Posts filed under ‘New York State’
Late Monday, Legislators and sleep-deprived staffers put the finishing touches on the 2014-2015 New York State Budget. For credit unions, the two most important take aways I have deal with title insurance and state tax policy.
As for title insurance, the Legislature agreed to the Governor’s proposal, which I talked about in a previous blog, to establish licensing requirements for title insurers. For those of you who want to take a closer look, you can find the relevant language in Part V in S.6537-D. In addition to establishing title insurer licensing requirements, the legislation imposes new disclosure requirements whenever lenders suggests using a title insurer with whom they are affiliated.
As a result, this bill will have its largest impact on the relative handful of credit unions that have mortgage lending CUSOs that provide title insurance services. The legislation is also significant because it gives the Department of Financial Services the authority it was seeking to more directly regulate title insurers by, for example, establishing minimum standards for the profession.
A second part of the budget that doesn’t directly impact credit unions but could be helpful in seeking needed reforms has to do with corporate tax reform. Specifically, the Legislature agreed to the Governor’s proposal to scrap Article 32 of the Tax Law, which imposed a tax specifically on banks. As a result, banks will be subject to the same tax treatment as other corporations in New York State. The proposal was perhaps the most controversial of the Governor’s Tax Package since some groups argued that it was essentially a tax cut for banks when New York is still suffering the effects of the Great Recession. However, this argument overlooks the fact that New York may be the capital of the banking industry, but is not guaranteed to remain so. The bank tax is a vestige of the time when banks simply didn’t have the ability to shift from state to state the way they do today.
Besides, the tax indirectly benefits credit unions. How’s that, you say? Because credit unions are also seeking authority to help New York’s economy grow by allowing municipalities to invest their funds in credit unions. Frankly, the argument that credit unions are somehow less deserving of these funds because they don’t pay corporate taxes rings all the more hollow now that the banks have successfully argued for their own tax breaks.
One generic point, Governor Cuomo and the Legislature deserve a tremendous amount of credit for four on-time budgets. But the Governor and all future Governors should give a big thank you to former Governor Pataki. It was his administration that laid the groundwork for these on-time budgets by successfully arguing that the Legislature could not amend the Executive’s Budget proposal without the Governor’s consent. On a practical level this means that the Governor has a tremendous amount of leverage since the legislature must ultimately choose between accepting the Governor’s recommendations or shutting down the Goverrnment. Simply put, the legislature doesn’t have as much leverage as they used to have in budget negotiations.
As readers of this blog will know, there are days when the amount of news is so great that I do away with my normal commentary to highlight the latest developments. This is one of those days.
Most importantly, NCUA announced late last evening that it would modify its Risk Based Capital proposal to both accommodate credit union concerns for greater flexibility and NCUA concerns about protecting the all important Share Insurance Fund. NCUA has decided to scrap its proposed placement of credit union assets into ten risk-rated categories. Instead, all assets held by credit unions will be given asset ratings of 1250%. This means that all credit unions will have to back up all their loans with 100% collateral.
For example, if you want to make a $100,000 member business loan, the member will have to provide you with collateral equal to 100% of the loan. Chairman Matz pointed out that the new system will make the SIF the safest of all bank insurance systems in the world. In addition, whereas the initial proposal effectively penalized credit unions for holding concentrations of residential mortgages and investing in CUSOs, the new system doesn’t discriminate against any type of lending activity. When asked how credit unions could survive under this new regime, Matz responded that “the key is going to be volume, lots and lots of volume.”
“Besides,” she explained, “NCUA’s ultimate responsibility is to protect the Share Insurance Fund, not credit unions.”
Following up on a ground-breaking speech yesterday in which she tried to convince people that the Federal Reserve Board really does care about Joe Six Pack when it artificially depresses interest rates that could otherwise be used to help fund retirements and help credit unions and community banks make more mortgages, Chairman Yellen announced that she would be converting the Federal Reserve Banks to credit unions. She explained that credit unions really do care about their local communities and if they modeled the Fed after the credit union corporate system, what could possbily go wrong? If the conversion goes through, it will reflect a trend where banks are converting to credit unions by the thousands to take advantage of the credit unions’ tax exempt status. Once the conversion is finalized, Yellen will be stepping down and her job will be taken over by credit union expert Keith Leggett. I have a soft-spot for Keith since he’s one of the few people I am certain consistently read this blog. His new job as head of the credit unions will enable him to take advantage of the low rates and great service offered by credit unions without being fired by the Bankers’ Association.
Speaking of new jobs, CUNA has responded to the clear, decisive guidance of credit unions by publicly announcing the criteria it will be using to recruit a new CEO. Specifically, CUNA has been tasked with finding someone who’s a cross between Mother Teresa and Karl Rove. Rumor has it that CUNA already reached out to Pope Francis about taking the job, but he declined explaining that Popes cannot resign. Another early candidate was Oprah Winfrey but she declined as one of the few candidates for whom the CUNA job would represent a pay cut.
Yesterday was the drop dead deadline for the American public to sign up for health insurance or be required to pay a fine — I mean tax, sorry Judge Roberts – for refusing to purchase health insurance. But if you haven’t signed up yet, don’t worry. The Department of Health and Human Services is expected to announce later today new regulations under which only the politically popular parts of Obamacare will take effect and the public can ignore those aspects it doesn’t like. The HHS explained that while the regulation may seem broad, it is perfectly consistent with the President’s power to do whatever he wants to do when Congress refuses to go along with his proposals.
Speaking of Congress, House Republicans reacted with anger to Chairman Yellen’s speech yesterday. They announced their own policies to increase employment highlighted by a bill to do away with all unemployment benefits. They explained that by completely eliminating government handouts people will have to go out and finally get a job.
Finally, New York State passed an on time budget for the fourth year in a row late last night. This is no joke, although if I said this just a few years ago, it would have been. The truth is your erstwhile blogger can remember sitting around the Capitol on Easter Sundays watching the Ten Commandments while Legislative leaders tried to hammer out a budget.
On that note, enjoy your April Fools Day.
Call me wacky, but I don’t think a convicted arsonist should be able to collect insurance for burning down his house.
If you agree, you’ll understand why I am a little uneasy about an announcement last evening of a settlement of more than $9 billion between Bank of America (BoA) and the Federal Housing Finance Administration (FHFA). This puts to bed claims that Countrywide and Merrill Lynch duped Fannie Mae and Freddie Mac into purchasing mortgage-backed securities that crashed, causing billions of dollars in losses and contributing to the eventual bankruptcy of the GSE’s.
I’m a bit more impressed, however, by a related announcement. New York’s Attorney General Eric Schneiderman was able to get former BoA CEO Ken Lewis to contribute $10 million to a settlement of claims that BoA deceived shareholders as part of the bank’s efforts to acquire the aforementioned Merrill Lynch and Countrywide. The AG’s settlement represents the first that I am aware of in which a CEO is taking personal responsibility for his actions during the mortgage crisis. What a concept! Lewis also accepted a three-year ban from serving as an officer or director of any public company.
Let’s take a trip down memory lane. As late as 2008, Fannie and Freddie were private corporations that specialized in buying mortgages and packaging them as mortgage-backed securities. Many of our largest private banks, including Countrywide and Merrill Lynch, also purchased mortgages from banks and credit unions and packaged them as so-called private label securities for sale in the secondary market.
One of the great myths is that Fannie and Freddie caused the mortgage meltdown. They didn’t. Banks like Countrywide bought and sold poorly underwritten mortgages because they were making gobs of money. If Fannie and Freddie didn’t exist, they still would have made the same loans and bundled the same securities, they would have simply made more money. That being said, government policies promulgated under the Clinton Administration to expand home ownership combined with Fannie and Freddie’s desire to maximize their own profits made the GSE’s willing co-conspirators in the mortgage mess and it was the insolvency of these two institutions that triggered the cascade of events leading the Great Recession.
Remember that when the crisis hit, the government was scrambling to save as many institutions as it could. That’s why it strongly encouraged a few healthy banks, including BoA to purchase Merrill Lynch and Countrywide in the first place, This brings us back to yesterday’s settlement. The idea that somehow Fannie and Freddie, institutions that specialized in bundling mortgages into securities, were fooled into buying securities of poorly underwritten mortgages is a convenient legal myth. There were no institutions in the world better positioned to do their own due diligence, nor any institutions more cognizant of the state of the housing market. So when the history of the last seven years is written, let’s not let the government off the hook.
Why should credit unions care? Because there are no lenders that need a well-functioning secondary market more than credit unions. Just as home buyers should be held accountable for the terms of their mortgage, institutions that sell to the secondary market should sell these mortgages secure in the knowledge that they are no longer responsible for them. unfortunately, the secondary market has developed as a system of “seller beware.” The more liability that companies face for mortgages that they sell, the more expensive it will be to sell mortgages to the secondary market. Ultimately, your members will pay for yesterday’s settlement. As part of housing reform, the laws have to be strengthened to limit the ability of any secondary-market participant to hold others responsible for arm-length purchases.
One of the most amazing things about watching the legislative process in New York State is that, as a friend of mine once explained, key staff people in the Capitol tend to draw their powers from the night. As a result, almost all the important legislation passed in New York State is negotiated in the wee small hours of the morning when any normal group of people would be in bed. Therefore, it is amazing to me that there arent’ as many drafting mistakes as you would expect given New York’s proclivity for late night hijinks.
This came to my mind yesterday as I read a recently finalized regulation from the State’s Department of Financial Services, which provides guidance for the interpretation of Section 6-m of the Banking Law — New York’s subprime loan law. As anyone who has tried to comply with the myriad of disclosures tied to mortgage loans these day knows, timing is everything. For instance, in New York State, a subprime loan is a first lien mortgage, the rate for which exceeds the weekly primary market survey for comparable mortgages by one and three quarters percentage points.
According to the statute, you would review the survey posted in the week prior to which the lender provided the good faith estimate. The new regulation provides useful guidance as to how this should be interpreted on an operational level. For example, let’s say a member comes in on a Friday afternoon. Do you base your subprime loan determination on the survey posted a day ago or a week ago? Since the primary mortgage market survey is posted on Thursdays, the relevant survey to be used for purpose of determining whether or not a loan is sub-prime “is the one published on the Thursday prior to receiving the Good Faith Estimate.” This means that, for the example above, you would look at the survey published the day prior.
What happens if a new GFE is provided to the member? That triggers a new look back period to determine whether or not we have a subprime loan on our hands.
I apologize for giving you this information before you have had your second cup of coffee, but there is no area of lending where attention to detail matters as much as in mortgage lending..
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.
. . . . . . . . .
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.