WARNING: The following blog is predicated on the assumption and\or delusion that Congress has both the ability and inclination to not just talk about the nation’s challenges but to do something about them
Good morning-Yesterday was a busy day in the public policy arena. Here is a quick review of some of the highlights
Credit Union Reg Relief TestimonyDouglas A Fecher, CEO of Wright-Patt Credit Union, delivered testimony on behalf of CUNA before a House Financial Services Sub Committee. The testimony highlighted an increasingly long list of needed reforms-ranging from putting the brakes on the Justice Department’s “Operation Choke Point” before it chokes off legitimate business activity, to forcing NCUA to scale back some of its proposed RBC asset weighting. CUNA estimates that, since 2008, credit unions have been subjected to 180 regulatory changes from 15 different agencies. The testimony is available here: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba15-wstate-dfecher-20140715.pdf
Warren is must see T.V. Even though I disagree with about 90 percent of what she has to say, Elizabeth Warren, the Birth-Mother of the CFPB and the current Senator from Massachusetts is good for America if only because she is one of the few politicians willing to publicly say how little is being done to prevent Too-Big-To-Fail banks from failing again at taxpayer expense. In this increasingly exasperated exchange with Fed Chairman Yellen Warren points out that so called “living wills,” which are intended to provide for blueprints for the orderly liquidation of the Behemoth banks, aren’t worth the paper they are printed on if the Fed doesn’t force institutions to make the changes necessary to allow for orderly liquidation. Yellen suggests that the Fed role in the process is merely advisory. http://www.huffingtonpost.com/2014/07/15/too-big-to-fail_n_5588558.html
The Feds Outlook Chairman Yellen’s written testimony before Congress didn’t break much new ground. She did indicate that it remains on track to stop the “twist” bond buying program. In addition, even though the economy is improving she still sees enough slack in it to keep from raising interest rates. The WSJ is reporting that she “hedged” on interest rates but every Chairman hedges on interest rates. http://www.federalreserve.gov/newsevents/testimony/yellen20140715a.htm
Senator George D. Maziarz Calls it quitsThe long serving Western New York Republican’s departure means that there are now four open seats in the State Senate. Republicans have to protect these seats and gain three in order to keep Senate Democrats from taking control of the Senate now that the Independent Democratic Caucus is backing the democrats to lead the chamber. http://www.buffalonews.com/city-region/all-niagara-county/george-maziarz-on-federal-probe-i-have-nothing-to-hide-20140713
On Mortgage meltdowns and prayers NY is slated to receive $92,000,000.00 from the Justice Department’s 7 billion settlement with Citi Bank over its shoddy underwriting practices for Mortgage Backed Securities but what really caught my eye was this quote from a Citi trader cited in the settlement papers : The trader stated that Citi should pray and explained that he“… would not be surprised if half of these loans went down. There are a lot of loans that have unreasonable incomes, values below the original appraisals (CLTV would be >100), etc. It’s amazing that some of these loans were closed at all.” http://www.justice.gov/iso/opa/resources/558201471413645397758.pdf
How much time do members have to inform you that they have spotted an unauthorized withdrawal from their account after receiving their statements?
The UCC gives consumers a year but that timeframe can be reduced by contract. Just how much that window can be closed has remained an open question in New York for decades until a narrow but an important ruling in New York’s Court of Appeals in May (Clemente Bros. Contracting Corp. v Hafner-Milazzo) held that business accounts opened by sophisticated large businesses could provide companies with as little as two weeks to report unauthorized withdrawals provided they receive adequate notice of account activity.
Clemente Brothers opened business accounts and a line of credit at NorthFork Bank which was subsequently gobbled up by CapitalOne; In order to open up the account it had to pass a corporate resolution specifying who could draw from the accounts and sign an account agreement that provided in pertinent part:
“That unless [Clemente Brothers] shall notify the Bank in writing within fourteen calendar days of the delivery or mailing of any statement of account and cancelled check, draft of any claimed errors in such statement, or that any such returned Instrument was forged…or that it was raised or otherwise altered … “ the account shall be considered correct for all purposes and said Bank shall not be liable for any payments made and charged to the account
All good unauthorized withdrawal cases seem to start with wayward employees and in this case a bookkeeper had been forging Clemente’s signature on certain CapitalOne Bank documents, including drawdown requests on the line of credit and checks paid from one of Clemente Brothers’ accounts. The company claimed she embezzled approximately $386,000 over the course of approximately two years, from January 2008 through December 2009. The withdrawals were discovered in 2010. They claimed that these were unauthorized withdrawals and that the Bank had to make them whole. You probably haven’t looked at the statute in a while. It provides that
1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.
(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (1) the customer is precluded from asserting against the bank.
N.Y. U.C.C. Law § 4-406 (McKinney)
The court bifurcated its ruling into two parts. The court did not dismiss the case in relation to the unauthorized draws against the line of credit. Even though the company was put on notice that money was being drawn on the line it wasn’t given copies of the actual drawdown requests. Therefore a trial court had to decide if the bank provided adequate notice to the company; chances are it did.
The more interesting question was whether or not the 14-day notice period could be enforced. The Court ruled that:
“Clemente Brothers had numerous employees, regularly moved hundreds of thousands of dollars in and out of its operating accounts, and had the resources to make an informed decision about opening accounts at CapitalOne. Critically, Clemente was fully aware of the terms of the agreements with CapitalOne because Clemente Brothers passed a corporate resolution acknowledging its obligation to notify CapitalOne of any irregularities within 14 days of each statement of account.”
Does this mean that all your account agreements should have a 14-day window? No. The court stressed that its ruling applied to a sophisticated large corporation. It might reach a different result if it was deciding a case involving an elderly account holder or a less sophisticated small business.
So what should you do? Don’t have the same window for members that you do for businesses and make sure you don’t rely on the UCC’s one-year language. The more sophisticated your business account members are, the shorter their notification window can be. No matter what number you decide on, make sure your policy is reflected in the account agreement and that your frontline staff gets the necessary paperwork as part of opening accounts.
Here is a link to the decision and an earlier blog I did on the case:
Having waved my family goodbye on Friday morning as they headed off to Ocean City Md. I was a man alone with his thoughts and no blog to write so when I read the CU Times article reporting on NCUA’s listening tour stop in Chicago I could do nothing but explain RBC reform to my dog. I’m pretty sure he just wanted to go for a walk. Here is what I told him.
–It’s good news that chairman Matz affirmed NCUA’s decision to extend the 18 month phase-in period for RBC reform even if she couldn’t resist lapsing into exasperated school-mum mode when she predicted that “no matter how long we extend it will never be enough.” The Chairman is half right: Some credit unions won’t be happy until the effective date is” sometime after when Hell freezes over.”
But she shouldn’t be too dismissive. Eighteen months is too short a period to make the necessary capital adjustments; train key staff; review investment policies and make sure vendor software is up to speed. I personally would give credit unions three years to be in compliance with these regulations so that the most impacted institutions can actually choose between cutting their balance sheets and growing to meet enhanced capital demands. But hey I’m just a middle-aged guy with a hyper dog.
Personally I’m as concerned with implementing a phase in period for credit unions currently below the $50 billion threshold than I am pushing back the effective date. Since credit unions that reach $50 billion are immediately required to operate under the RBC framework, growing credit unions have to start adjusting their practices long before RBC officially applies to them. Some credit unions have suggested a phase in period for institutions that reach the magic number. NCUA should also consider raising the threshold. It’s in no one’s interest for a credit union to slow down its growth simply to avoid the RBC framework,
–Chairman Matz described as “a myth” the contention of the trades that RBC reform will force credit unions to raise $7 billion. She explained that “more than half of all credit unions subject to the rule would have a buffer of at least 3.5% or even higher than they do today”
Do I note a change in emphasis? What happened to the statistic about over 90% of credit unions being in compliance with the proposal so it’s really no big deal? As I explained in a previous blog NCUA is the only financial regulator implementing Basel III reform that hasn’t informed its financial institutions that it expects them to have capital buffers well in excess of being well capitalized. Even if NCUA decides not to push individual credit unions to raise their buffers credit union boards will. Many more credit unions are impacted by this proposal than NCUA originally suggested.
–Matz said that it was not the NCUA’s intent to provide examiners with the independent authority to raise capital requirements. You could have fooled me. The agency plans to re-write this portion of the proposal. This is good news but the devil is still in the details. NCUA’s proposal to authorize customized RBC requirements for specific credit unions should be scrapped completely. If it isn’t willing to do that it should develop objective quantifiable criteria for determining what credit unions would be subject to these customized plans.
–The RBC proposal is morphing from a regulation into a Rorschach test with regulators assuring the industry that the proposal doesn’t do what it says it does and\or is going to be amended to make necessary changes. This is a proposal that isn’t ready for prime time and a subsequent comment period would give stakeholders the ability to comment on the type of technical issues that are more typically addressed when regulations are proposed.
Besides it will keep me from muttering at my dog.
Nothing at all to do with credit unions but unless my eyes and ears deceived me there was a commercial in the run- up to the World Cup final yesterday for a movie coming out “this holiday season” in November! I Want a law banning holiday advertisements before November 20th. Otherwise marketers are going to suck the joy out of the holiday season. First Amendment be dammed.
It wasn’t all that long ago that debt collection law firms in New York would literally inundate credit unions with information subpoenas seeking to track down debtors without any regard for whether or not a credit union would realistically have such information. After all, chances are a single SEG credit union for telephone workers in Binghamton isn’t going to have an account for a debtor in Manhattan. These large scale fishing expeditions were just a cost of doing business to these firms, but to credit unions they were imposing huge operational burdens since every subpoena required a response. Today, the law isn’t perfect but New York’s existing statute, improved by amendments resulting from credit union lobbying efforts, have reduced this huge operational burden.
Why the trip down memory lane? Recently, an information subpoena that was sent to a credit union demonstrated that the law must be working because debt collecting lawyers are trying to do end runs around it. Let’s make sure they don’t get away with it.
First, a refresher course, with apologies to those of you who handle these things on a regular basis. When used properly, information subpoenas are an important means of getting money from people who haven’t paid off a debt. They can be issued by attorneys acting in their legal capacity. But there are several conditions that must be met for a subpoena to be valid. First, unless both parties agree to accept subpoenas in electronic form, an information subpoena must be accompanied by a “copy and original of written questions and a prepaid, addressed return envelope. Service of an information subpoena may be made by registered or certified mail, return receipt requested. Answers shall be made in writing under oath by the person upon whom served.” (N.Y. C.P.L.R. 5224 (McKinney)).
Second, it has to include a signed certification from the issuing attorney that she has “A REASONABLE BELIEF THAT THE PARTY RECEIVING THIS SUBPOENA HAS IN THEIR POSSESSION INFORMATION ABOUT THE DEBTOR THAT WILL ASSIST THE CREDITOR IN COLLECTING THE JUDGMENT.”
Finally, attorneys who send out more than 50 subpoenas a month must maintain for five years records detailing the basis of their reasonable beliefs. Failure to do so can get them sued by the AG. If this is valid, then an attorney could circumvent virtually all the law’s requirements by bulk mailing subpoenas with an accompanying certification cover page.
Nice try fellas, but I don’t think this is kosher. First, there is no provision in the statute allowing the certification requirement to be waived except for authorizing subpoenas to be sent electronically with the consent of the party to be served. It’s quite a stretch to suggest that the certified mail requirement can be waived for any other reason.
In addition, since a party receiving a valid information subpoena is obligated to respond, suggesting that their signature waives the certification requirement is awfully close to making an offer that can’t be refused. (“Either your blood or your signature is going to be on this contract” but – with apologies to those of you who haven’t watched The Godfather – I digress).
So what should you do if you receive one of these subpoenas? If you get a subpoena with this waiver request, I would cross out the offending sentence, initial the change and answer the subpoena subject to your amendment. Otherwise, you may be paving the way for bulk mailings of uncertified mail. In addition, remember the subpoena has to include the attorney’s good faith assertion, otherwise place it in the garbage. Last, but not least, send a copy of questionable subpoenas to the Association. My boss, Mike Lanotte, gets almost as fired up about protecting credit union advances in this area as he does about his Mets actually playing well, and if we see abuses taking place we will bring them to the attention of the right people.
Bond buying to end by October
Here are the minutes from the last Fed meeting. The big take away is that the bond buying program will be done by October.
See you Monday.
Republican Congressman Patrick McHenry’s asking questions that NCUA should have answered a long time ago in advocating for risk-based capital reform. According to our good friends at CUNA, the Republican Congressmen is asking NCUA to inform him of:
- Any cost-benefit analyses performed by the NCUA or that otherwise form part of the administrative record in this matter;
- The metrics used to determine what asset classifications required revisions;
- A justification for the revised weighing associated with each individual asset class; and
- An explanation of the extent to which NCUA examiners would be empowered to assess and make capital recommendations to credit unions that might deviate from the new RBC standards.
NCUA keeps on saying it is committed to a transparent rulemaking process when it comes to RBC reform but, aside from making the impact of the proposal on credit unions publicly available on its website, the proposal has been short on specific explanations about how NCUA settled on the specifics. When a rule of this importance is proposed, it is typically accompanied by a section by section analysis explaining in detail why an agency is proposing the specific change. I know everyone likes to bash the CFPB, but they do such a thorough job of explaining what it is they want to do and why that you know a tremendous amount of thought was put into any one of its proposals.
The same can’t be said for NCUA’s RBC proposal. If you are wondering why NCUA feels that CUSO investments should have a 250% risk weighting you won’t find much of an explanation as to how NCUA decided on this number when it developed its proposal. In fact, the preamble to the proposal contains no explanation as to why or how a magic 100 percent weighting for loans to CUSO’s was divined either. All we are told is that “A credit union may be adversely affected by the activities or condition of its CUSOs or other persons or entities with which it has significant business relationships, including concentrations of credit. . .” and that the repayment of loans is normally a high priority in the event of a CUSO’s liquidation. I’m all for brevity but more than a few lines should be devoted to proposals that could have a major impact on the industry.
But beyond the need for more information is the nettlesome problem that the law requires regulators to do a cost-benefit analysis of the proposed regulations. I hope we get to see NCUA’s response to the Congressman because NCUA’s cost-benefit analysis is, to put it euphemistically, lacking in substance. The Chairman has repeatedly defended the proposal with the mantra that the NCUA Board has the responsibility to safeguard the Share Insurance Fund. But considering that the vast majority of credit unions survived the worst economic downturn since the Great Depression and NCUA has already put in place justifiable reforms of the corporate system, this protection hardly serves as an explanation for why the burdens imposed by this regulation are outweighed by its benefits.
To be fair, risk-based capital is complicated stuff which is why the banking industry has literally spent decades refining its framework with very limited success. The vast majority of New York State credit unions support some type of risk-based capital reforms (I don’t see the need, but reasonable minds can differ). But what we can all agree on is that credit unions deserve to know that important proposals are competently vetted and analyzed by NCUA. On this score, NCUA has fallen woefully short. In fact, seeing NCUA push a sophisticated RBC framework has been about as nerve-racking as watching a five year old with matches. Very little good can come of it unless drastic changes are made and NCUA starts explaining itself in more detail.
As it stands, this proposal is bereft of detail and its rationale is far too simplistic. In fact, I’ve come to believe that NCUA’s RBC proposal isn’t so much a capital framework as it is an examiner wish list: let’s make it difficult for credit unions to do everything we don’t think they should do and the world will be a safer place. I hope I am wrong on this last point. A thorough response to the Congressman is a step toward proving I am.
Governor Cuomo made it official yesterday: he held a bill signing ceremony to mark approval of legislation (A.6357-e) making New York the latest state in the nation legalizing the medical use of marijuana. Its use will be ramped up over the next 18 months as the state promulgates the necessary regulations.
Despite what I have seen in the blogosphere, it is not time to stack up on the munchies. Unlike states such as Washington and Colorado, which have legalized marijuana possession, and other states, such as California, that have legalized the “medical” use of marijuana, the legislation is drafted in a way that medical use of marijuana will be limited to people with designated illnesses and only available in forms prescribed by doctors.
The use of medical marijuana in New York will be highly regulated. According to the Governor’s memo, the law allows for five registered organizations that can each operate up to four dispensaries statewide. Registrations for organizations will be issued over the next 18 months unless DOH or the Superintendent of State Police certifies that the new program could not be implemented in accordance with public health and safety interests. Because it is so regulated, chances are your credit union won’t be asked to open up a business account for these organizations, and if it is the organizations are so highly regulated that much of your due diligence will be easily obtainable. This means that, at least in the short term, legalization of the drug won’t present financial institutions with the legal question of how to comply with federal laws banning the possession and sale of marijuana and bank secrecy act requirements mandating that credit unions and banks monitor their accounts for potentially illegal activity with state law declaring marijuana use to be legal.
This is not to say that your credit union won’t be impacted by this law. Under the legislation a certified caregiver or patient can’t be subject to any civil or disciplinary action by a business or licensing board solely because of their lawful use of marijuana. In addition, eligible users are classified as disabled under New York’s human rights law. At the very least, we now know that there are going to be employees legally entitled to be taking marijuana. So, if you have a policy of categorically prohibiting employee drug use, this is going to have to be modified.
Conversely, it doesn’t mean that an employee can come into work today and get stoned at lunch time. The state is going to have a registry of patients. The key is not to make changes tomorrow. If you heard the Governor speak yesterday, then you heard a person who is dead serious about making sure that this legislation truly is for medical purposes and not a backdoor means of legalizing pot smoking. The regulatory process will be a serious one and given the number of issues that need to be addressed, I’m sure the concerns of employers will be taken into account. In the meantime, it appears that New York financial institutions have avoided the legal quagmire that comes from a more unregulated approach.
In a recent interview, President Obama suggested that what the country needs is more banking reform. Speaking on MarketPlace Radio last Wednesday, the President was asked whether Dodd-Frank had worked since mega banks are as big as ever? After going through the usual litany of Dodd-Frank accomplishments – i.e., the CFPB and so-called “living wills,” as well as increased capital requirements, the President changed his tone:
“Here’s the problem, the problem is that for 60 years, we’ve seen the financial sector grow massively. Now, it’s a great strength of our economies that we’ve got the deepest, strongest capital markets in the world, but what has also happened is that as the financial sector has grown, more and more of the revenue generated on Wall Street is based on arbitrage — trading bets — as opposed to investing in companies that actually make something and hire people. And so, what I’ve said to my economic team, is that we have to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy, but not a situation in which we continue to see a lot of these banks take big risks because the profit incentive and the bonus incentive is there for them. That is an unfinished piece of business, but that doesn’t detract from the important stabilization functions that Dodd-Frank was designed to address.”
Now, to be clear, politics being politics the White House quickly got out the word that the President’s comments didn’t mean that another push for banking reform was on its way. And there was speculation as to whether the President actually meant what he said or if his comments were simply intended to preempt criticism of Dodd-Frank in advance of its upcoming anniversary.
But the President’s comments reveal an inconvenient truth of which anyone who has tried to implement Dodd-Frank is aware: Congress and the President have done precious little to prevent another financial crisis. The too big to fail banks are still too big and with finance taking on an increasingly important role in the economy as a whole, reform of the banking system – such as reinstating boundaries between investment and commercial banking – are now all but impossible to achieve. The President had his chance, and he did not go far enough. For my money, it will go down as the greatest failure of his Presidency,
Unfortunately, credit unions are still left with the financial burden of complying with Dodd-Frank inspired mandates that are making it increasingly difficult for them to provide the types of products and services that got them into the business in the first place. In the meantime, the reality that major banks are “too big to fail” does give them a competitive advantage over their smaller counterparts. To steal a favorite political metaphor, the banks went through the car wash with the windows down and credit unions got wet.
True banking reform is not going to happen, but maybe, just maybe, with both Republicans and Democrats criticizing aspects of Dodd-Frank now’s a good time to push once again for mandate relief. At the top of my list would be an outright exemption from Dodd-Frank mortgage requirements for all credit unions. There is no evidence that credit unions caused the financial crisis, yet there is lots of evidence that Dodd-Frank is increasing costs for credit unions. There is also no good reason why credit unions should have to bear the costs for institutions that Congress doesn’t have the stomach to truly regulate.
The government reported stronger than expected job growth in June with the economy adding 280,000 new jobs. In addition, the growth was spread over a large cross-section of industries providing the best evidence yet for those of you who see the economic glass as half full. About the only negative I could find in the report is that the workforce participation rate was unchanged. People are already arguing that the jobs report is a signal that the Fed should move up its timeline for raising short term interest rates. There are some great arguments for why this approach is short sighted, but the blog has already gone on longer than I wanted.
Good luck making it through today after a nice long weekend. My advice: more coffee – lots and lots of coffee.