in overtime, ended up being one of the best basketball games you’ll ever see. This, of course, has nothing to do with qualified mortgages, but it does explain why my blog is a bit late this morning and I always want to make sure you’re paying attention. Have a great day!
As I pointed out in a previous blog post, even though my father was able to get five kids through college and give himself the flexibility to play the occasional weekday game of tennis by starting his own accounting firm, it became painfully obvious at a very young age that his older son would not be following in his footsteps. So, it is with that caveat that I am here to tell you that one of the most troubling issues on the regulatory horizon for credit unions has to do with changes proposed by the Financial Accounting Standards Board (FASB) which would make financial institutions anticipate and more quickly reflect investment losses on their balance sheets.
Under existing accounting standards, financial institutions must generally reflect investment losses on their balance sheets once they are incurred. Under FASB proposal, 2012-260, this standard would be changed so that financial institutions would have to account for expected financial losses. The distinction is between reflecting a loss that is going to happen and one that may happen given current economic conditions.
The rationale behind the change is a sound one as applied to financial institutions whose balance sheets are confusing to even the most sophisticated investors. The intent behind the shift is to put investors in a better position to react to changes in a corporation’s financial condition before trouble strikes. For example, in an analysis of the failure of small community banks and recent testimony before Congress, the GAO pointed out that existing accounting standards did not adequately capture the fact that community banks were aggressively moving into the commercial real estate market. It opined that “loan loss allowances were not adequate to absorb the wave of credit losses that occurred when the financial crisis began, in part because current accounting standards for loan loss provisions require banks to estimate loan losses using an incurred loss model” as opposed to one that forces banks to more quickly recognize likely investment losses.
The vast majority of credit unions do not hold the type of sophisticated investments that cannot be adequately accounted for under existing accounting standards. Application of a new forward looking standard will force them to adopt a whole new approach to accounting standards and ultimately reserve more capital even though the money could be better spent making prudent loans to their members and helping revitalize local communities. (Notice the slight dig against community banks, Keith?) In addition, as cooperatives we do not have investors buying and selling shares based on a minute-by-minute analysis of the economy. The overriding importance of accounting standards as applied to credit unions is that they adequately allow examiners to quickly and accurately assess a credit union’s safety and soundness. The existing incurred loss model is more than sufficient to do that given the relatively low risk and static nature of most credit union investments.
Credit unions ultimately want to be treated as fairly as their financial institution counterparts by both regulators and legislators. Sometimes in order for that goal to be achieved, regulators have to recognize that the unique structure of credit unions makes it impossible for them to be fairly subjected to a proposed regulation or accounting requirement. If this proposal is finalized as currently written, it is time for NCUA to consider raising the threshold below which credit unions do not have to comply with GAAP standards.
Without much fanfare, the OCC announced that it will grant two year exemptions to the nation’s seven largest banks from a Dodd-Frank mandated requirement that large financial institutions “push out” their swap operations to non bank subsidiaries. The idea behind the provision is that federal insurance guarantees shouldn’t be used to bail out investment banks that make bad bets on tricky derivatives. We are told that the two year extension will facilitate the orderly implementation of this requirement. Who wants to bet that Bank of America, Citibank et al will ever have to comply with this regulation?
Now, from what I have read on this subject there are strong arguments both for and against the provision, but frankly good and bad arguments can be made about all of the most contentious provisions of Dodd-Frank.
We are coming up on the third anniversary of its enactment and astoundingly only 38% of its provisions have been implemented. It is becoming increasingly obvious that for the biggest and well-connected institutions — aka the institutions most responsible for necessitating financial reform in the first place — regulators will do everything they can to accommodate their wishes. As the former Inspector General of the TARP program commented when hearing about the latest regulatory capitulation “regulators continue to kowtow to the financial interest of the largest banks rather than inconvenience them.”
Of course this isn’t fair. Credit unions have less than six months now to comply with mortgage and servicing requirements that will have a profound impact on the way they provide home loans to their members, even though they are not responsible for these onerous mandates.
I have a solution. Let’s pass a simple amendment to Dodd-Frank providing that no provision or regulatory requirement of the act shall take effect until all of its requirements are imposed on the ten largest financial institutions in the country.
This simple amendment would tie the regulatory burden of credit unions to the lobbying efforts of our nation’s financial giants. We would get no worse a deal than that negotiated by J.P Morgan’s government representatives. It would also put Congress in the uncomfortable position of actually having to push for Dodd-Frank to be implemented.
Of course this would never happen. Instead, the way Dodd-Frank is taking effect Congress and the President can say they reformed Wall Street; Wall Street gets to carry on as usual and when consumers complain about the lack of Wall Street reform, Congress can blame regulators on the one hand while continuing to take campaign contributions from the very banks fighting Dodd-Frank with the other.
Three years ago, I had no patience for armchair extremists who saw conspiracies behind every rock of our political system. But when I compare the enormity of the problems exposed by our financial crisis with the paucity of fundamental reforms, it is getting harder and harder to brush aside the reactionaries. It is pathetic to see credit unions burdened with regulations that they didn’t need in the first place while the institutions that truly need reigning in effectively choose the mandates with which they will comply and continue to conduct themselves in a manner worthy of Russian oligarchs who know that they can get away with anything they want, just so long as they keep the political overseers happy.
Patent trolls are companies that specialize not in developing technology but in buying it and then trolling around for patent violations. Yesterday, the White House unveiled Executive orders and legislative proposals designed to crack down on these potentially parasitic interlopers. As any credit union that has received those increasingly ubiquitous demand letters informing them that they are violating registered patents with their ATM technology and graciously offering to forego litigation in return for a licensing fee knows, there has been an explosion in patent litigation that is impacting virtually every business in this country.
The problem is while the President’s Executive Orders and legislative recommendations announced yesterday put a spotlight on an extremely serious problem, there is very little he can do without the help of Congress. For example, he would like to give federal courts more power to make the losing party in a patent lawsuit pay the legal costs. Right now there is very little disincentive for patent trolls to cast their net of potential violators as widely as possible, which is why credit unions have been confronted with allegations that they are violating technology over which they often have absolutely no control. Under the President’s Executive Orders patent examiners will be given training to enable them to more closely scrutinize technology patent applications, particularly related to claims of exclusivity for the functional use of software technology.
I admit this may sound like dry stuff but as technology gets more complicated unless the law evolves to keep up with it, credit unions of all shapes and sizes will have to choose between retaining a patent attorney or settling lawsuits they know to be frivolous. It’s the type of cost that legitimately gets people angry about our legal system.
FIS Security Breach Larger Than First Reported
Speaking of the impact that technology has on credit unions, you may want to take a look at this blog posting outlining the extent of last November’s break-in of FIS. As the CU Times reported yesterday, the breach was “far more extensive and serious” than previously disclosed by the corporation. Considering that FIS is one of the largest information processors for financial institutions in the world, this is the type of report that can send chills down the spine of your IT team. As a result of last November’s break-in, FIS first reported that approximately 7,170 accounts may have been put at risk. The hackers used an increasingly common scheme in which they were able to break into FIS networks and eliminate withdrawal limits on debit and prepaid cards.
NCUA Releases Quarterly Review Of Industry Trends
NCUA released its latest snapshot of credit union growth trends. The report, which includes a state by state comparison of key credit unions data, indicates that New York credit unions continue to perform above the national average in many key categories.
Many of us know someone who knows someone who got stuck with a timeshare in New Orleans. You know how it goes. Rekindled romance and one too many mojitos made the normally level-headed lovebirds decide that New Orleans was a great place to spend summer vacations. In the old days when you woke up from your hangover, you sheepishly paid off a mortgage and warned others against your folly. But today, you refuse to pay and instead bring a class action lawsuit when the debt collector comes calling. It would be amusing except these types of cases make borrowing more expensive for everyone.
Which brings me to the subject of today’s blog. A recent ruling by the Court of Appeals for the Second Circuit gave the court the opportunity to address an issue for the first time. The court held that the federal Fair Debt Collection Practices Act does not require debtors to contest their debts in writing after they receive notice from a debt collector of a past due debt. In Hooks v. Forman, Ms. Hooks and a friend were visiting Atlantic City in December of 2009 when they attended a presentation on vacation time shares sponsored by Windham Vacation Resorts. The presentation was apparently a good one because the plaintiffs agreed to purchase a time share. The plaintiffs subsequently explained that they didn’t realize that the document they had signed was a mortgage, which explains why neither of them made any required payments.
Eventually, Windham called in the debt collectors who sent the plaintiffs a notice explaining that unless they notified the debt collectors “in writing within 30 days after receipt of this letter” that the debt is disputed, the debt would be presumed valid. Here comes the issue of first impression, the plaintiffs sued in federal district court in New York stating that the notice violated the Act because debtors are not required to dispute a debt in writing. The trial court actually dismissed this claim; however, on appeal the circuit court not only reinstated the lawsuit but effectively held that the law in this area was so well settled that the defendants should have known they were violating the statute. The lawsuit was allowed to go forward. Incidentally, the Third Circuit, which has jurisdiction over New Jersey, reached the opposite conclusion in a previous lawsuit.
I understand times are tough and I am not advocating the return of debtors prison, but a huge cultural shift has taken place in this country. Not only has the stigma of delinquency faded away, but almost every day is replete with new examples of a court system and legal structure that views debtors as victims to be compensated. Whether its foreclosures, statutory exempt accounts, or debt collection, this cultural shift is ultimately in no one’s interest. Since when did the “can do” nation become the “can’t pay and don’t have to” nation?
On Wednesday, the CFPB finalized further revisions to its definition of qualified mortgages intended to ensure that small creditors don’t stop making mortgage loans once Dodd-Frank’s mandated mortgage reforms take full effect next year. The definition of small lending institutions was not changed, which means that in order to qualify for substantial relief from Dodd-Frank’s mortgage requirements, your institution has to have $2 billion or less in assets and make 500 or fewer first lien mortgage loans a year.
The most important reform is that mortgages made by small creditors that exceed a 43% debt to income ratio will be eligible for qualified mortgage protection. Remember that qualified mortgages have greater legal protection than other types of mortgage loans. If your credit union is also a CDFI, the regulations also exempt your credit union from the baseline ability to repay requirements. This is great news since it allows your institution to continue to make loans the way it has always made them without worrying about the cost of regulatory compliance.
At the end of the day, the requirements demonstrate once again the fact that the CFPB understands that there are fundamental differences between credit unions and other financial institutions, but is unwilling to extend flexibility from Dodd-Frank requirements for all but the smallest credit unions. For example, in the preamble to Wednesday’s regulations, the CFPB noted that credit unions were not responsible for the lending crisis. However, it refused to extend exemptions from Dodd-Frank mortgage requirements to all credit unions. Why should credit unions be given categorical exemptions from the Dodd-Frank mandates? Because they are not-for-profit institutions with a recognized track record of providing the types of safe mortgages that Dodd-Frank was ostensibly designed to encourage. Another proposal rejected by the CFPB would have extended Dodd-Frank mortgage exemptions to low-income credit unions. Ultimately, the CFPB was uncomfortable with the fact that LICUs don’t exclusively serve low-income communities.
So yet again, because the CFPB isn’t willing to give the credit union industry as a whole Dodd-Frank exemptions or, in the alternative, raise the threshold for small lender exemptions, credit unions will have to manage their mortgage portfolio in much the same way they currently have to manage their small business loans. Those credit unions that are getting close to exceeding the 500 mortgage lending cap will have to decide whether exceeding the cap outweighs the increased compliance cost of Dodd-Frank. It will be a de facto cap for many credit unions and community banks, for that matter, and one which will ultimately do more harm than good.
It has taken three years, but regulations to impose federal restrictions on the garnishment of certain federal funds have finally been published. The good news is that regulators listened to comments and calls for clarification, particularly from states like New York, which already exempts funds and needed guidance as to when state law applied or was preempted. The bad news is that one of the compliance areas that credit unions already find the most challenging will be getting more, not less, complicated. By the way, don’t consider this a comprehensive overview. I don’t have the space and I don’t want to put any of you to sleep. But I strongly suggest you have whoever is in charge of levy and restraint read these regulations post haste.
First some background. In 2011, the Department of the Treasury, Social Security Administration (SSA); Department of Veterans Affairs (VA); Railroad Retirement Board and the Office of Personnel Management issued interim final rules establishing threshold exemptions when accounts that have had benefits from these agencies electronically deposited into them are served with a levy or restraint order.
Under these regulations, financial institutions that receive garnishment orders must determine the sum of such federal benefit payments deposited to the account during a two month period, and to ensure that the account holder has access to an amount equal to that sum or to the current balance of the account, whichever is lower.
Of course, New York already has state level statutes that exempt government benefits from creditors. Specifically, state law creates an automatic exemption from garnishment for the first $2,625 in an account in which any payments reasonably identifiable as “statutorily exempt payments” were made electronically or by direct deposit during the 45-day period prior to service of a restraining notice or income execution. In addition, New York’s exemption actually applies to more funds than the newer federal regulations. “Statutorily exempt benefits” under Article 52 include funds from sources such as public assistance, workers’ compensation, unemployment insurance, public or private pensions and black lung benefits. CPLR § 5205(l)(2). Remember New York also exempts funds that aren’t electronically deposited but the federal regulations are only triggered by ACH transactions.
There were several key questions that needed to be resolved for the sake of clarity and yesterday’s final regulations and the accompanying preamble provided clear cut answers.
First some good news. If you wouldn’t apply a levy or restraint under state law then you don’t have to worry about the federal regulations. As explained in the preamble: “It serves no useful purpose to follow the rule’s procedures in situations where a financial institution has made a determination not to take any action against an account on the basis of a garnishment order.” If a financial institution will not act on a garnishment order due to the operation of State law, the financial institution need not examine the order to determine if a Notice of Right to Garnish Federal Benefits is attached or included or take any of the additional steps required under the (federal) rule.”
Another issue was whether the regulation’s definition of garnishment and restraints was to be applied to those issued directly by lawyers. The final regulation clarifies that it applies in states like New York where garnishment orders can be issued not only by courts, but also by attorneys acting on behalf of judgment creditors.
Now for the type of news that makes the compliance officer moan. State and municipal creditors are exempt from New York’s exemption requirements. That is why currently if you get a levy from the State Tax Department you simply send the amount of the levy.
However, the clarifications released to the federal regulation states that levies and restraints issued by states and localities are subject to the federal exemption regulations. This means that once these regulations take effect and you get a levy or restraint from the Tax Department, for example, state law still won’t apply but the federal regulations will. You will have to do a two month look back to determine if there were electronic payments deposited into the account by the agencies that promulgated this regulation. If there is then an amount equal to the lesser of the sum of such exempt payments or the balance of the account on the date of the account review are exempt from even a municipal tax collector.
Are New York car liens more vulnerable to fraud as a result of a new law (Chapter 493 of the Laws of 2012) that will take effect on June 17th ? At a recent presentation hosted by New York Bankruptcy and Collection Attorney Rudy Meola, whose analysis of this issue provided the impetus for this blog, he said the answer is yes.
For a few years now, dealers have been agitated by the length of time it takes some financial institutions to clear title on used cars that dealers want to resell. To address this problem, a new law will permit dealers who receive motor vehicles and arranges for the satisfaction of any security interest in these vehicles but for which a release of the security interest has not been issued to send proof to the Department of Motor Vehicles that a car lien has been satisfied. Dealers must first provide lien holders with two weeks notice. The Department will have only 15 days after receiving the dealer’s information to issue a clean certificate. The dealers can satisfy their requirement by providing the DMV with evidence that the security interest has been satisfied such as by submitting evidence of an electronic funds transfer, a cashiers check or “other evidence as determined to be satisfactory by the Commissioner” so long as it is accompanied by evidence that the amount delivered to the lien holder satisfied the outstanding lien. The strongest protection under the bill for credit unions is that car dealers who apply for the clean liens will be responsible for indemnifying the purchaser and lien holder of the vehicle.
So, if the law works as envisioned those institutions that quickly provide dealers with evidence that a car lien has been satisfied will not face any problems. After all, dealers would be responsible for them if they get a DMV release and there is still an outstanding lien on the property. Rudy’s concern is that this protection will not be sufficient to protect against crooks who forge the required dealer documentation and are able to turn around and sell stolen property with clear title. Under Rudy’s scenario, the indemnification protections would not kick in because a car dealer never requested DMV to issue a new title in the first place. For all intents and purposes, the credit union would have no realistic means of getting back any money for its unsatisfied car loan. By the way, it’s a good thing Rudy uses his powers for good instead of evil. He could cost us all a lot of money if he ever turns to the dark side.
As the law takes effect, we will have to keep an eye out to see if any of the worst case scenarios are realized. In the meantime, the law underscores the importance of quickly releasing liens on car loans that have been satisfied. I’ll be driving down to God’s country, aka Long Island, in my second-hand vehicle tomorrow on which one of our local credit unions holds the lien. That means I’ll be back on Tuesday with another blog.
Last week, NAFCU released the results of a survey indicating that 88% of respondents will reduce or discontinue originating mortgage products that don’t conform to the CFPB’s definition of a qualified mortgage. Considering that slightly more than 37% of respondents reported underwriting mortgages that would not meet QM criteria in 2012, this is potentially big news and I just hope it is based on an objective assessment of the impact that the regulations will have on lending practices and not on a misconception about what the law requires.
So before you jump on the QM bandwagon, keep these points in mind. First, a QM is granted the highest form of legal protection regulators can give it, but it is a specific type of mortgage. In contrast, the CFPB wants all mortgages to be subject to an ability to repay analysis. This is the true baseline criteria and for the vast majority of credit unions, it is a requirement that they already meet. For example, how often do you not assess an applicant’s ability to repay a mortgage before you give them one? Do you make liar loans? Or do you actually request documentation that the person you are thinking of lending tens of thousands of dollars to actually has a job? This is just one example of the type of criteria which Congress and the CFPB justifiably felt compelled to mandate as a result of the non-existent underwriting standards that triggered the Great Recession.
Here’s another question for you. How many of your mortgages go into foreclosure and, of those, are you confident that your staff and lawyers understand the foreclosure process well enough to defend these foreclosures in court? The most practical benefit of a QM mortgage is that it provides a safe harbor against a homeowner’s claim that a foreclosure action should not go forward because proper underwriting standards and legal procedures were not followed. If you know this isn’t true, then why deny making the loan to the vast majority of members who may not qualify for QM loans but whom you are confident will repay their mortgage obligations? In any event, given the atrocious length of time it takes to foreclose in New York State, this should be a last resort anyway.
One more question to ask yourself. Do you reserve the right to hold mortgages that don’t meet secondary market standards? Of course you do. Now’s not the time to stop. The reality is that the importance of Fannie Mae and Freddie Mac to credit union mortgage underwriting will diminish in coming years. Those credit unions that want to engage in mortgage lending are going to have to hold more mortgages. Does this mean that smaller credit unions will be put at a further disadvantage with regard to mortgage lending? You bet it does. But this has nothing to do with the decision of individual credit unions as to whether or not they should take on QM mortgages.
In addition, keep in mind that Fannie and Freddie are adopting some, but not all, of the QM criteria. Most importantly, they are reserving for themselves the right to establish their own debt to income ratios.
The Association’s Director of Compliance, Michael Carter, and I have come to realize that your stance on the impact that these regulations will ultimately have on credit union lending reflects whether you are listening to the underwriters or the lawyers in getting ready for the new mortgage regime. Underwriters understand that many mortgages that don’t meet QM criteria will do just fine because a member has the ability to repay the loan. Lawyers are paid to be paranoid, and ultimately the secondary market is going to want loans that meet the higher standards of legal protection. Both sides have a point and each credit union will be well advised to look at its own unique situation and adopt the approach that best fits its comfort level and commitment to its members. Don’t assume that a QM is the only type of mortgage you should be offering.
On Thursday, the National Consumer Law Center sent a letter to NCUA criticizing 9 federally chartered credit unions for engaging in pay-day lending practices. This was not the first time the Center had criticized these credit unions. Lest our enemies outside the industry get too excited about this, the NCLC stressed that the vast majority of credit unions do not offer these loans.
Some of the criticized credit unions responded by pointing out that it was a CUSO they were affiliated with that was actually making the pay-day loans. As for the other credit unions, they are exceeding the 18% interest rate cap on federal credit union loans only if the application fee charged is included in these calculations.
I find myself disagreeing a lot with the NCLC, but this is not one of those times.
Although the credit union activity was perfectly legal, it is a prime example of how credit unions can get in trouble if we abide by the letter rather than the spirit of the law. NCUA permits credit unions to make short term loans that exceed the interest rate cap. This regulation also permits credit unions to charge an application fee in the amount of up to $20. In other words, there is a way of offering pay-day loan alternatives without offering pay-day loans. To be sure, this alternative has been less than enthusiastically embraced by the industry as a whole, in part because its strictures mean that its cost outweigh its benefits for most credit unions. But the answer is not to evade the spirit of NCUA’s regulations, but rather to work within the existing regulatory structure for a change that reflects a broad-based consensus.
Some of the 9 credit unions point out that they simply referred members to CUSOs that made the offending loans. Chairwoman Matz pointed out that NCUA lacks the authority to directly regulate CUSOs. Again, this is the type of response that lawyers love but that make the public so distrustful of lawyers. If anyone could name me one person outside the credit union industry who knows what a CUSO is, I’d be more surprised than finding out that Stephen Hawkins is going to be on Dancing with the Stars. Part of your third-party due diligence obligation should be to assess the reputational risk that a CUSO’s activities cause your credit union. Explaining to a member who can’t repay a pay-day loan that the credit union told them about in the first place that the credit union isn’t the bad guy isn’t exactly the type of answer that is going to engender good will within your community.
Let’s keep in mind that there is still a proposed regulation out to give NCUA expanded authority to directly regulate CUSOs. From everything we have been told, this proposal is all but dead. However, if credit unions start hiding behind CUSOs to justify activities in which they themselves would not engage, NCUA might take another look at this whole issue. I hope not.
FCU’s authorized to do PAC payroll deductions
Last week, I scared the bejeebies out of a few people in the office when I blogged about proposed regulations by New York State’s Department of Labor that would ban employers from making payroll deductions to facilitate voluntary political contributions. I also said that we would have to get clarification on whether or not this regulation would be preempted by federal law. With a little help from our good friends at CUNA, we were sent a Federal Election Commission opinion letter clearly indicating that regulations such as New York’s would be preempted as applied to contributions made for federal political activities (FEC Advisory Opinion 1982-29). On that happy note, let’s all have a great week, shall we?