Posts filed under ‘New York State’
Yesterday, Mayor Bill De Blasio, who was busy putting the liberal back in liberal, highlighted the creation of a city ID card that could be used to, among other things, open a bank account. For those of you outside the Big Apple it is a discussion worth watching. With more than half of the Assemblymen in the State Legislature residing in the City, what NYC does may very well help shape state-wide debates.
The Mayor’s speech triggered some of my increasingly aged brain cells. For almost fifteen years immigration groups have lobbied for the acceptance of identification cards other than a drivers license. For instance, for years there was a bill debated in the State Legislature that would have required banks to accept Consular Identification Cards for members seeking to open accounts.
Now, I understand that immigration is a hot button issue. It is hard to discuss the legalities of accepting alternative forms of identification when opening bank accounts. Let’s be honest, the primary use of alternative forms of government identification is to facilitate essential services for undocumented aliens. Whether you are for or against immigration, the federal government’s unwillingness to provide definitive guidance on what types of alternative identification are acceptable is just short of an abdication of its responsibility, which puts credit unions and their banking counterparts in a no win situation.
Most importantly, section 326 of the USA Patriot Act requires banks and credit unions to establish reasonable procedures for the identification and verification of new account holders. As soon as this statute and its implementing regulations were proposed, the Treasury Department was bombarded with 24,000 comment letters relating to the question of whether the final rules precluded financial institutions from relying on certain forms of identification issued by foreign governments. The Treasury Department responded to these legitimate questions with classic bureaucratic doublespeak, that because of the “divergence of opinion, it makes little sense from a regulatory perspective to specify individual types of documents that cannot be used within the nation itself.”
Read in isolation, this not so artful dodge gives institutions the right to decide for themselves what documentation is appropriate for opening an account. In addition, City-issued cards provide credit unions a solid means of verifying a person’s identity since they would be issued by municipal officials, presumably pursuant to appropriate procedures. However, not even this is all that clear. For instance, finCEN, which oversees implementation of the Bank Secrecy Act, has opined that a bank may not open an account for a U.S. citizen who doesn’t have a tax payer identification number. At the very least, this means that from a BSA perspective a member even with proper identification is not entitled to an interest bearing account since the interest is reportable income.
To be sure, cities such as Los Angeles have developed identification cards similar to that being proposed by De Blasio, but advocates of these proposals would be well advised to couple their efforts on the local level with a push for regulators to further qualify under what circumstances individuals without more common types of identification can be accepted as members consistent with BSA requirements.
Just as good fences make good neighbors, clearly written laws make for good business practices by clearly defining each party’s obligations. Credit unions and banks are acutely aware of this since every time they process a check, they are relying on warranties developed and refined over hundreds of years. However, technology is evolving much faster than the law of check negotiation.
No where are the potential problems with this trend better exemplified than with the recent emergence of remote deposit capture that allows members to take a picture of the front and back of their drafts and send the electronic images into the payment stream.
First, some real basic stuff. When your credit union receives a paper check for deposit and converts it into a substitute check, it presumably has a process in place to ensure that the duplicated original paper check is not mistakenly put into the payment pipeline.
But what happens when one of your members uses her mobile phone to create a substitute check and then forgets to destroy the original? What happens when that original check mistakenly, or in some cases, intentionally, is deposited into another depository institution, which, unaware that a substitute check has been made, honors the paper draft? What institution should ultimately bear the cost for this mishap? Believe it or not this extremely basic question has not been addressed by either the courts or regulators.
Consequently, it is a welcome development that in its December proposal making changes to Regulation CC, the Federal Reserve is proposing to add a new section, 229.34(g). Under this section, a depository bank or credit union that authorizes a member to use remote deposit capture would indemnify another depository bank that accepts an original check for deposit.
The Board argues, and for what it’s worth I tend to agree, that the financial institution that introduced “the risk of multiple deposits of the same check by offering a remote deposit capturing service should bear the losses associated with multiple deposits of a check.”
If this regulation is finalized, it will underscore to credit unions the importance of monitoring members before automatically entitling them to using remote capture technology. It also underscores the importance of account agreements that put the member on notice that she is obligated to destroy the original of a check once it is deposited.
If you want more information on this subject, you can go to page 46 of the proposal and see if you can get a copy of the December 2013 issue of Clark’s Bank Deposits and Payments Monthly.
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Governor Cuomo’s Executive Budget Proposal includes corporate tax reforms that would benefit New York State banks. The proposal is irksome to some advocacy groups who argue that this is not the time to be giving tax cuts to the banks even if they represent an important part of the state’s economy. You can get a good summary of the argument in this article.
The extent to which states can block payday lending activities and the role financial institutions, including credit unions, should play in this effort continues to be an issue that is vexing regulators, law enforcement and the judiciary.
An article in this morning’s New York Times demonstrates why the issue is so confusing. On the one hand, it highlights how the Justice Department is targeting financial institutions as the choke point of payday lending activities. However, the same article shows that legislators, such as Darrell Issa of California, are critical of such efforts complaining that the Justice Department is trying to deter perfectly lawful lending activities. Who’s right and who’s wrong? The truth is that there is no definitive answer to either one of these questions and that how you answer it depends on where you live.
First, some basics. The Internet has made it incredibly easy to export financial products across state lines. New York, with its usury limits, has always effectively banned payday loans. However, federal law contains no such prohibitions as applied to banks. It has always been possible for a federal bank located in a state with no usury limit to offer payday lending options to New York State residents. However, the growth of the Internet has greatly expanded the marketplace for such offers.
There are two separate paths that have been taken to deter payday lending. One approach is to make financial institutions utilizing the ACH system more closely scrutinize payment requests coming from payday lenders. The other is to have the Court issue injunctions against payday lending activity.
Under the first approach, when a member enters into a payday lending agreement, these agreements typically include authorization for the lender to electronically pull money from the borrower’s account. Generally speaking, when an originator such as a payday lender originates such a payment request, the primary obligation to assess whether the payment is in fact authorized is on the institution with which the business has a banking relationship (the Originating Depository Financial Institution). Rules being proposed by NACHA would generally lower the threshold after which originators are obligated to further scrutinize such payment requests. On Friday, the FTC weighed in favoring NACHA’s approach.
But according to New York State’s Department of Financial Services, which has also commented on the proposal, NACHA’s proposal is a step in the right direction but does not go far enough. According to the Department evidence “that illegal payday lenders continue to use the ACH system to effectuate illegal transactions demonstrates that there are insufficient consequences for exceeding the return rate threshold. More effective enforcement of NACHA rules is necessary to prevent originators from engaging in illegal conduct through the ACH network.”
The problem is that what might be illegal to New York State’s Department of Financial Services is a perfectly legitimate business activity when viewed from the perspective of a Californian congressman. A federal district court judge in New York has ruled that the state has the authority to regulate payday lending activity when conducted over the Internet even when such activity is originated by a financial institution on an Indian Reservation. In contrast, California state courts have reached the exact opposite conclusion. A recent decision ruled that California’s financial regulator did not have the authority to impose fines on payday lenders controlled by Indian tribes. See People v. Miami Station Enterprises, 2d District, CA Court of Appeals (January 24, 2014).
If all this sounds confusing, it’s because it is. Ultimately, Congress or the Supreme Court, will have to decide if states have the ability to regulate payday lending and if so, under what conditions. The use of NACHA rules to regulate unseemly but arguably legal activity is destined to be an ineffective way of dealing with payday lending.
If Governor Cuomo has his way, New York State will soon be requiring title insurers to be licensed for the first time. The proposal, which was included in the Governor’s budget package released yesterday, could impact your credit union if, for example, you have an ongoing relationship with a title insurance company. It includes a new, more detailed disclosure that would have to be provided to your members. You can find the language related to this proposal in Part V of the Article VII language bill for the Transportation, Economic Development and Environmental Conservation budget (TED).
The proposal got a surprising amount of attention yesterday. It was highlighted in yesterday’s New York Post and by New York State’s Budget Director Bob Megna. The administration is highlighting the proposal as a way of clamping down on New York’s closing costs, which are among the most expensive in the nation. I’m not quite sure if the proposal will have the dramatic impact on closing expenses that the Governor is suggesting. However, it makes little sense on a policy level not to license title insurers.
Now, for a little inside baseball. Because the proposal was included as part of the Governor’s spending plan, the Legislature won’t get an opportunity to take an up or down vote on it. Instead, it will be amended, if at all, in the context of budget negotiations. A series of court cases dating back to the Pataki Administration have given the Executive Branch enormous power to force the legislature to adopt programmatic bills, which previously had been considered outside the budget process. The Governor noted yesterday that this year’s budget negotiations may be a bit more contentious than his previous submissions because of the number of legislative proposals integrated into the spending plan. Still, we are in an election year and I would strongly suspect that we see another budget pass by the April 1, 2014 deadline.
By the way, it’s cold out there. Stay warm.
Good morning my credit union brethren. Here are some news items to ponder as you start your day.
The Wall Street Journal is reporting that consumer spending made solid gains in December fueling hopes that consumers will help strengthen the economy this year. According to the Journal, retail sales gained 0.2% in December and jumped 0.7% when auto sales are excluded. Considering that retail spending drives a little less than 70% of the nation’s economic output, this is, of course, good news.
I’m curious how many of you are seeing evidence of this spurt in consumer confidence in the activities of your credit union members, particularly given the persistence of high unemployment, but this skeptical view of the nation’s economic malaise may just reflect the fact that I haven’t had my second cup of coffee yet.
Another day, another Empire State office holder calls it quits
Almost all of you will be meeting with newly elected officials in the year ahead. Plattsburgh Democrat Bill Owens announced that he will not be seeking re-election to the Congressional seat that he has held since 2009. Owens will go down as one of the luckiest or craftiest politicians in the history of New York State. In 2009, he made national news when a divide within the Republican party helped him become the first Democrat to hold the seat since the Civil War. His Departure gives the Republicans a prime opportunity to pick up an open seat and you don’t have to be Charlie Cook to expect an awful lot of national money being poured into the race.
Owens joins Long Island Congresswoman Carolyn McCarthy (Democrat), who recently called it quits. It will be interesting to see if McCarthy’s departure triggers a new round of political musical chairs. Republican Lee Zeldin from Long Island has already indicated that he is foregoing another term in the State Senate to run against Congressman Tim Bishop. Zeldin’s departure coupled with the recent retirement of Senator Charles Fuscillo means that the battle for control for the State Senate where Republicans combined with an independent caucus of four Democrats to control the chamber promises to be the biggest political fight of this election cycle.
Incidentally, not all the departures have been completely voluntary. Earlier this week, Bronx Assemblyman Eric Stevenson lost his seat after he was convicted of taking $22,000 in bribes. This followed on the heels of Assemblyman Dennis Gabryszak resigning under pressure following accusations of sexual harassment. There are now eleven open legislative seats.
Tales of QM Mortgage Woes
Yesterday, the concerns of credit unions and community banks regarding the qualified mortgage regs were highlighted at a hearing of the House Financial Services SubCommittee on Financial Institutions and Consumer Credit. Speaking on behalf of NAFCU, Orion FCU CEO Daniel Weickenand, explained in his testimony that “when you take into account the additional legal liability associated with non-QM loans, this margin will be even narrower. While some institutions may start charging a premium on their loans to account for the additional risk associated with non-QM’s, we do not feel that this is in the best interest of our credit union, our members, or our community. Consequently, we have decided to cease to offer non-QM loans at this time.”
Reasonable minds can, of course, differ and I wholeheartedly agree that Congress should consider extending greater QM relief for credit unions and smaller lending institutions. In addition, each credit union has to make its own decision based on its own unique circumstances. However, I’ve said it before and I’ll say it again: before your credit union starts exclusively offering QM mortgages, do an analysis as to whether or not the cost associated with the perceived risk of potential legal liability are outweighed by the loss of credit union revenue from refusing to do perfectly legal non-QM mortgages.
We’ve come a long way, for better or for worse. I won’t venture an opinion one way or the other in this blog since a Presidential candidate felt the need to explain that he puffed but did not inhale pot in his college days.
By announcing in his State-of-the-State address that New York would allow 20 hospitals to distribute marijuana for the medical treatment of chronically ill individuals, Governor Cuomo put the state among 21 others and the District of Columbia that authorize the legal use of marijuana. The degree of legalization varies widely across these states, with New York’s restrictive medical model contrasting with Washington State and the aptly nicknamed Mile-High State where voters approved referenda legalizing the sale and possession of cannabis, thereby insuring the most mellow tailgating parties before their respective championship games in the history of the NFL.
The odd thing is that, even though the states have been busy legalizing pot, as recently as 2005 the U.S. Supreme Court affirmed that the cultivation and use of the drug, even for personal use, could be and was banned under federal law. So what, you say, what does the regulation of the Wacky Weed have to do with credit unions? Quite a bit, actually.
In fact, how to properly integrate the legal pot industry into the banking system is one of the hottest regulatory issues going. In late August, the Justice Department issued a guidance and gave Congressional testimony explaining that while federal law continues to ban the possession, distribution and cultivation of cannabis, the Department would not prosecute individuals for engaging in such activities in states where they are legal, provided that the state laws aren’t being used to circumvent core federal law enforcement priorities such as preventing the distribution of drugs to minors. In addition, the Bank Secrecy Act (BSA) imposes an obligation on credit unions and banks to both know what their customers are up to when they open an account (the CIP requirements) and report suspicious activity (SARS).
Not surprisingly, then, banks and credit unions in Colorado, Washington State and California (where receiving a medical diagnosis is about as easy as finding a neighbor with their Christmas decorations still out) are squeamish about opening accounts for businesses lawfully selling marijuana. Remember, even though pot use is legal in those states, the distinctive aroma permeating from a member with a perpetual case of the munchies running an all cash business leaves little doubt as to precisely what business the member is engaged in.
The conundrum is getting attention in high places. In a speech in November before American Bankers’ Bar Association’s Money Laundering Conference FinCEN’s Director, Jennifer Shasky Calvery, noted that she understands the need for additional guidance in this area in light of the DOJ’s policy guidance but stressed that “the issue is a complicated one given that federal law still applies in these states.”
There’s only so much that federal regulators can do as long as marijuana remains illegal under federal law. The ultimate solution is for Congress to amend either the BSA or the Controlled Substances Act. But my personal view is that this is about as likely to happen in the near future as John Boehner switching his cigarettes for joints. As a result, as more and more states legalize marijuana, more and more credit unions will have to wade in to this hazy labyrinth.
Governor Cuomo’s fourth State of the State address yesterday was overshadowed by news that high ranking members of Governor Christie’s staff exacted political revenge on Fort Lee’s mayor, who had the audacity not to endorse the Governor’s re-election bid, by creating traffic on the George Washington Bridge.
Personally, I don’t know what Republicans viewing the New Jersey Governor as a potential Presidential nominee should find more disturbing: the fact that his staff has such callous disregard for New Jersey commuters or the fact that they are so politically incompetent that a traffic jam on the GW can be directly attributable to their actions. It’s kind of like highlighting a needle in a haystack and then denying its existence.
Still, the Governor’s speech is important for credit unions for what it tells them about the state of New York’s regulatory environment. Most importantly, there is not a single mention in the Governor’s State of the State or his accompanying 200 page booklet of initiatives for this year’s legislative session referring to the word foreclosure, bank, or financial crisis. This demonstrates that, like the federal government, regulators and elected officials have put all the regulatory and legal structures in place that they feel they need to in response to the Great Recession and mortgage meltdown and are now ready to carry on with the new normal.
Don’t underestimate the significance of this shift in tone. When the Governor took office, his first State of the State criticized lax financial enforcement and advocated for the merger of the State Banking and Insurance Departments. He even put one of his most trusted aides, Benjamin Lawsky, in charge of the project. Fast forward to yesterday, and what we have is a Department of Financial Services that more aggressively pursues financial malfeasance than the old Banking Department ever did and that is more willing to regulate on issues such as mortgage modifications and debt collection practices than was the case a mere seven years ago. And, of course, much of what the nation as a whole is going to start grappling with tomorrow when it comes to what constitutes a good faith effort to keep someone in their home has already been grappled with by New York State credit unions for several years now.
All this means, bottom line, is that if you missed the State of the State, there was nothing tucked away that could potentially impact your credit union’s operations but as you rush to make sure that you are complying with the latest federal mandates, your credit union would be well advised to keep an eye on what the Department of Financial Services is doing, as well.
On December 31st, New York’s minimum wage increased to $8.00 an hour. Even if you pay your employees more than this minimum, your credit union’s operations have been directly affected by this increase whether or not you realize it.
New York law exempts an amount equal to 240 times the state or federal minimum wage — whichever is higher — from levy and restraint. Remember, this is a baseline number for those members who don’t have exempted funds electronically deposited into their account. That number is adjusted for inflation every three years. This means that as of December 31st, members have at least $1,920 exempt from a restraining or levy notice.
I haven’t seen any official notice on this increase from the Department of Financial Services, but something tells me that you will have impacted members cognizant of this increase irrespective of whether or not New York State gets the word out. As I have said in previous blogs, New York’s levy and restraint exemptions are very often the subject of compliance inquiries. This is, in part, a reflection of the fact that they impact both state and federal credit unions, but mainly because, as a review of the statute will indicate, there are different trip wires for your credit union to keep in mind whenever the collector comes calling.
On that note, your faithful blogger, who stayed up a little too late watching the Auburn-Florida State Game last night, wishes you all a pleasant day.
Usually, my first blog of the new year is one of the easiest ones I do. But this year, I have been scratching my head for the last few days and that’s a good thing. The more and more I think about it, 2014 is analogous to the day after the storm has ended when you climb out of the shelter, survey the flotsam and begin the clean-up. You know there’s a lot of work to be done, but you have a pretty good idea about the extent of the damage.
For the last several years now, we have dealt with the Dodd-Frank, CFPB deluge of regulations that will have their greatest impact on mortgage lending and servicing practices. This is, of course, a big deal. The regulations officially kick in on January 10, but for your credit union, the policies, procedures and decisions you had to make to put these new requirements in place should already be settled. Frankly, if they are not, I have no sympathy for you.
With the key regulations already in place, this will be a year for the litigators. Specifically, you will begin to see the lawsuits in which the courts begin to analyze all those ability to repay policies and procedures and servicing requirements that credit unions and banks put in place to comply with Dodd-Frank. Will these lawsuits pose a potential risk to credit unions? Absolutely, and one of the responsibilities of Associations and credit unions alike will be to stay apprised of developments that mean your policy has to be tweaked. Is this a burden? Absolutely, but it is nothing when compared with having to implement thousands of pages of arcane, regulatory minutia.
This is going to be the year when we see how big an impact the courts will have on the bottom line of credit unions. On a national level, there is, of course, the pending appeal of Judge Leon’s decision striking down the Durbin Amendment regulations. It’s impossible to know what the precise impact will be if the Judge’s decision is upheld, particularly since credit unions have so far survived the worst case scenarios envisioned by the industry when caps were first imposed on larger institutions. At the very least, if his ruling calling on regulators to go back to the drawing board and impose a tighter interchange fee cap is upheld, credit unions will face more uncertainty and continued fear that interchange fees will drop for all issuing institutions.
Another important case that is unique to New York but has national implications deals with an appeal of a federal court decision ruling that New York State’s ban on credit card surcharges is illegal. New York is one of several states that impose such bans and if the merchants are successful in validating New York State’s statute, you can bet that the days of these other statutes are numbered.
Finally, I have joked in a previous blog that this is the year that all banking attorneys should be boning up on the federal Administrative Procedure Act. The Volcker rule has no direct impact on credit unions. However, we are going to see litigation centered around not only the specifics of that regulation, but, more generally, the flexibility regulators have in promulgating regulations mandated by Congressional legislation. This might not sound like the most exciting stuff in the world, but the extent to which the federal courts decide to trim the power of regulators will have a profound impact on the regulations to which your credit union is subject for years to come.
Well, I’m off to start the snow blower and scratch my head as I ask myself why exactly I live in the great northeast. By the way, my can’t miss Superbowl pick: San Diego/Seattle with Seattle winning easily.