Posts filed under ‘New York State’

Who Rules The Bond Market?

There are some issues that represent such an important shift in the way the broader financial sector operates that they are important to know about even if they don’t impact credit unions directly. Besides, they are just interesting.

One of these developments comes in the form of news that Argentina is on the verge of defaulting on its government bonds. This is no run of the mill default as it could be precedent-setting by giving U.S. courts the upper hand in enforcing judgments against nations. Not only that, it underscores just how powerful those information subpoenas you receive are, provided they are valid.

There is a long history of foreign governments refusing to enforce judicial rulings by U.S. courts seeking to enforce money judgments. As far back as 1832 when Chief Justice John Marshall ruled that the federal government and not the states had authority to negotiate with tribes to purchase land owned by Indian tribes in Georgia  (Worcester v. Georgia (1832), President Jackson allegedly responded with his famous retort, Marshall made his ruling, now let him try to enforce it.

Similarly, when it comes to bonds issued by a foreign nation the conventional wisdom has been that there is only so much bondholders can do to redeem assets to pay off bond defaults. So when the Argentinian government defaulted on its bonds in the first years of this century, the vast majority of bondholders took the reduced payouts reasoning that it’s better to get half a loaf than no bread at all. However, a handful of bondholders held out for full payment.  With the aid of some of the best lawyering you are ever going to see, these holdouts have backed the Government of Argentina into a corner.

Typically, Argentina would pay the American bondholders who accepted the modified payouts independent of what it owes to the hold outs. However, Judge Gleason of the Federal Court for the Southern District of New York issued an order mandating that, as explained by the New York Law Journal,   “the next time the ‘exchange’ debt holders are paid by Argentina, and the country is expected to pay them $900 million, the country must pay one of the hold outs $1.3 billion, plus interest, or about $1.5 billion.”  Presumably, if Argentina chooses to ignore this order, the holdouts could attach any payouts to other bondholders.

In addition, the legal wrangling underscores just how powerful those third-party information subpoenas are. In a 2012 case before the Second Circuit, which has jurisdiction over New York credit unions, The holdouts argued that subpoenas against third-party banks holding assets in a foreign country are valid-even if the money sought is ultimately out of the creditors reach. Why does this matter? Because as the Court explained, “New York State’s post-judgment discovery procedures, made applicable to proceedings in aid of execution by Federal Rule 69(a)(1), have a similarly broad sweep. The New York Civil Practice Law and Rules provides that a “judgment creditor may compel disclosure of all matter relevant to the satisfaction of the judgment.” N.Y. C.P.L.R. § 5223; see David D. Siegel, New York Practice § 509 (5th ed. 2011) (describing § 5223 as “a broad criterion authorizing investigation through any person shown to have any light to shed on the subject of the judgment debtor’s [**6] assets or their whereabouts”).

But remember, an information subpoena under NY law is only valid if it is properly issued and that includes mandating that the creditor have a good faith reason for thinking that money may be stowed away in your accounts.

By the way, I would still bet that the issue will be resolved sometime today short of default, but no matter what happens the power of U.S. courts and creditor subpoenas have been given a big shot in the arm. Can you imagine if Europe had to negotiate with New York judges before restructuring Greek debt? This is the type of power we are talking about. As former Presidential Advisor James Carville once quipped, when he comes back to life he wants it to be as the bond market.

 

July 31, 2014 at 9:40 am Leave a comment

In What Order Do You Process Your Checks?

There are some issues that are hanging over the industry like a sword of Damocles.  This morning an article in the Wall Street Journal provides further evidence for those who feel that the CFPB should do more to regulate overdraft fees. 

According to a survey conducted by the paper, hundreds of small, regional banks, and credit unions are “clinging to the practice” of processing checks on a high to low basis.  The paper’s survey revealed that smaller depository institutions are continuing this practice even as larger institutions are backing away from it.

What exactly to do about overdraft fees has been debated for more than a decade now.  In 2010, the Federal Reserve promulgated regulations requiring that members opt in to bank payment on debit card overdrafts.  I was silly enough to think that this would put the issue to a close, but it hasn’t.  For example, in a statement accompanying a 2013 report on overdraft processing, CFPB warned that if “policies and practices do not protect consumers in accordance with consumer protection law, it will use it authorities to provide such protection.”  

The more I look at the issue, the more I feel that overdraft fees are the most misunderstood practices engaged in by depository institutions.  Do they represent an important source of income for many banks and credit unions?  Absolutely, but I bet if you asked your average consumer if they are willing to pay more to make sure that their mortgage or car payment doesn’t bounce, they’d agree.  In other words, overdraft fees are a product that some consumers want and need.

Regulatory Update

I’ve been AWOL for a couple of days and based the volume of work that regulators pumped out over the last week it’s obvious that many of our regulatory overlords intend on being AWOL for most of August. Here are a couple of regulatory proposals to review in preparation for Fall.

CFPB’s HMDA Proposal  Empowered by the Dodd-Frank Act , the Bureau that never sleeps is proposing revisions to the Home Mortgage Disclosure Act. It may not sound like a page turner, but for those credit unions that have to comply with it, properly reporting mortgage loan information can be one of the great compliance headaches. If the regulation goes forward as proposed the types of mortgages subject to reporting requirements will be expanded to include “all mortgage loans secured by a dwelling, regardless of the purpose of the loan” including HELOCS and commercial loans secured by a home.  Here is a link.

NYS moves to regulate Bitcoin New York State’s Department of Financial Services is rushing ahead of federal and state regulators by proposing licensing requirements and a comprehensive regulatory framework for institutions that buy, sell, transfer or store virtual currencies. Here’s a link to NYS’s proposal.

July 29, 2014 at 8:20 am Leave a comment

On “The Talk,” Fixed Assets, And Settlement Money

I have a potpourri of newsworthy tidbits to start your credit union day.

Viva Las Vegas – I would have gladly wagered money yesterday that NCUA Chairwoman Debbie Matz could get nothing more than polite applause out of the attendees of NAFCU’s annual convention, but that was before I knew that the Chairwoman would be using her appearance to outline some regulatory relief proposals that NCUA plans to propose at its July meeting. According to the Chairwoman, NCUA will propose “effectively eliminating” the fixed asset rule.  Currently, NCUA regulation caps at 5% of a credit union’s shares and returned earnings the amount that can be spent on fixed assets absent a waiver from NCUA.  As CUNA pointed out in a comment letter last year advocating for scrapping the cap “The rule restricts investments not only in real property, but also in technology and systems that are increasingly central to the success of all financial institutions. Overly restricting investments in these items—or subjecting the relevant decisions to a slow and unpredictable process — does not facilitate credit unions’ use of online and mobile banking technologies even though the utilization of such technologies is more important now than ever.”

Two other mandate relief proposals will deal with member business lending and updating appraisal provisions. The proposals aren’t out yet and the devil is in the details; but it’s nice to be able to compliment NCUA again. It wasn’t all that long ago that it was aggressively pushing mandate relief reforms such as the streamlining of low-income credit union designations. Maybe the Chairman should spend more time in Sin City.

Having “The Talk” – What’s the single most uncomfortable talk that parents have with their kids? It’s not about the Birds and the Bees, it’s about money. Great article in MarketWatch reporting that a recent survey indicates that “[p]arents in their 50s and 60s think they’ve done a bang-up job talking with their adult kids about their estate and retirement plans. Their kids think just the opposite. It’s the new Generation Gap. Specifically, nearly two-thirds of parents and adult kids (64%) disagree on the best time to start talking about things like wills, estate planning, eldercare and covering retirement expenses. Many credit unions do a great job providing financial education to their members and this might be one more area to highlight. Making sure everyone is on the same page when it comes to maximizing retirement assets can save a lot of heart ache down the road and is a great way of stretching those retirement savings. Besides, like the World’s Most Interesting Man, you really can give your father The Talk.

Just where does all that settlement money go anyway? Billion dollar settlements with major banks are becoming about as commonplace as low scoring baseball games. (Maybe they really are laying off the steroids after all). This morning’s article from Reuters paints a not too flattering picture of how at least some of the money – which is ostensibly sought for mortgage and foreclosure relief – is actually being spent by state and federal officials. Reuters reports that since May alone there has been $18.5 billion in settlements – $5 billion of which goes to New York. It suggests that the guidelines on how this money is to be allocated are so broad that at least some people are concerned that there are perverse incentives to drive up the size of settlements. Personally, any incentive Government has to crack down on blatantly illegal activity is OK with me.

July 24, 2014 at 8:26 am Leave a comment

UPDATED: Busy day in DC..sort of

July 16, 2014 at 8:55 am Leave a comment Edit

WARNING: The following blog is predicated on the assumption and\or delusion that Congress has both the ability and inclination to not just talk about the nation’s challenges but to do something about them

Good morning-Yesterday was a busy day in the public policy arena. Here is a quick review of some of the highlights

Credit Union Reg Relief TestimonyDouglas A Fecher, CEO of Wright-Patt Credit Union, delivered testimony on behalf of CUNA before a House Financial Services Sub Committee. The testimony highlighted an increasingly long list of needed reforms-ranging from putting the brakes on the Justice Department’s “Operation Choke Point” before it chokes off legitimate business activity, to forcing NCUA to scale back some of its proposed RBC asset weighting. CUNA estimates that, since 2008, credit unions have been subjected to 180 regulatory changes from 15 different agencies. The testimony is available here: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba15-wstate-dfecher-20140715.pdf

Warren is must see T.V. Even though I disagree with about 90 percent of what she has to say, Elizabeth Warren, the Birth-Mother of the CFPB and the current Senator from Massachusetts is good for America if only because she is one of the few politicians willing to publicly say how little is being done to prevent Too-Big-To-Fail banks from failing again at taxpayer expense. In this increasingly exasperated exchange with Fed Chairman Yellen Warren points out that so called “living wills,” which are  intended to provide for blueprints for the  orderly liquidation of the Behemoth banks, aren’t worth the paper they are printed on if the Fed doesn’t force institutions to make the changes necessary to allow for orderly liquidation. Yellen suggests that the Fed role in the process is merely advisory.  http://www.huffingtonpost.com/2014/07/15/too-big-to-fail_n_5588558.html

The Feds Outlook Chairman Yellen’s written testimony before Congress didn’t break much new ground. She did indicate that it remains on track to stop the “twist” bond buying program. In addition, even though the economy is improving she still sees enough slack in it to keep from raising interest rates. The WSJ is reporting that she “hedged” on interest rates but every Chairman hedges on interest rates. http://www.federalreserve.gov/newsevents/testimony/yellen20140715a.htm

Senator George D. Maziarz Calls it quitsThe long serving Western New York Republican’s departure means that there are now  four open seats in the State Senate. Republicans have to protect these seats and gain three in order to keep Senate Democrats from taking control of the Senate now that the Independent Democratic Caucus is backing the democrats to lead the chamber. http://www.buffalonews.com/city-region/all-niagara-county/george-maziarz-on-federal-probe-i-have-nothing-to-hide-20140713

On Mortgage meltdowns and prayers NY is slated to receive $92,000,000.00 from the Justice Department’s 7 billion settlement with Citigroup over its shoddy underwriting practices for Mortgage Backed Securities but what really caught my eye was this quote from a Citi trader cited in the settlement papers : The trader stated that Citi should pray and explained that he“… would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals (CLTV would be >100), etc. It’s amazing that some of these loans were closed at all.” http://www.justice.gov/iso/opa/resources/558201471413645397758.pdf

 

July 16, 2014 at 9:23 am Leave a comment

Busy day in DC..sort of

WARNING: The following blog is predicated on the assumption and\or delusion that Congress has both the ability and inclination to not just talk about the nation’s challenges but to do something about them

Good morning-Yesterday was a busy day in the public policy arena. Here is a quick review of some of the highlights

Credit Union Reg Relief TestimonyDouglas A Fecher, CEO of Wright-Patt Credit Union, delivered testimony on behalf of CUNA before a House Financial Services Sub Committee. The testimony highlighted an increasingly long list of needed reforms-ranging from putting the brakes on the Justice Department’s “Operation Choke Point” before it chokes off legitimate business activity, to forcing NCUA to scale back some of its proposed RBC asset weighting. CUNA estimates that, since 2008, credit unions have been subjected to 180 regulatory changes from 15 different agencies. The testimony is available here: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba15-wstate-dfecher-20140715.pdf

Warren is must see T.V. Even though I disagree with about 90 percent of what she has to say, Elizabeth Warren, the Birth-Mother of the CFPB and the current Senator from Massachusetts is good for America if only because she is one of the few politicians willing to publicly say how little is being done to prevent Too-Big-To-Fail banks from failing again at taxpayer expense. In this increasingly exasperated exchange with Fed Chairman Yellen Warren points out that so called “living wills,” which are  intended to provide for blueprints for the  orderly liquidation of the Behemoth banks, aren’t worth the paper they are printed on if the Fed doesn’t force institutions to make the changes necessary to allow for orderly liquidation. Yellen suggests that the Fed role in the process is merely advisory.  http://www.huffingtonpost.com/2014/07/15/too-big-to-fail_n_5588558.html

The Feds Outlook Chairman Yellen’s written testimony before Congress didn’t break much new ground. She did indicate that it remains on track to stop the “twist” bond buying program. In addition, even though the economy is improving she still sees enough slack in it to keep from raising interest rates. The WSJ is reporting that she “hedged” on interest rates but every Chairman hedges on interest rates. http://www.federalreserve.gov/newsevents/testimony/yellen20140715a.htm

Senator George D. Maziarz Calls it quitsThe long serving Western New York Republican’s departure means that there are now  four open seats in the State Senate. Republicans have to protect these seats and gain three in order to keep Senate Democrats from taking control of the Senate now that the Independent Democratic Caucus is backing the democrats to lead the chamber. http://www.buffalonews.com/city-region/all-niagara-county/george-maziarz-on-federal-probe-i-have-nothing-to-hide-20140713

On Mortgage meltdowns and prayers NY is slated to receive $92,000,000.00 from the Justice Department’s 7 billion settlement with Citi Bank over its shoddy underwriting practices for Mortgage Backed Securities but what really caught my eye was this quote from a Citi trader cited in the settlement papers : The trader stated that Citi should pray and explained that he“… would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals (CLTV would be >100), etc. It’s amazing that some of these loans were closed at all.” http://www.justice.gov/iso/opa/resources/558201471413645397758.pdf

 

July 16, 2014 at 8:55 am 1 comment

Court clarifies timeframe for unauthorized withdrawals

How much time do members have to inform you that they have spotted an unauthorized withdrawal from their account after receiving their statements?

The UCC gives consumers a year but that timeframe can be reduced by contract. Just how much that window can be closed has remained an open question in New York for decades until a narrow but an important ruling in New York’s Court of Appeals in May (Clemente Bros. Contracting Corp. v Hafner-Milazzo) held that business accounts opened by sophisticated large businesses could provide companies with as little as two weeks to report unauthorized withdrawals provided they receive adequate notice of account activity.

Clemente Brothers opened business accounts and a line of credit at NorthFork Bank which was subsequently gobbled up by CapitalOne; In order to open up the account it had to pass a corporate resolution specifying who could draw from the accounts and sign an account agreement that provided in pertinent part:

“That unless [Clemente Brothers] shall notify the Bank in writing within fourteen calendar days of the delivery or mailing of any statement of account and cancelled check, draft of any claimed errors in such statement, or that any such returned Instrument was forged…or that it was raised or otherwise altered … “ the account shall be considered correct for all purposes and said Bank shall not be liable for any payments made and charged to the account

All good unauthorized withdrawal cases seem to start with wayward employees and in this case a bookkeeper had been forging Clemente’s signature on certain CapitalOne Bank documents, including drawdown requests on the line of credit and checks paid from one of Clemente Brothers’ accounts. The company claimed she embezzled approximately $386,000 over the course of approximately two years, from January 2008 through December 2009. The withdrawals were discovered in 2010. They claimed that these were unauthorized withdrawals and that the Bank had to make them whole. You probably haven’t looked at the statute in a while. It provides that

1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.

(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (1) the customer is precluded from asserting against the bank.

 N.Y. U.C.C. Law § 4-406 (McKinney)

 

The court bifurcated its ruling into two parts. The court did not dismiss the case in relation to the unauthorized draws against the line of credit. Even though the company was put on notice that money was being drawn on the line it wasn’t given copies of the actual drawdown requests. Therefore a trial court had to decide if the bank provided adequate notice to the company; chances are it did.

The more interesting question was whether or not the 14-day notice period could be enforced. The Court ruled that:

“Clemente Brothers had numerous employees, regularly moved hundreds of thousands of dollars in and out of its operating accounts, and had the resources to make an informed decision about opening accounts at CapitalOne. Critically, Clemente was fully aware of the terms of the agreements with CapitalOne because Clemente Brothers passed a corporate resolution acknowledging its obligation to notify CapitalOne of any irregularities within 14 days of each statement of account.”

Does this mean that all your account agreements should have a 14-day window? No. The court stressed that its ruling applied to a sophisticated large corporation. It might reach a different result if it was deciding a case involving an elderly account holder or a less sophisticated small business.

So what should you do? Don’t have the same window for members that you do for businesses and make sure you don’t rely on the UCC’s one-year language. The more sophisticated your business account members are, the shorter their notification window can be. No matter what number you decide on, make sure your policy is reflected in the account agreement and that your frontline staff gets the necessary paperwork as part of opening accounts.

Here is a link to the decision and an earlier blog I did on the case:

http://law.justia.com/cases/new-york/court-of-appeals/2014/64-0.html

http://newyorksstateofmind.wordpress.com/2013/07/09/when-does-your-responsibility-for-forged-checks-end/

July 15, 2014 at 9:21 am 1 comment

New York Goes to Pot

Governor Cuomo made it official yesterday: he held a bill signing ceremony to mark approval of legislation (A.6357-e) making New York the latest state in the nation legalizing the medical use of marijuana. Its use will be ramped up over the next 18 months as the state promulgates the necessary regulations.

Despite what I have seen in the blogosphere, it is not time to stack up on the munchies. Unlike states such as Washington and Colorado, which have legalized marijuana possession, and other states, such as California, that have legalized the “medical” use of marijuana, the legislation is drafted in a way that medical use of marijuana will be limited to people with designated illnesses and only available in forms prescribed by doctors.

The use of medical marijuana in New York will be highly regulated.  According to the Governor’s memo, the law allows for five registered organizations that can each operate up to four dispensaries statewide. Registrations for organizations will be issued over the next 18 months unless DOH or the Superintendent of State Police certifies that the new program could not be implemented in accordance with public health and safety interests. Because it is so regulated, chances are your credit union won’t be asked to open up a business account for these organizations, and if it is the organizations are so highly regulated that much of your due diligence will be easily obtainable. This means that, at least in the short term, legalization of the drug won’t present financial institutions with the legal question of how to comply with federal laws banning the possession and sale of marijuana and bank secrecy act requirements mandating that credit unions and banks monitor their accounts for potentially illegal activity with state law declaring marijuana use to be legal.

This is not to say that your credit union won’t be impacted by this law.  Under the legislation a certified caregiver or patient can’t be subject to any civil or disciplinary action by a business or licensing board solely because of their lawful use of marijuana. In addition, eligible users are classified as disabled under New York’s human rights law.   At the very least, we now know that there are going to be employees legally entitled to be taking marijuana. So, if you have a policy of categorically prohibiting employee drug use, this is going to have to be modified.

Conversely, it doesn’t mean that an employee can come into work today and get stoned at lunch time. The state is going to have a registry of patients. The key is not to make changes tomorrow. If you heard the Governor speak yesterday, then you heard a person who is dead serious about making sure that this legislation truly is for medical purposes and not a backdoor means of legalizing pot smoking.  The regulatory process will be a serious one and given the number of issues that need to be addressed, I’m sure the concerns of employers will be taken into account. In the meantime, it appears that New York financial institutions have avoided the legal quagmire that comes from a more unregulated approach.

 

 

 

 

July 8, 2014 at 9:07 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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