Posts filed under ‘New York State’
The Wall Street Journal reports this morning that community banks are slowly fading away. In an excellent analysis of the trend, the paper reports that the number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression. The number of banks has now shrunk to 6,891 and with the exception of one brave — or some may argue, delusioned — group of investors, no one is applying to form new community banks these days.
I’m not highlighting these statistics to disparage community banks. Rather, I’m posting them because the trend highlighted by the article is so similar to that taking place in the credit union industry. For instance, the decline in bank numbers from their peak of 18,000 “has come almost entirely in the form of exits by banks with less than $100 million in assets. . . with the bulk occurring as a result of mergers, consolidations or failures.”
The credit union industry has long recognized that the small institution is fading away. The trend is impossible to miss. But it is one thing to spot a trend, it’s quite another to come to a consensus about what, if anything, to do about it.
Simply put, how much should the industry really care that small credit unions are fading away? I argued in a recent blog for CU Insight (shameless plug) that the decreasing number of credit unions is, in part, a reflection of regulatory overkill. But, the regulatory burden is growing and likely to continue to do so. Only large and growing credit unions are going to have the economy of scale necessary to absorb these costs.
The Wall Street Journal also notes that small banks are the most sensitive to interest rate squeezes. Again, I certainly sympathize with smaller institutions, but unless the economy makes a miraculous recovery, banking margins are going to be squeezed well into the future.
This raises one more question. Is there something that small institutions provide that larger institutions, be they credit unions or banks, simply won’t? Increasingly, I believe the answer is yes, but consumers are unwilling to pay for the better service or home-town feel that can only come from smaller institutions. To me, if I have to choose between a teller’s friendly smile and a convenient online bill payment, I’ll take convenience, especially if I haven’t had my second cup of coffee.
One more thought, with all the hurdles facing both community banks and credit unions, why in God’s name do banks waste so much of their lobbying time trying to destroy credit unions? Looking at these numbers, any community banker who believes that the key to the survival of this industry lies in altering the tax status of credit unions is about as misguided as White House officials extolling the virtues of their improved health care website. There’s so much more that needs to be done. . .
. . .Yesterday evening, the Moreland Commission begun by Governor Cuomo in July to investigate political corruption in the Empire State released a preliminary report. The executive summary recommends various campaign finance reforms, but also takes pains to stress that investigations of political corruption including possible allegations of criminal wrongdoing are ongoing.
Yesterday, a colleague forwarded to me a news report from a Tuscon, AZ television station that was so disturbing at first I thought it was a joke. Unfortunately, it’s no joke and what it says about the mentality of certain corporations disturbs me. See for yourself (http://www.myfoxphoenix.com/story/23964173/2013/11/13/robbery-toy).
Just in time for the holidays, Playmobile released a 126-piece bank robbery toy set, including an armed bank robber, tellers and a crow bar to break the Automated Teller Machine (ATM). Police are, of course, sold separately. At least in the Tuscon area, Toys ‘R’ Us thinks the toy is worthy of stocking. Far from being embarrassed, the company defends their product as helping little tykes everywhere differentiate good guys from bad guys.
Somehow I don’t think the “creators” of this toy would see much educational value, let alone something worthy of being put under the Christmas tree, if they had personally had a gun stuck to their head. Somehow I don’t think they would have smiling tellers if they heard stories of terrified moms and dads being told to hand over cash as their lives were being threatened. I don’t know what it says about modern-day business that someone can come up with an idea like this and it actually becomes part of a company’s product line as opposed to a good reason for firing the lunatic before he does some real damage to the company’s reputation. Last, but not least, what the heck is Toys ‘R’ Us thinking? The space of major retailers is among the most precious commodity in business. Who at this Toys ‘R’ Us looked at this toy and said that this is the best they could do?
New York Clamps Down on Unsolicited Checks
Earlier this week, Governor Cuomo signed legislation (Chapter 467) deterring financial institutions from sending out unsolicited convenience checks to consumers. Specifically, where a consumer is sent convenience checks aligned with an existing account or granting a line of credit, he or she is not responsible for the use of those funds by a third-party. However, given the way the bill was drafted, it doesn’t actually prohibit institutions from sending these checks, so long as they are willing to gamble that the consumer will be the ultimate user (http://open.nysenate.gov/legislation/bill/A3601-2013). The bill took effect immediately.
As readers of this blog and those credit unions unfortunate enough to get caught in the cross fire know, the state has taken aim against pay day lenders who provide loans to New Yorkers. Specifically, in early August it sent out cease and desist letters to 32 Internet pay day lenders; criticized NACHA rules for not enabling institutions to do more to block the processing of pay day loans; and sent a letter to 117 institutions, including credit unions, strongly urging them to assist the state’s efforts in curtailing pay day lending activity.
Among the pay day lenders subject to the state’s wrath were Indian Tribes based in Michigan and Oklahoma. These tribes have sued the state claiming that its activities interfere with their sovereignty.
Round One of what may end up being a very protracted legal dispute went to the state. For those of you who like boxing, the fight is not over yet, but let’s say the Indian Tribes certainly received a standing eight count. In The Otoe-Missouria Tribe of Indians, et al v. NYS Department of Financial Services, et al, the Tribes sought to get a preliminary injunction blocking the state from further interference with its payday lending activity. As a general rule, preliminary injunctions are granted to parties who can show that they are likely to win in a lawsuit and are being harmed by the ongoing activity over which they are suing. The issue comes down to whether or not Internet activity takes place on Indian land. It is pretty well settled that activities taking place wholly on Indian reservations are exempt from state law unless Congress says otherwise. The Indian tribes argued that they own and control the websites through which the payday loans are offered and that consumers are clearly informed that payday loans are subject to tribal law.
In its ruling, the Court said that none of this mattered since “consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds, or repay those proceeds with interest.” The Court concluded that consumers “have not in any legally meaningful sense travelled to tribal land.” New York State can regulate this off-reservation activity.
The decision still leaves credit unions and other financial institutions whose members receive pay day loan proceeds via ACH transactions (so called ”receiving depository financial institutions”) in a legal grey area. Simply put, it is still not realistic to expect RDFIs to monitor where a specific electronic transaction originated and if it is legal in that given jurisdiction. If any changes are to be made, the onus has to be placed on the institution originating the requested money transfer since that institution is in the best position to know if the activity being triggered is lawful. However, the decision does strengthen the state’s hand as it seeks to clamp down on Internet payday lenders.
Perhaps the best thing about this weekend for Giants fans is that we aren’t obligated to sit through three hours of losing football on Sunday. We already got that out of our system last night. There’s always hockey season and basketball is right around the corner. Your faithful blogger is taking some time off next week, but I should be back before week’s end. In the meantime, let’s hope common sense prevails and that most politicians realize, like my four year old already does, that defaulting on debt payments is a BAD thing to do.
I have two thoughts this morning. First, however much the merchants are paying their lawyers, it’s worth it, and my General Tsao’s Chicken just got more expensive.
On Friday, a federal district court in Manhattan struck down New York’s law prohibiting retailers from charging surcharges on credit card purchases (see Expressions Hair Design et al v. Schneiderman, No. 13 Civ. 3775 (JSR), Oct. 3, 2013). New York is one of ten states that restrict such charges. Prior to last year, the statute wasn’t all that important because surcharge bans were included in the standard merchant contract between merchants and VISA and MasterCard. Following last year’s anti-trust settlement under which Visa and MasterCard agreed to do away with this provision, a group of retailers brought a suit claiming, among other things, that the statute violated the first amendment.
The offending statute, which has been in place since 1984, provides as follows: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.” – See NYS General Business Law, section 518.
According to the judge, this statute is unconstitutional and vague and keeps retailers from explaining to consumers the true costs related to a transaction. For example, the existing law already permits retailers to offer discounts for individuals who pay in cash. This is why gas station owners consistently offer lower prices for people who pay in currency as opposed to a charge card. The crux of what the judge contends is wrong with what he describes as an “Alice in Wonderland” piece of legislation is that a gasoline station owner careful or sophisticated enough to always characterize the lower prices as a discount for cash is not violating any provision of the law; but if a colleague down the street described the higher price as a credit card surcharge, he has violated the law.
To the Judge, the distinction between a surcharge and a discount comes down to semantics. Very respectfully speaking, in my ever so humble opinion, semantics matter. As explained by the Oxford American Dictionary, a surcharge is “an additional charge or payment from: retailers will be able to surcharge credit-card users.” Let’s be honest, the language clearly does matter as merchants have been trying for more than 3 1/2 decades now to remove bans on surcharges, first on the federal level and now on the state level. If the New York State Legislature wants to deter discrimination against credit card users by prohibiting the use of credit card surcharges, it is free to do so and the language is well understood. The fact that from an economic standpoint there is little practical distinction between a discount and a surcharge is irrelevant to the statute’s legality.
I hope this is one the AG is going to appeal. As for my General Tsao’s chicken, when my blog, like this one, takes a little too long to write and I go out for lunch instead of relying on leftovers, I go to a Mom and Pop Chinese place down the street run by a nice couple that for years has deterred me from using my credit card by charging two dollars every time I use a card to pay. I doubt they knew they were violating the law, but now that a federal judge has told them that their free speech rights were being violated by not being able to gauge me, they can breathe a little easier.
Here is my government shut-down quote of the day from Long Island House Representative Peter King:
“I don’t consider these guys conservatives. I think the party is going in an isolationist trend. It’s appealing to the lowest common denominator in many ways. And this whole threat of defunding the government, to me, is not conservative at all,” said King, who added later: “Maybe we do live in different worlds. These guys from the Ted Cruz wing live in their own echo chamber.”
Well, it’s official. In the political equivalent of holding your breath until you get your way, so-called House Conservatives are so convinced that Obamacare should not exist that they really feel that if they keep government from spending money on itself long enough, legislators will come to their senses and decide not to implement the President’s major domestic achievement after all. While this abject lesson in political imbecility will undoubtedly do some damage to the economy, it won’t have much of a short-term impact on the day-to-day operation of credit unions or their regulators. It’s full speed ahead for Dodd-Frank’s regulations.
Yesterday, HUD came out with regulations proposing its version of a qualified mortgage. What’s more, we only have thirty days to respond to this proposed QM standard, even though regulations of this importance should have at least a 60 day comment period. In explaining why it is fast tracking the proposal, the regulator noted that unless it can get its regulations promulgated by January 10, 2014 an important source of financing for first time homebuyers and minorities will be subject to the CFPB’s QM definition. HUD is concerned that the CFPB’s QM criteria ”is not focused on, to the extent that HUD’s definition is required to be, the populations that the mission of HUD is to serve.” This is the bluntest assessment I have yet seen that Dodd-Frank may result in fewer individuals being qualified for home ownership. The problem I have with HUD’s 30-day comment period is that it has had several months to respond to CFPB’s proposal. The issues involved here are too complicated to be rushed through without an adequate public vetting and 30 days just isn’t enough time for an intelligent look for what HUD is proposing.
In the meantime, NCUA sent out a letter about the impending government shutdown. Since it is funded by fees as opposed to general fund appropriations it avoids being subject to the shutdown. And, of course, none of this directly impact’s New York State government. Yesterday, Eric Schneiderman, New York’s Attorney General, announced a settlement with a group of debt collectors in relation to their collection efforts on behalf of pay day lenders. The settlement is the latest in a series of escalating legal skirmishes between the state and pay day lenders over whether New York has the ability to clamp down on out of state pay day lenders and those based on tribal lands.
On that note, have a nice day.
Governor Cuomo took the lead in announcing regulations yesterday intended to crack down on force-placed insurance practices. The regulations are the culmination of a two-year investigation by the Department of Financial Services, which oversees both the insurance and banking industries in NY. They seek to address what the state feels are excessive premiums and insurer-servicer relationships that pose conflicts of interest. The regulations should not have much of a direct impact on credit unions, particularly since most of the notice requirements can be satisfied by complying with the notice requirements the CFPB has already put in place (12 CFR 1024.17(k)), but you should definitely be mindful of these new restrictions.
The regulations outline several prohibited practices that also apply to mandated flood insurance. For example, insurers are prohibited from:
- issuing force placed insurance on mortgage property serviced by a servicer affiliated with the insurer;
- paying commissions to a servicer or a person or entity affiliated with a servicer; or
- splitting premiums on force placed insurance with a servicer.
The regulations take effect 30 days after their publication in the State Register.
On that note, enjoy your weekend and let’s hope the Giants win one for the Gipper.
I recently wrote a blog expressing concerns about proposals placing an affirmative obligation on the part of credit unions to report suspected elder abuse. As pernicious as this problem is, the best way to attack it is to ensure that the law provides adequate protection for those who suspect foul play as opposed to putting more pressure on our front line staff to recognize and act on evidence of suspected abuse.
One solution, as highlighted in a recent discussion at the Association’s Legal and Compliance Conference, is to file a SAR. Judging by the statistics, this is becoming an increasingly common practice and provides maximum protection to the credit union reporting the suspected abuse. The problem is that an awful lot of damage can be done between the time a SAR is filed and if and when it is acted on. Fortunately, existing law provides another narrow, but important protection, at least in New York State.
Merrill Lynch Pierce Fenner & Smith, Inc. suspected that one of its account holders suffered from dementia. It even had a letter from her doctor stating that within a month of granting the power of attorney, she lacked the legal capacity to understand what she was doing when she created the document to help manage her affairs. Merrill Lynch refused to honor the delegation of agency power which was granted to an agent in December of 2010 and instead a proceeding was commenced under New York’s General Obligation Law under Section 5-1504(2) and 5-1510(2)(i) to compel acceptance. The use of the law in this situation puts the onus on a court to ultimately decide if the power of attorney should be recognized.
As a result, a credit union with doubts as to whether or not a power of attorney should be honored has the authority to commence a special proceeding. This isn’t as complicated as it sounds. Special proceedings are more analogous to arbitrations than they are a trial. The resolution of the Merrill Lynch case shows how difficult some of these decisions can be. The judge ruled that the account holder had the capacity to enter into the power of attorney. He noted that even when a member has dementia, depending on how advanced the condition is, a person may still have capacity to make binding power of attorney decisions.
Ultimately, these are difficult, fact sensitive decisions. Expanded use of quick legal proceedings, a willingness to file SARs when appropriate, and, as I argued previously, statutory language that maximizes protection for institutions that report suspected abuse provide a framework for clamping down on elder abuse.
Lottery Bill Sent To Governor
Legislation to permit credit unions to offer lottery savings accounts (S.5145/A.7341) has been sent to the Governor. The legislation, for which the Association advocated, will allow credit unions in New York to follow the lead of those in other states to encourage savings by tying raffle prizes to the opening of savings accounts. The Governor has ten days to act on the bill.
New York Attorney General Eric Schneiderman yesterday filed a lawsuit in State Supreme Court in Manhattan against Western Sky Financial and a subsidiary seeking to block it from offering payday loans. The Attorney General argues that the company is violating New York’s usury laws, which cap loan interest at 16% when offered by non-bank lenders. All interest rates are capped at 25% in New York State.
The catch is that Western Sky Financial is located on tribal land in South Dakota and contends that it is not subject to either New York’s laws or its jurisdiction. According to the AG, through the Internet it has made a total of almost 18,000 loans to New Yorkers who now owe almost $185 million to the company.
In a separate action last week, New York’s Department of Financial Services issued a cease and desist order against 35 payday lenders including Western Sky. The DFS also wrote a letter to NACHA criticizing the electronics payment network for being unable to block payday loans. Under existing NACHA regulations, it is the responsibility of the originating financial institution to ensure that payments are lawful before sending them on to the receiving depository financial institution (RDFI). At least some credit unions have received a letter from the DFS inquiring about the way they process payments and deposits through the NACHA system.
This dispute shows no signs of resolution. The use of Indian Reservations is just an extreme example of the jurisdictional issues involved when institutions from other states seek to export high-interest loans into a state like New York that has usury limits. My guess is that our good friends from the CFPB will soon be joining the fray. This is ultimately a national problem that can best be dealt with on a national level.