Posts filed under ‘New York State’
With snow coming the Meier family has decided to head over the river and through the woods to Grand Ma’s house on Long Island a little earlier than originally planned (I can hear someone in Buffalo saying “Snow! They call six inches Snow!”). There is a fair amount I want to tell you about before my hiatus so here goes.
Will NCUA approve a pot CU?
Now that Colorado has approved a state charter for a credit union dedicated to providing financing for the state’s nascent marijuana industry NCUA will have to decide whether or not to federally insure the institution. I’ve written several blogs about the legal difficulties of providing pot financing. Marijuana remains illegal as a matter of federal law and even though federal prosecutors have indicated that they would turn a blind eye to institutions providing banking services in states where pot use is legal, finding financial institutions willing to open up businesses for ganja related businesses has proven to be difficult.
I have no idea what NCUA’s ultimate decision will be but I would love to see it deny federal insurance for credit unions created to circumvent federal law.
There is a huge disconnect going on here. Heroin use is on the rise and a culture that glorifies pot use inevitably contributes to that rise by making drug use that much more acceptable. To those who extol pot’s medical benefits I would point out that few of the states that have legalized pot limit its possession to medical uses and one that has ostensibly done so-California-has made a mockery of these limits (Maybe New York will be the exception).
Let’s be honest, national groundswells for improved healthcare don’t catch fire just because some people want better healthcare-if they did than President Obama would be the most popular President in history.
To my peers who think that pot use is no big deal I say grow up and think about your kids. College is over. Here is a link to a’s CU Times article and some previous blogs I’ve done on the subject.
New York classifies application of it sub prime loan statute
In 2013 the Federal Housing Finance Administration changed its policies to mandate that insurance premiums on FHA insured loans be collected over for the entire length of a mortgage. This change meant that some loans would be considered subprime loans under New York law making them all but impossible to sell in the secondary market. Legislation signed by the governor establishes a separate formula for calculating sub- prime loans insured by the FHA. The law is an important amendment for mortgage lenders but it does mean that there is now an additional formula that has to be calculated when determining how a mortgage loan should be classified under the state and federal Law. Chapter 469 of 2014 takes effect immediately.
Speaking of New York laws, in the same batch of legislation the Governor also approved a bill clarifying the authority of parents guardians to request that credit reporting agencies preemptively place security freezes on the credit reports of persons 16 years or younger. Most importantly the bill authorizes parents to request that a freeze be placed on a child’s credit information even if the child has no file. This means that it will be more difficult for identity thieves to use a stolen social security card to create an alternate identity with which they can take out loans and sign up for credit cards for example. The legislation is Chapter 441 of 2014.
FHFA maintains Confirming loan limits
The FHFA, which oversees Fannie Mae and Freddie Mac announced yesterday that it was maintaining confirming loan limit at $417,000. The confirming loan limit is the maximum price above which a residential property will not be purchased by the GSE’s. For my downstate brethren who think that this is a pretty low number remember that conforming house values are higher in certain parts of the country, including much of the downstate area. Here is a link to the announcement and a link to a list of conforming value limits.
Good morning, if this headline got your attention, get your mind out of the gutter. Think in bankruptcy parlance. A “strip off” occurs when a court cancels a lien that is wholly unsecured.
On Monday, the Supreme Court decided to hear an important case to answer this question: can a court overseeing a Chapter 7 Bankruptcy cancel a junior lien on a residential mortgage where the value of the property is so low that there is no equity with which to pay back the subordinate lien holder? The Supreme Court decided to consolidate two cases from the 11th Circuit (Bank of America v. Caulkett and Bank of America v. Toledo-Cardona). Both cases deal with residential mortgages that tumbled in value once the Great Recession hit. The homes tumbled so much in value, in fact, that there wasn’t enough money in either house to pay back the holder of the principle mortgage, let alone the holders of home equity lines of credit taken out on the properties.
Most courts that have addressed this issue in other jurisdictions have concluded that a subordinate lien survives bankruptcy regardless of the amount of equity left in the residential property. In New York, for example, the leading case is Wachovia Mortgage v. Smoot, 478 B.R. 555 (E.D. NY 2012). The court provided an excellent explanation of why subordinate liens survive Chapter 7 Bankruptcy. In addition, at least three other circuit courts have reached the same conclusion.
In contrast, the 11th Circuit, which includes Florida, has reached the opposite conclusion. In the consolidated cases to be decided by the Supreme Court, the Florida homeowners were successful in getting their subordinate liens cancelled. Why does this matter? In depressed housing markets, it may not make much of a difference, but in states like New York, where it may take several years to foreclose on a property, a homeowner could see a sharp rise in their property values between the time when they declare bankruptcy and the time a house is foreclosed on. They would end up pocketing money to which the subordinate lien holder would otherwise be entitled. The Court will be issuing a decision in this case by June.
My challenge today is to see if I can write this blog in less time than Eli Manning takes on average to throw an interception. No easy task, but here goes.
There are two basic reasons to hold a hearing in Albany. The first reason is to react to an issue without actually doing anything about it. Typically you’ll see these hearings later in a legislative year when there simply isn’t enough time to get something accomplished. The second reason is to actually lay the groundwork for key issues the Legislature will deal with in an upcoming session.
On Friday, the Assembly’s Consumer Affairs and Protection Committee and its chairman Jeffrey Dinowitz held a hearing on legislation he proposed (A.10190) mandating that businesses in New York develop policies and procedures to deter data breaches. Given the controversy surrounding the issue, I wouldn’t concentrate too much on the specifics of the legislation at this point. But the mere fact that the Assemblyman has decided to hold a hearing on the issue demonstrates that the question of what to do about data breaches is sure to be a high profile issue in the upcoming legislative session.
The hearing featured the testimony of Ted Potrikus, the President of the Retail Council,. and an erstwhile Albany veteran. The way retailers tell the story, there really is no need for data breach mandates. The reputational risk to retailers from data breaches is more than enough to get them to put the necessary precautions in place.
However, data breaches are not a new phenomenon and merchants have so far been unwilling to invest the resources necessary to guard against data breaches. Every year, a survey is done assessing PCI compliance. As I explained in a previous blog, the most recent survey results indicate that businesses are still not making the commitment to guard against data breaches. Home Depot’s top executive recently conceded as much.
A second argument advanced by retailers is that they are as much victims of data breaches as are financial institutions. Again, this is not entirely accurate. First, it is banks and credit unions that have to bear the cost of replacing compromised debit and credit cards. Secondly, it is extremely difficult to make merchants legally responsible for their negligence in handling customer data. For example, many retailers contract with third-party processors. These companies aggregate plastic transactions on behalf of merchants and process their payments. Litigation involving Heartland has underscored just how difficult it is for card issuers to make these processes responsible for the cost of their negligence.
Don’t get me wrong, no retailer wants to see their business victimized by data breaches. But as the law stands right now, they simply don’t have enough skin in the game to incentivize the creation and implementation of the policies and procedures Assemblyman Dinowitz wants to mandate. Finally, the retailers correctly argue that the battle against data breach is a constantly shifting one. A business may invest in the best technology possible today only to find that the bad guys have made it obsolete tomorrow. But this argument misses the point. Precisely because there is no magic bullet technology that will prevent all data breaches, legislators need to ensure that merchants are legally obligated to take baseline steps to protect against data breaches.
It could, of course, be argued that a national problem such as data breaches should best be dealt with on a federal level. I would love to see national legislation addressing this problem. But a state as large and important as New York has the authority and the ability to finally impose baseline responsibilities on all businesses. After all, credit unions and banks, for that matter, have already been required to have regulations and policies in place for years now, but without the help of merchants they are fighting with one hand tied behind their back.
The CFPB continued its incredibly frenzied pace yesterday. In the same day, it proposed federal regulations on prepaid cards and fined Franklin Loan Corporartion, a California-based mortgage banker for illegally compensating its loan originators. In the pre-Dodd-Frank days, either one of these would have been among the biggest news of the year for one of our federal regulators. But for our good friends at the Bureau that Never Sleeps, it’s all in a day’s work.
First, let’s talk about the illegal compensation settlement. In 2010, the Federal Reserve Board imposed restrictions on the way loan originators could be compensated. Specifically, the Federal Reserve Board promulgated regulations prohibiting compensating originators based on a term or condition of a mortgage loan. The CFPB is now responsible for enforcing this provision and to avoid making this discussion any more complicated than it has to be, my references are to the re-codified regulation. Before the Board’s prohibition, Franklin had a straightforward compensation system in which originators would get a percentage of each mortgage loan they closed. The compensation would be based on the total cost of the loan, which included an originating fee, discount points and the retained cash rebate associated with the loan. As a result, loans with higher interest rates generated higher commissions. After the Board passed it prohibition in 2010, Franklin instituted a new system. All loan officers were given an upfront commission for each loan they closed. However, on a quarterly basis, they would receive the difference, if any, between the adjusted total commission, which was based in part on the interest rate of the mortgage, and the upfront commission. In other words, the higher the interest rate the more a Franklin originator would be compensated.
The originator clearly crossed the line with its compensation structure. But remember, the regulation isn’t as clear cut as it first appears. Take a look at the official staff commentary accompanying 12 CFR 1026.36(d)(1)(I):
- Permissible methods of compensation. Compensation based on the following factors is not compensation based on a term of a transaction or a proxy for a term of a transaction:
- The loan originator’s overall dollar volume (i.e., total dollar amount of credit extended or total number of transactions originated), delivered to the creditor. See comment 36(d)(1)–9 discussing variations of compensation based on the amount of credit extended.
- The long-term performance of the originator’s loans.
- An hourly rate of pay to compensate the originator for the actual number of hours worked.
- Whether the consumer is an existing customer of the creditor or a new customer,
Whether or not the way you compensate your originators is acceptable is a fact-specific analysis. The bottom line is this: in trying to comply with this prohibition it is best to keep in mind what the CFPB is seeking to prevent. It doesn’t want to create an incentive for originators to provide mortgages with higher interest rates and transaction costs than a member needs to pay in order to get an appropriate mortgage.
As for the CFPB’s proposed regulation of prepaid cards, in concept anyway, this is a proposal that is long overdue. More than a decade ago, legislation was introduced in the NYS Assembly that placed restrictions on prepaid cards which were increasingly being used by employers. At the time, one of the primary arguments against the proposal was that regulation of prepaid cards should be done on the federal and not the state level. Prepaid cards are increasingly being used as de facto bank accounts, particularly for the poor and young. It makes sense both from a competition standpoint and from a consumer protection standpoint that consumers that choose to use these cards get basic protections. I will undoubtedly have more to say about this regulation as a I read through its specific provisions. I know you can’t wait.
In the meantime, have a great weekend.
Hurricane Sandy slammed into New York’s coastline on October 29, 2012 and despite the billions of dollars being spent on reconstruction there are still homeowners, some of whom undoubtedly have credit union mortgages, struggling with insurance companies to get claims resolved.
Given the scope of the storm some delays and disputes are inevitable but a disturbing article in this morning’s New York Law Journal is making me sick to my stomach. It reports that at least one engineering company hired to assess insurance claims is accused of doctoring reports in an effort to avoid compensating homeowners on legitimate claims. According to the federal magistrate overseeing the dispute there has been “reprehensible gamesmanship by a professional engineering company that unjustly frustrated efforts by two homeowners to get fair consideration of their claims. Worse yet, evidence suggest that these unprincipled practices may be widespread.” In addition the judge concluded that an attorney for the insurance company, Wright National Flood Insurance Co, violated discovery rules by failing to disclose a draft report favorable to the homeowner’s claims.
The case which has stirred the magistrate’s ire is Deborah Raimey and Larry Raisfeld vs. National Flood Insurance Co., 14 CV 461. It involves owners of Long Beach rental property that was damaged in Hurricane Sandy. It has exposed the practice of “peer reviews.” You will see why I’m using quotes in a second.
Following the hurricane the plaintiff’s made an insurance claim with Wright National Flood Insurance Company. In a Draft report the engineer concluded:
1) The physical evidence observed at the property indicated that the subject building was structural [sic] damaged by hydrodynamic forces associated with the flood event of October 29, 2012. The hydrodynamic forces appear to have caused the foundation walls around the south-west corner of the building to collapse.
2) The extent of the overall damages of the building, its needed scope of repair combined with the age of the building and its simple structure, leads us to conclude that a repair of the building is not economically viable
However the homeowners/plaintiffs never received this report. Instead the report’s conclusions were changed after an engineer “peer reviewed the report.” Despite the fact that this second engineer never physically inspected the damaged property the final report made available to homeowners and their attorney concluded:
1) The physical evidence observed at the property indicated that the subject building was not structurally damaged by hydrodynamic forces, hydrostatic forces, scour or erosion of the supporting soils, or buoyancy forces of the floodwaters associated with the subject flood event.
2) The physical evidence observed at the subject property indicated that the uneven roof slopes, leaning exterior walls and the uneven floor surfaces within the interior of the building, were the result of long term differential movement of the building and foundation that was caused by long-term differential movement of the supporting soils at the site and long-term deflection of the building framing.
Based on these findings the insurance company decided not to pay the homeowners. Imagine if you held this mortgage?
Reasonable minds can differ. Maybe two honest engineers reached different conclusions. But the report was written by the same engineer who changed his conclusions following a phone conversation with another engineer for a company retained by the insurance company.
At the very least this case exposes conflicts of interest inherent in a system where third parties are retained by insurance companies to decide what claims should be honored. Homeowners shouldn’t have to sue to get both sides of the story. The case also underscores the difficult issues raised by discovery requests.
But what disturbs me most of all is that the case is yet another example of how this country is suffering from a crisis in ethics coming not just from Wall Street but Main Street. People are being forced to choose between doing the honest thing, such as reporting a car defect or disclosing BSA violations, and the financially expedient thing. Every day the newspaper’s report on how someone chooses the financially expedient option.
Abraham Lincoln once said “That every man has a price and you are getting dangerously close to mine.” I wonder if the economic downturn has made people a little more willing than they use to be to put their ethics aside to keep their paychecks secure.
I routinely wonder about what makes credit unions unique and how they can communicate these unique attributes to their members and policy makers. I’m no Pollyanna but I believe that most credit unions are dedicated to treating people not just legally but fairly. Ethics count. Let’s not be one of those industries that push them aside in pursuit of higher profits.
A link to the case is available at:
The biggest news from last night’s elections for New York credit unions isn’t the Republican takeover of the U.S. Senate. Rather, it is the fact that Senate Republicans appear to have gained a slim but decisive majority in the State Senate. If the preliminary results hold up, it appears that Senator Dean Skelos of Long Island won’t even need the five member Independent Democratic Caucus (IDC) to exercise control over New York’s Senate Chamber.
On a practical level, this means that the lines of power in Albany are clearer than they have been in years. For decades, Republicans ruled the State Senate and acted as a counterbalance to the overwhelmingly Democratic Assembly and the occasional Democratic Governor. In recent years, the model appeared to be changing. Republicans only kept control by entering into a coalition with the IDC. In addition, it appeared that Republican strong holds in Long Island and the mid-Hudson were fading away.
These long term trends may continue, but they’ve been arrested, at least for this election cycle. Republicans cruised to victory on Long Island, picked up an open seat in the Hudson Valley (Terrence Murphy), flipped a seat in Hudson Valley (Susan Serino beat Terry Gipson), won a hotly contested capital region race (George Amedore defeated Cecilia Tkacyzk) and flipped a seat in the Rochester area (Richard Funke beat Ted O’Brien). To me, the remarkable thing is not only that the Republicans reclaimed the Senate majority, but that it was so decisive. In recent years, no election cycle has been complete without a drawn out legal battle. But this year heading into a new legislative session, we have a re-elected Governor and, in all likelihood, a single majority leader. Here is a great site recapping election results.
As for the national election results, to me the real question isn’t so much who has the majority, but what they want to do with it. The American public has been playing ideological ping pong since the beginning of the 21st Century. The result has been an increasingly dysfunctional Congress more interested in ideological posturing than getting anything useful accomplished. I actually think that President Obama has more flexibility to strike deals with U.S. Senate Republicans than he would if the Democrats held on to a slim majority. Maybe, just maybe, it is in the interest of both Congress and the President to get something accomplished. Otherwise, we have another two years of political atrophy while the political class awaits the results of the next decisive election,. The problem is that there are no decisive elections in American politics.
Kudos to the trades. According to the Politico website, assertions made by NAFCU and CUNA have “hit a nerve with merchant associations.” I’ve just been on the retail website and hitting a nerve is a bit of an understatement. The hyperbole being used by the retailers is more analogous to a person getting root canal without anesthetic.
From a tactical standpoint, I respect what the merchants are doing. After all, there a times when a good offense really is a good defense. Consequently, no one should be surprised by suggestions that merchants would somehow all be using EMV technology today but for credit unions that have been reluctant to adopt the technology. Nor should anyone be surprised by the suggestion that merchants already face more than enough liability. No need to point fingers here, we’re victims, too, they argue.
Now for reality. The HomeDepot data breach is the latest example of merchants investing less in consumer protection than they could have to prevent foreseeable harm. According to press reports, employees within the company put their supervisors on notice that the company was vulnerable to cyber attacks, but precious little was done in response to these concerns. The reality is that given the current state of the law, liability for card issuing credit unions and banks is clear cut. Under Regulation E, credit unions have long been strictly liable for any unauthorized consumer debit transactions. In addition, financial institutions have long made consumers whole for unauthorized credit card transactions. When it comes to the maintenance of business accounts, the UCC has been interpreted as imposing an obligation on the part of financial institutions to exercise reasonable care to protect against data breaches caused by electronic transfers.
in contrast, courts have been reluctant to impose liability on merchants for the negligent protection of consumer data. Although there are some recent cases suggesting that this may be changing (See Lone Star Nat. Bank, N.A. v. Heartland Payment Sys., Inc., 729 F.3d 421 (5th Cir. 2013), the reality is that if I’m HomeDepot or a small merchant down the street, when I do the cost-benefit analysis of investing in greater technology to protect consumer privacy or putting that money toward the bottom-line, the arithmetic still says to put it toward the latter.
To be clear, no merchant wants to see their consumer’s data stolen. And it is impossible to say how many data breaches would be prevented if merchants faced greater liability for their lack of due diligence. What is clear is that is that our legal system works best when it places the cost of accidents on the party best positioned to prevent losses from occurring. Right now there is no balance between merchant and bank liability and this has to change.
Does New York need a state level export/import bank? Governor Cuomo thinks so. In a speech yesterday, he proposed creating a state level bank modeled after its controversial federal counterpart. It would provide credit and grants to foreign corporations that want to move to New York and New York companies looking for assistance to increase their exports to foreign markets. Assuming the Governor is re-elected, this proposal will be featured prominently in next year’s Executive Budget proposal.