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.
There are some things that just make no sense to me. For example, why can’t a country of 270 million sports loving citizens, many of whom grew up playing soccer, find 23 people good enough to make us one of the best soccer teams in the world? I’m sorry, there’s only so much pride I can take in beating Ghana.
Another mystery of more practical concern is trying to figure out how great a risk resetting Home Equity Lines of Credit (HELOC) pose to financial institutions in particular and the economy as a whole. Since the start of the Great Recession, pundits have been predicting a second wave foreclosure crisis as the draw periods on HELOCS come to an end. With so many people still struggling and interest rates likely to rise, it seems logical to assume that problems are on the horizon. But, so far, the worst case scenarios haven’t materialized.
Nevertheless, if I was a regulator, I would be a little nervous, which is why I’m not surprised that a joint guidance was issued yesterday instructing financial institutions, including credit unions, to take steps to mitigate against the risks posed by HELOCS which are coming to the end of their draw periods. Among other things, examiners will generally be reviewing how cognizant your credit union is of its HELOC portfolio and the risks posed by pending repayment periods. The amount of scrutiny will vary depending on your credit union’s size, but examiners will be reviewing, among other things, if your credit union is:
- Developing a clear picture of scheduled end-of-draw period exposures;
- Ensuring a full understanding of end-of-draw contract provisions;
- Evaluating near-term risks;
- Contacting borrowers through outreach programs;
- Ensuring that refinancing, renewal, workout, and modification programs are consistent with regulatory guidance and expectations, including consumer protection laws and regulations;
- Establishing clear internal guidelines, criteria, and processes for end-of-draw actions and alternatives; and
- Documenting the link between ALLL methodologies and end-of-draw performance.
This is not a definitive list, but you get the idea.
Why are our regulatory overlords releasing this guidance now? For one thing, resets on HELOCS are expected to accelerate this year and peak between now and 2017, according to this article in National Mortgage News which warns that there is little the Government can do if the housing sector experiences a wave of second-lien induced foreclosures.
Then, of course, there is the fear that rising interest rates will squeeze consumers since most HELOC payments are tied to interest rates. Last, but not least, is the reality that people are again turning to HELOCS to tap equity in their homes. According to the WSJ, HELOCS are up 8% this year and “While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share.” Oh, boy.
Is this yet more proof that consumers and many lenders didn’t learn a darn thing from the last seven years? You bet. Enjoy your Fourth. I will be back on Monday.
Buffalo, New York, has the most stable housing market in America. According to research conducted on behalf of Bloomberg.com, Buffalo is followed by Pittsburgh, Louisville, Nashville and Raleigh, NC.
Working with Zillow, Bloomberg analyzed housing prices since 1979 for the 50 largest housing markets using a five year rolling average to calculate changes in home prices. The result shows that you may not strike it rich buying that home in Buffalo, but you won’t lose your shirt either. The data shows that over the last 35 years, Buffalo homeowners had “virtually no chance” of losing money on their house. In contrast, the same can’t be said for Hartford, Connecticut at the bottom of the list.
Some of those areas on the least stable list are awfully nice places to live so what’s the difference? One agent pointed out that your typical Buffalo buyer is planning to stay in the area for the long-term. Buffalo isn’t where you go to invest in a second home or flip houses.
By the way, in commenting to NCUA many NY credit unions argued that NCUA’s proposed risk weightings for mortgage concentrations were too severe because they didn’t take into account a credit union’s track record in making well performing mortgages. This research provides one more piece of evidence that not all mortgage loans are equal. Hopefully, NCUA will take that into account in finalizing its RBC framework.
Court Says Localities Can Block Hydro-fracking
Remember when high powered hydro-fracking was a big issue, with New York’s Department of Environmental Conservation analyzing the potential impact of its widespread use in the Southern Tier? There hasn’t been much movement on the issue since the Department of Health was tasked with analyzing its health effects in 2012 and has yet to reach its conclusions. In the meantime, a statewide moratorium on the process remains in effect.
But yesterday, the NY Court of Appeals — our highest Court — ruled that localities could use local zoning laws to block hydro-fracking even if the state authorizes it.
This may be another setback for drillers or it might actually allow the state to lift the moratorium because only towns that want the drilling are going to get it. Remember, the issue is important to credit unions that should insure their interest in mortgaged property is adequately protected in the event that a member wants to lease out their property for oil drilling.
The answer to the first question is that our good friends at the CFPB have provided us with a definition of application for purposes of sending out mortgage disclosures that takes effect next August. The answer to the second question is if your credit union offers mortgages, then you should.
First, some background. Who could forget last December when the CFPB unleashed a host of Dodd-Frank mandated regulations reshaping the regulatory framework for mortgages. I know you all now know what a QM mortgage is, but you’re not quite done yet. The CFPB also released regulations that integrated mortgage disclosures mandated by both the Truth in Lending Act and RESPA. Starting next August, the GFE and early TIL will be replaced with a single document titled the Loan Estimate. If you were like me, you looked at the 900 pages of this proposal, noted that the effective date wasn’t until August of 2015 and put it at the bottom of your to-do list. Now, it is time to get focused. There a lots of operational decisions that need to be made beyond simply calling up your vendor and finding out if it will be ready to send out the new disclosures.
One of the most basic and important changes made by the CFPB has to do with the definition of application. Under existing law, lenders have to give a borrower a good faith estimate of the mortgage costs within three business days of receiving a mortgage application. Under existing regulations, an application is received when a lender has the borrower’s name, monthly income, social security number, the property address, an estimate of the value of the property, the requested mortgage loan and — here’s the key part — “any other information deemed necessary by the loan originator.” The catch-all provision is crucial since it gives lenders the ability to provide general loan estimates without being bound by a GFE.
Flash forward to August of next year and that catch-all provision will no longer be included in the definition of application. Instead, any time a credit union receives the other six pieces of information, the application has been received and the GFE clock starts ticking. Now, many lenders use more than these six pieces of information in making lending determinations. So what are they going to do?
First, a GFE is not the same as making a mortgage determination. If, as verifying information comes in, you determine the applicant isn’t qualified for a mortgage loan, you don’t have to give him one. Second, you can continue to prequalify members without requesting the six pieces of information.
But there is a more subtle way in which the CFPB is still allowing lenders flexibility in terms of when an application becomes an application. As the CFPB explains in the preamble to the regulation, “the definition of an application may not have a significant impact on a creditor’s ability to delay provision of a Loan Estimate, because the creditor can simply sequence its application process to delay collection of some or all of the six pieces of information that would make up the definition of an application.” For example, let’s say there are two additional pieces of information beyond the six in the definition that you have to specifically ask for before providing a GFE. The CFPB is allowing institutions to ask for those two pieces of information before the other six. You can find this quote at the bottom of page 79766 of the Final Regulation. I would actually save the specific page in my mortgage file. The ability to sequence isn’t all that clear from the language of the regulation or its official interpretation.
This is just one example of operational questions that have to be considered by your credit union and then communicated to your vendor. There are several other key compliance issues impacted by this regulation and with regulators in summer mode, I will be passing on tidbits in the days and weeks to come. I know this is not exciting stuff, but it’s time to stop procrastinating.