More HMDA Guidance Issued; Student Lending Requirements Take Effect

It’s getting more confusing keeping track of proposed amendments to HMDA than it is to keep track of the developments in the Trump impeachment inquiry. That being said, after 45 minutes, albeit with no coffee, I think I have it straight.

Yesterday, the CFPB finalized a regulation extending a partial exemption from HMDA reporting requirements for institutions that do not meet certain mortgage thresholds. Specifically, for open-end lines of credit, the rule extends for another two years, until January 1, 2022, the current temporary coverage threshold of 500 open-end lines of credit. For data collection years 2020 and 2021, financial institutions that originated fewer than 500 open-end lines of credit in either of the two preceding calendar years will not need to collect and report data with respect to open-end lines of credit.

In addition to this announcement, there are pending regulatory proposals for which comment is due by Tuesday, or forever hold your piece. One proposed rule would also extend to January 1, 2022, the current temporary threshold of 500 open-end lines of credit for open-end institutional and transactional coverage. Once that temporary extension expires, the proposed rule would set the open-end threshold permanently at 200 open-end lines of credit in each of the preceding two calendar years. The other is an Advanced Notice of Proposed Rulemaking. This will likely be the more significant of the two going forward. In the Dodd-Frank Act, Congress mandated that HMDA-reporting institutions collect several additional data points, and gave the CFPB the discretion to add other data field reporting requirements that it deemed to be appropriate. The Bureau took up this task with gusto. The ANPR is likely to be the first step by the Kraninger-led Bureau to scale back the reporting requirements imposed by King Cordray.

DFS Creates Student Loan Advisory Task Force

To mark the effective date of a new law imposing licensing and servicing standards on student loan providers, DFS Superintendent Linda Lacewell announced the creation of a student advisory board to advise the Bureau on consumer protection issues related to students. Remember that in addition to establishing baseline servicing requirements on student loan providers, the new law also imposes licensing requirements, but credit unions and banks are exempt from these regulations. Credit unions should notify the Department of their exempt status by email at SLSLicensing@dfs.ny.gov.

How Low Should Mortgage Rates Go?

Finally, here is a great article in today’s Wall Street Journal suggesting that mortgage rates should be even lower than they are based on traditional indicators, such as 10-year treasury notes, the fact that lenders haven’t cut rates more aggressively underscores how big an appetite there is among consumers to refinance their existing mortgages.

On that note, enjoy your weekend. If you’re like me, you’re already happy because you know you don’t have to waste your Sunday watching the Giants lose to the Patriots. You already wasted Thursday night. By the way, we now know how bad the Patriots can play and still easily defeat the Giants.

October 11, 2019 at 9:42 am Leave a comment

FOM Litigation Not Over Yet

Even as the NCUA starts to approve charter expansions based on its recently upheld field of membership regulations, a motion filed with the Court of Appeals for the D.C. Circuit is a reminder that the litigation is not yet over.

Early last week, the American Bankers Association filed a petition requesting that the court reconsider its ruling that the NCUA acted within its regulatory and statutory authority when expanding the definition of a “well-defined local community” to give credit unions greater flexibility to expand their community charters. The rule also amends the definition of a “rural district” by increasing the population limit from 250,000 (or 3 percent of total state population) to 1 million people.

I read the motion last evening, and as much as I love baseball, it actually was more entertaining that the Yankees series against the Minnesota Twins, but I digress. The typical federal appeals case is decided by three judges who belong to the same circuit. A petition for an En Banc review is a request for an entire circuit court to reconsider an earlier ruling. To successfully be granted a rehearing, the moving party, in this case the ABA, would have to prove not only that the three judge panel came up with the wrong decision, but that it also misapplied settled law in a way that must be corrected. The motion is a longshot, but it is not unheard of. It was a successful En Banc petition which led the D.C. Circuit to reverse an earlier ruling that the CFPB’s governing structure was unconstitutional.

Not surprisingly, the motion zeros in on the issue which is central to this case: how much discretion does the NCUA have to define what constitutes a local community? In making its ruling, the court concluded that since Congress had delegated the authority to NCUA to define these terms, it gave NCUA “vast discretion.” In addition, the court held that the regulations should not be struck down based on the fact that NCUA may approve overly expansive community charters in the future. The only issue before the court was whether the framework established by the agency was illegal. According to the ABA, the court’s analysis is all wrong.

Let’s remember that this case has potential significance for industries other than credit unions. In the past, I have talked about a legal framework called Chevron deference, under which courts will generally defer to agency interpretations with expertise on the issue at hand when a statute’s language is vague or unclear. The conservative wing of the Supreme Court, most notably Justice Gorsuch, has signaled that it believes that judicial deference to agency interpretations has gone too far. As a result, you can bet that even if the case is not taken up again by the court of appeals, the Bankers will be petitioning the court, arguing that they can use this decision as a vehicle to chip away at this line of cases…

More ADA Website News

Speaking of the Supreme Court, on Monday, it decided not to take up a case decided by the Ninth Circuit Court of Appeals on the West coast. Credit unions have been successful in arguing that disabled persons who do not qualify for membership in a credit union lack standing (i.e. the legal right) to sue credit unions, claiming that their websites violate the ADA because they don’t accommodate the needs of blind persons. None of these cases address the underlying issue of whether or not the ADA applies to websites in the first place. In Domino’s Pizza LLC v. Robles, the Court held that the ADA does apply to websites, at least where there is a nexus between the website and the physical location. In this case, you can order a pizza from your local Domino’s location using their website. That being said, if you know anything about good pizza you shouldn’t be doing that in the first place, but again I digress.

The case has no direct impact on credit unions, but I expect other circuit courts to have to grapple with the underlying issue and, who knows? Someday, maybe the Department of Justice can issue final regulations once and for all.

October 9, 2019 at 9:36 am Leave a comment

My Kind of Town?

Chicago’s taxi medallion industry is in even worse shape than New York’s, and New Yorkers are to blame. That’s my synopsis of a lengthy article by the New York Times published over the weekend, in which the Times details the dramatic rise and fall of Chicago’s taxi medallion industry, which has caused hundreds of people, many of whom are drivers, to declare bankruptcy. Furthermore, the paper continues to argue that the investment and lending practices which caused medallions to inflate was so reckless and predatory that the loans would have collapsed with or without the rise of Uber and Lyft.

As with the previous article on New York’s taxi medallion industry, the practices of certain credit unions, as well as banks and other lenders, is a part of the story. “As prices rose, lenders flocked to Chicago. Three credit unions that had long provided loans to most New York medallion buyers all came, along with new players in the industry, including Actors Federal Credit Union from New York. So did bigger institutions such as Capital One. Medallion Financial, the Manhattan company, expanded its presence in Chicago.”

The First Monday in October

It’s that time of year again. The Supremes are back in session. Although this promises to be an extremely high profile session, with cases on abortion and immigration to be decided by June, so far, there isn’t much that directly impacts your credit union on the agenda.

A colleague of mine who is also a regular reader of this blog recently predicted that credit unions will be facing an increasing number of ERISA lawsuits. As a result, one of the cases that I will be keeping an eye on is Thole v. U.S. Bank, in which the Court will decide whether a participant in a defined benefit pension plan has standing to sue the plan’s fiduciary for alleged mismanagement, where the plan in question is overfunded. This might not seem like the most relevant question- okay, it’s not- but credit unions are being subjected to more and more ERISA related lawsuits, and the question of who can bring these lawsuits and when is important.

A second case, which the Supreme Court will be hearing arguments on today, will answer the question of whether Title XII of the Civil Rights Act prohibits discrimination based on a person’s sexual orientation. Altitude Express Inc. v. Zarda is a consolidation of lawsuits brought in New York and Georgia. The case is particularly important for those of you who work in states that don’t prohibit discrimination on the basis of sexual orientation as a matter of state law. For those of us in New York, the case is an interesting example of the interplay between New York’s Human Rights Law and federal protections.

October 7, 2019 at 9:23 am Leave a comment

Digital Currencies Will Make BSA Compliance Easier

In yet another sign that Facebook has grown too large for Mark Zuckerberg’s skill set, the Wall Street Journal reported Tuesday that Facebook’s ambition to create a cyber currency called Libra, in association with a group of large banks and payment processors is losing momentum. The paper reports that would-be investors are backing away from the project in the face of stiff opposition from regulators. For those of you who just don’t like Mark Zuckerberg, or who fear that a cryptocurrency is yet another on the ever-growing list of putatively existential threats facing the industry, this is good news. For those of us who believe that the reactionary rejection of Facebook’s idea is based more on ignorance than legitimate regulatory concerns, this is too bad.

What really got me fired up was this paragraph in the WSJ article: “government officials and central bankers were quick to criticize the project, citing concerns about how the network would protect users’ privacy and prevent criminals from using it to launder money.” In fact, a well-functioning digital currency system will greatly reduce money laundering. Here’s why.

Labor and bitcoin technology are based on distributed ledger technology. With apologies to IT people who will probably cringe at this explanation, the basic idea of distributed ledgers is that software converts each new digital transaction into a unique digital block which is added to a block chain produced by previous transactions. The technology has the ability to simplify everything from contracts to land title searches by creating a single chain of evidence that can be accessed from multiple computers. For example, let’s say that contract you are entering into requires a wet signature. If you could enter into that same contract using block chain technology, both parties to the agreement would have instantaneous and unequivocal proof that the contract has been signed and agreed to. Legislation has even been introduced that would preempt state laws seeking to prohibit the use of block chain technology in commercial transactions.

Nevertheless, regulators continue to argue that block chain technology raises dangerous Bank Secrecy Act concerns. In fairness to the regulators, the technology could be abused. After all, bitcoin is a favorite tool of money launderers, extortionists, and black market entrepreneurs. The bitcoin’s appeal, however, is that it enables the bad guys to exchange electronic currencies without meeting each other or exchanging identifying information, such as an account number. So long as both parties can confirm that a new link in the block chain has been created, they can process transactions in virtual anonymity.

However, this problem can be easily addressed, which is why we are seeing the growing use of this technology. Regulators can mandate that legally sanctioned cryptocurrencies come with electronically identifying marks that make it clear which parties are engaging in a transaction. Furthermore, this electronic confirmation can be more secure than existing BSA compliance, which at the end of the day remains reliant on documents that can be doctored as well as staff people who are, after all, only human. Let’s also keep in mind that nothing is better suited for money laundering than paper currency payable on demand, no questions asked. Furthermore, digital currency is worthless unless a business accepts it. There will still be a need for banks and credit unions that are willing and able to convert digital currencies into cold, hard cash.

So, if you want to dislike Libra, go ahead. But let’s not let regulators throw obstacles in the way of digital innovation that don’t need to be there. The quicker we get to the widespread use of cryptocurrency, the quicker we will have more efficient and safer payment systems.

October 4, 2019 at 12:07 pm Leave a comment

Second Chance IRPS Provides Much Needed Clarity for CU Employees and Applicants

I’m beginning to think that I have done this a bit too long.

In 2008, NCUA issued a guidance providing clarity as to the procedures and policies credit unions should have in place when evaluating job applicants who have committed crimes. At the time, I thought the guidance was well-intended but too vague to be of much use, and in some ways, created more confusion than clarity. Fast-forward to 2019 and it appears that NCUA has finally gotten the message. The reality is that credit unions can face severe penalties for running afoul of this prohibition, so, the more clarity NCUA can provide, the better.

The comment period has recently ended on a proposed new IRPS, which would provide much needed guidance to job applicants, credit union employees and employers responsible for balancing legitimate safety and soundness concerns against the need not to discriminate against individuals who have paid their proverbial debt to society and are entitled to a second chance. The issue is particularly important in states like New York, where decriminalization of crimes including marijuana possession have been coupled with mechanisms for individuals to wipe their criminal records clean.

On the off chance that you may not remember this issue from 2008, here are some of the basics. Section 205(d) of the Federal Credit Union Act prohibits credit unions from employing “any person who has been convicted of any criminal offense involving dishonesty or a breach of trust, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense” without the approval of the NCUA Board. The 2008 IRPS gave credit unions greater flexibility in making these decisions. The IRPS currently pending before the NCUA would expand the category of offenses the board considers de minimis. This is important because credit unions can hire someone who has committed de minimis crimes without getting board approval. Another addition to the IRPS that is being proposed would clarify the records that credit unions should keep when making these determinations.

Another confusing trick in interpreting 205 (d) is determining when it does and does not apply to third party venders. Specifically, the prohibition applies to “institutional-affiliated parties” who knowingly engage in breaches of trust that are likely to negatively impact the credit union. I’m thinking of individuals like lawyers, accountants, and hot-shot consultants. The prohibition also applies to individuals who participate directly or indirectly in the affairs of the credit union. The IRPS would provide much needed guidance as to who is and who is not covered under this incredibly broad definition.

These are just some examples of the types of changes NCUA may be making. Given the changing political winds, these changes are being made in the nick of time and, when and if they are finalized, it should be a top priority of your HR guru to understand their implications and to update your policies and procedures.

October 3, 2019 at 9:59 am Leave a comment

A Wednesday Hodgepodge

Good morning. Yours truly is back from a college tour in the great Northeast, and there are a lot of odds and ends I need to catch you up on. First, however, congratulations to all you Nats fans out there. Your team finally won a big game. Now don’t get me wrong, all you won was the right to lose to the Dodgers, but at least that’s something. Besides, that was the most fired up Washington crowd I’ve heard since the Redskins were good. Maybe D.C. can get united about something after all. Now onto the material you read the blog for.

Beware of the Business Appraisal Rule

CU Today is reporting that an advisory group of the National Association of Credit Union Service Organizations put out a welcomed reminder telling credit unions to practice “careful restraint” when it comes to taking advantage of the new commercial real estate appraisal requirements for credit unions, which take effect in this month.

Their warning should be taken to heart. In July, the NCUA finalized a regulation that increases the threshold for required appraisals in commercial real estate transactions from the current $250,000 to $1 million. The regulation was an aggressive move by Chairman Hood and Board Member McWaters, who argued that the increased threshold did not raise safety and soundness concerns and would help credit unions provide member business loans. The decision was a controversial one. Credit unions now have more commercial real estate transaction flexibility than do banks. Board Member Harper voted against the proposal. Against this backdrop, even though only 4% of credit unions make these types of loans, you can bet that the industry will be under the microscope with critics anxious to point to this new regulation as an example of NCUA being too aggressive.

Treasury Moves Forward with GSE Reform

Lest anyone doubt that the Trump Administration is serious about moving forward with major reforms of the secondary housing market, those doubts should be put to rest once and for all. On Monday, the Treasury announced that it would be authorizing Fannie Mae and Freddie Mac to retain up to $25 and $20 billion in earnings, respectively, as opposed to the $3 billion capital cushion at which they are currently capped. This means that the government is deciding that it will no longer be taking almost all the profits being generated by the GSEs.

More than a decade ago now, when the government gave the GSEs a $200 billion line of credit and a huge bailout, it received preferred shares which made it the first in line to receive dividend payments. This has proven to be an incredibly lucrative investment for the government, and has led to lawsuits with irate shareholders claiming that the government has effectively taken their profits for themselves. The cynics among us have even suggested that the profits are so appealing that the government would never want to privatize Fannie and Freddie. This is the clearest sign yet that their cynicism is misplaced. The Treasury’s ultimate goal is to allow Fannie and Freddie to build up huge capital reserves and then function as private entities absent implicit government support. Just how much of this goal can be accomplished without Congressional support remains to be seen.

Arbitration Update

In a recent blog, I said that all medium to large sized credit unions should consider putting arbitration agreements into their account agreements and their HR handbooks. Now that the Supreme Court has consistently and emphatically upheld the legality of such arrangements, it is almost negligent not to consider making this move if your credit union is large enough to be the target of class action lawsuits. Those of you interested in looking into the issue further would be well advised to take a look at this excellent analysis of the issue provided by the Weil, Gotshal & Manges LLP’s September employment law report. The firm summarizes several cases demonstrating how courts are going to scrutinize arbitration agreements to make sure that employees affirmatively agree to be subject to arbitration clauses. I also think some of the concepts are useful when getting your members onboard with arbitration.

Collins Pleads Guilty, Resigns

Western New York Republican Congressman Chris Collins resigned yesterday after pleading guilty to insider trading charges. Nationally, Collins is best known for being the first sitting Congressman to endorse Donald Trump. Trump ended up winning the district by 26 points, but Collins only narrowly won reelection in 2018 after being arrested on the insider trading charges. Credit unions in New York will also remember Collins and his staff for being well-informed and generally supportive of credit unions and their issues. Governor Cuomo will call a special election to fill the vacancy.

October 2, 2019 at 9:12 am Leave a comment

“Ugh.”

That is how a trusted colleague of mine responded to this article in the CU Times reporting that veteran Congresswoman Carolyn Maloney, who sits on the House Financial Services Committee called for a moratorium on taxi medallion foreclosures during a committee hearing dedicated to debt collection practices. In addition, none other than Rep. Alexandria Ocasio-Cortez referred to some of the taxi medallion loans as “criminal.”

These comments are the latest sign that the taxi medallion issue is not going to go away anytime soon. As policymakers discuss how best to aid drivers in financial straits, let’s hope that some basic facts are understood. Most importantly, the medallion crisis cannot be separated from the rise of Uber and Lyft. We would not be having this discussion today if these two companies did not upend the entire structure of the taxi industry and destroy the value of medallions.

In addition, many medallion loans are now being serviced directly by NCUA. NCUA has to do more to publicly explain to policymakers on both the state and federal level what steps it is taking to modify these loans. Many credit unions are working with members, but that message is not getting out to the public as effectively as it should be with NCUA in control of so many of the lending decisions.

Finally, I hope legislators think long and hard before advocating for a foreclosure moratorium. The reality is that the price of medallions has tumbled and may very well continue to do so. A moratorium would do nothing except put further downward pressure on medallion prices, and extend the time it will take to get the medallion crisis behind both drivers and lenders alike. Instead of talking about moratoriums, policymakers should look at the example of the HAMP Program and see if there are mechanisms to assist both lenders and borrowers in making financially responsible modifications. Stay tuned.

A Phase-in for CECL

In addition to a delay in its effective date, another piece of good news on the CECL front is that Chairman Hood has indicated that NCUA will be joining with banking regulators in permitting credit unions to phase in recognition of loan losses triggered by the new standards over a three-year period.

CECL requires financial institutions to recognize lifetime expected credit losses, and not just credit losses incurred as of a reporting date. In addition, it implements a lower threshold for financial institutions to recognize a potential credit loss. As a result, many institutions could experience a reduction in their retained earnings as they increase buffers to guard against potential losses.

Many banks and credit unions have expressed concern that they could face dramatic losses on paper if they are not allowed to phase in the recognition of losses caused by this new standard. Earlier this year, the OCC and FDIC finalized regulations giving banking organizations that experienced a reduction in retained earnings as a result of adopting CECL the option of phasing in its effects over a three-year period. At a presentation before NAFCU earlier this month, Chairman Hood indicated that NCUA will be proposing similar regulations for credit unions.

 

September 27, 2019 at 9:51 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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