Bitcoin is Dead.  Long Live the Bitcoin!

With an impeccable sense of timing, last Tuesday I gave a presentation on the future of virtual currency at a chapter event in which I proclaimed that the technology is going to fundamentally change the way banking is carried out only to read headlines the next morning detailing how investors are running for the exit when it comes to virtual currency. 

A colleague of mine who was at the event even emailed me to ask me if I wanted to change my opinion: my answer is a resounding No.  To be clear, many virtual currencies will go the way of the tulip in 17th century Holland, but the technology makes so much sense that in the coming years, financial institutions will either have to adopt it as their own or be left behind. 

When we talk about virtual currency, it’s important that we all agree on the terms to be used, particularly in the absence of regulatory definitions.  When I’m referring to virtual currency, I am talking about an electronic store of value which is traded electronically using Distributed Ledger Technology (DLT).  By DLT, I am referring to a system of network computers which validates transactions involving virtual currencies using advanced cryptography without the use of a third-party intermediary.

I have no idea what the bitcoin is going to be worth a week from now; but I do know that, as we speak, companies large and small are thinking of ways to apply DLT.  For example, imagine a world in which the job of the county clerk to record home purchases and liens is usurped by DLT which creates a chain, which everyone can access, recording every single transaction involving that piece of property. Imagine a world in which overdraft transactions are a vestige of a bygone era because transactions are executed immediately. 

This is also a world in which there is less and less need for third party intermediaries such as credit unions.  Remember, a DLT network validates and records transactions. 

But this is not one of those “credit unions are obsolete” blogs.  Instead, for those of you who understand the technology, there are many things you can do to integrate your institution into this new technology and benefit your members along the way.  For example, the OCC has already authorized banks to act as electronic wallets– effectively, safety deposit boxes – for consumers who want a central place to store those passwords and electronic keys they need to access all those transactions recorded on those distributed ledger chains.  In addition, this technology will make the NACHA network about as antiquated as rabbit ears on a black and white television. 

The bottom line is: even as you chuckle at that crazy cousin who just lost all that money investing in a virtual currency which exists only in cyberspace, keep on planning for a world in which the technology that powers that, currency changes the way virtually all important financial mediation is done. 

May 17, 2022 at 9:32 am Leave a comment

Just When Does The Equal Credit Opportunity Act Apply?

The CFPB waded even further into a legal dispute which has direct implications for your day-to-day compliance obligations, by issuing an advisory opinion concluding that the Equal Credit Opportunity Act and its implementing Regulation B applies even after an applicant has been granted credit.  If the CFPB is right, you are all going to be sending out more notices. 

As I know most readers of this blog know, taken as a whole, the ECOA and Regulation B prohibit lending policies and practices which have the purpose or effect of discriminating against individuals on the basis of race, sex and other characteristics.  This is why an individual denied credit is entitled to a written explanation of the reasons for the denial.  Everything I just said is settled law.  In recent years, however, there has been an increase in litigation across the country seeking to sue lenders for actions taken after a loan has been approved. 

For example, in Tewinkle v. Capital One, N.A., 2019 WL 8918731 (W.D.N.Y., 2019), a Western New York resident, sued Capital One after it discontinued his line of credit.  Although he received notice of the closure as specified in his account agreement, he did not receive an explanation as to why the line was shut down.  Many financial institutions have taken similar steps in recent years, particularly following the Great Recession and Mortgage Meltdown.  The district court sided with the bank.  Similar cases are now being appealed.

Enter the CFPB.  In its advisory opinion, the Bureau stated the Tewinkle court as well as others that have reached similar conclusions have got it all wrong.  The Bureau argues as a matter of statutory history and (implicitly) the deference due to regulators interpreting ambiguous statutes that consumers like Mr. Tewinkle should receive full disclosures under Regulation B.  To be fair, other courts have agreed with the Bureau’s analysis, which means this is going to be a hotly debated issue in the federal courts, that could ultimately be decided by the Supremes.

This is an area where it is extremely important that people understand precisely what is being debated.  With or without the ECOA, lenders cannot discriminate against individuals at any point in the lending process.  For example, if a lending institution reduced credit just to African-American consumers, this would be a blatant violation of both state and federal law. 

In addition, as pointed out in Tewinkle the ECOA would have applied in this case had our disgruntled homeowner Tewinkle sought reconsideration or applied for renewal of the line of credit.  At this point, he would have been seeking new credit and been entitled to an explanation if he did not receive it;  but that is not what happened in this case. Capital One followed the terms of its account agreement in closing down a line of credit, something it and other lenders should be allowed to do in a fair, efficient manner. 

Stay tuned. This is a debate which is far from over. By the way, I hope to see some of you at tonight’s Southern Tier Chapter event at McGirk’s Irish Pub in Binghamton.

May 11, 2022 at 9:45 am Leave a comment

Required Reading for the Compliance Geek

Yours truly is always a little ambivalent when someone gives me a reading suggestion; on the one hand, I love a good recommendation, on the other, there’s an implicit pressure that comes with the suggestion lest you have to sheepishly explain why you haven’t gotten to the book the next time you run into the recommender.  
So, with apologies to those of you who already have a list of compliance material piling up in your virtual in-box, there are two recent publications that all good compliance people should take the time to peruse. 

Most importantly, the CFPB released its Quarterly Compendium Of Supervisory Highlights which it uses to put financial institutions on notice as to its areas of regulatory emphasis in the coming months.  The Spring issue includes many topics with which I have seen credit unions grapple in the past, including mandatory re-evaluation of increased credit card interest rates under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) and continued concerns about the reporting practices of financial institutions under the Fair Credit Reporting Act.  But the issue that the CFPB decided to highlight that I think credit unions would be well advised to look at most closely has to do with GAP car insurance and the refund of excess payments.  This has already been the subject of lawsuits and if the issue is highlighted by the CFPB you can bet it’s one that class action lawyers will continue to scrutinize.   

A second document you should review is one of my personal favorites.  A new Consumer Compliance Outlook report has been issued by the Philadelphia Federal Reserve.  This issue provides you with a comprehensive overview of CDFIs and how to become one.  I know this is an area that many a credit union has been examining and, as usual, the report is concise and useful. 

On that surprisingly upbeat note, enjoy your day.  For the five of you who care about hockey out there in the blogosphere, I am predicting a Tampa Bay-Calgary Stanley Cup but was unfortunately not able to get this certified as acceptable collateral, as my hockey predictions are even worse than those for other sports. 

May 3, 2022 at 9:02 am Leave a comment

New York State Issues Important Guidance on Virtual Currency and BSA Requirements

New York’s Department of Financial Services issued guidance yesterday emphasizing the unique BSA concerns raised by virtual currency.  While this guidance only applies to entities subject to the Department’s virtual currency license requirements as well as certain trust companies, categories which do not include credit unions, I would suggest anyone responsible for integrating virtual currency oversight into your credit unions compliance framework would be well advised to analyze New York State’s missive. 

In today’s blog, yours truly is not going to summarize the guidance but instead provide some context as to the considerations that regulators and financial institutions should take into account as they begin to dip their virtual toes into the virtual currency space.  In doing so I want to illustrate why I think the DFS guidance is important. 

What virtual currencies such as Bitcoin and Ether have in common is that they allow individuals to transfer these currencies between computers so long as the sender and receiver have set-up virtual wallets.  The key to this arrangement is Distributed-Ledger-Technology (DLT). 

With apologies to the technologically savvy out there, every time a request is made to send or receive “currency” from, or to, a wallet and the transaction is confirmed as valid, a notation is added to a computer program called a block-chain.  This technology is the key to the whole process since it provides a virtual ledger confirming the transfer of debits and credits. 

This means that without the use of a financial institution, any two individuals, using fictitious names, can transfer money.  Needless to say, since the emergence of the Bitcoin, there have been concerns raised about the utility of this technology to facilitate money laundering and other illicit activities (since we’re on the subject of money laundering, my wife and I have started binge watching Ozarks, which is the best show I’ve seen since I binged Breaking Bad, but I digress). 

These concerns have been partially vindicated since ransomware attacks typically include a demand for payment in Bitcoin.  But that may be changing.  Law enforcement is beginning to understand DLT.  For example, the ransomware attack on the Colonial Pipeline understandably got a lot of attention last year, but as significant as the attack itself, is the fact that the FBI was able to track down at least some of the culprits and retrieve much of the ransomed funds. 

Now, I’m not suggesting that credit unions or vendors need to be as savvy as the FBI in order to ensure compliance with BSA and AML requirements, but in the old days it was thought that the only way of deterring illicit activity was to make it as difficult as possible to convert Bitcoin and its prodigies into cold hard cash.  The DFS guidance emphasizes that even now there are basic steps that financial institutions can take as they begin to consider how to integrate virtual currency offerings into their lines of products or working with third party vendors as already permitted by the NCUA.  Besides, as virtual currencies become more widely accepted, there will be less and less need to convert them into fiat currency, but that’s a blog for another day.

April 29, 2022 at 10:20 am Leave a comment

New York Court Invalidates Congressional and Legislative Districts

In a decision which could have a direct and substantial impact on the political environment in which credit unions operate, not only in New York State but around the country, New York’s highest court invalidated a Congressional map which would have favored Democrats to pick up at least three seats, and a state Senate map which was the first drawn by Senate Democrats since the modern redistricting process started in the 1960s and would have helped them maintain their super-majority

In the decision, the Court of Appeals not only invalidated the new maps but put a special master in charge of developing an alternative.  The Court concluded that there was insufficient time to allow the Legislature to redress the situation.  To put it nicely, the decision scrambles the political timeline.  Currently, primaries are scheduled to take place on June 28th, but with members not knowing precisely what districts they will be running in, it looks like New York is headed for a frenzy of political activity over the summer. 

This was the first redistricting cycle following amendments to the state constitution in which a bi-partisan Independent Redistricting Commission (IRC) was charged with drawing a map to be submitted to the legislature for its approval.  Under the process outlined in the Constitution, the IRC was supposed to make at least two attempts at coming up with a single plan for submission to the legislature.  The IRC deadlocked however, and its only submission to the Legislature was a set of competing maps.  State law now also mandates that maps not be politically gerrymandered. 

The Court of Appeals ruled that the maps approved by the Legislature failed both tests.  “Through the 2014 amendments, the People of this state adopted substantial redistricting reforms aimed at ensuring that the starting point for redistricting legislation would be district lines proffered by a bipartisan commission following significant public participation, thereby ensuring each political party and all interested persons a voice in the composition of those lines. We decline to render the constitutional IRC process inconsequential…”.

While this is a big deal, remember that we won’t know its precise impact until Election Day and New York is still a state with an overwhelming Democratic enrollment edge. 

April 28, 2022 at 9:35 am Leave a comment

Getting Ready For The Legislature’s Stretch Run

Yours truly is back from his Carolina vacation and has caught up with enough e-mail to finally post again.  While there is a lot I want to get off my chest – there is only so much my wife wants to hear about the banking industry during an eight-hour car ride – I think I will start with a description of some of the key legislative and regulatory issues that will be impacting New York state credit unions in the coming weeks. 

Not only is this an election year, but it is an election year following the redrawing of the election map, meaning that the legislature will want to get out of town as quickly as possible, especially with primaries scheduled for June. 

One of the most important issues we are dealing with is a bill that would retroactively impose strict new requirements on lenders foreclosing on property (S5473D Sanders).  As many of our members have already explained to their representatives during our state GAC, as currently drafted, the retroactive application of this bill and the ambiguity regarding the right of lenders and borrowers to negotiate modifications without running out of time to foreclose on property will actually make it more difficult to work with delinquent borrowers.

We are also continuing to advocate for changes to a proposed data portability and privacy bill which does not currently exempt financial institutions (S6701A Thomas / A680B Rosenthal) as well as continuing to express a strong opposition to state level anti-trust legislation (S933A Gianaris) which could negatively impact the ability of credit unions to help provide communities banking services, particularly in underserved areas. 

All this is taking place as New York’s highest court hears an appeal of a case challenging the legality of New York’s redrawn Congressional map which could allow Democrats to pick up four additional seats as they struggle to keep their majority.  Expect a decision to come down shortly.

As for the federal level, there is an interesting article in today’s WSJ reporting that privacy legislation may finally be getting traction in Congress.  This is potentially good news, provided the legislation does not impose additional requirements on credit unions and the legislation preempts state law.  But I still remain skeptical that Congress will be able to get legislation done this year.  Hopefully, I am wrong.

On the regulatory front, we are still waiting to see what will come out of the CFPB’s initiative against so-called “junk fees”.  The president of the American Bankers Association has already taken to publicly accusing the Bureau of going rouge.  My bet is that we are going to be hearing a lot about overdraft fees in the coming months. 

Last, but not least, let’s hope that the NCUA is going to be following up on its reach-out to credit unions by providing additional guidance as credit unions begin to explore the banking issues raised by distributed-ledger technologies and cyber currencies.  On May 11th yours truly will be discussing the state of regulation in this area and how it is going to impact your credit union as part of the Southern Tier’s Spring Chapter Event in Binghamton.  I noticed it’s at an Irish pub, so let’s share a half-and-half as we ruminate on how technology is once again upending the way banking is done.

Full disclosure, my wife and kids won’t be attending.  They already heard enough about how the NCUA needs to move more quickly and provide additional guidance in this area.  It was one of my favorite topics as we drove around North Carolina.

April 27, 2022 at 9:57 am Leave a comment

Gone fishing… and to the beach!

Your faithful blogger has headed South for some fishing and beach fun!

I’ll be back again on Monday, April 25th to continue to share my thoughts on controversial legislation, complicated regulations or a groundbreaking lawsuit!

April 14, 2022 at 5:30 pm Leave a comment

Why Overdraft Fees Are An Endangered Species

Good morning boys and girls, I want you all to grab a cup of coffee and gather around the virtual rug while I tell you a fascinating story about the history of overdraft protection programs and why a recent decision by the Court of Appeals for the Tenth Circuit is instructive for your credit union.

A long, long time ago, in an age before the internet and computers, banks and credit unions would decide on a case-by case basis whether to honor a member’s checks.  Let’s say Mrs. Jones didn’t have quite enough money to pay for the new vacuum she wrote out a check for. If they knew she was a good consistent member who deposited her paycheck every Friday, chances are they would cover the check. Everyone was happy, including the store owner who was dependent on checks to grow his business. 

Times changed.  Technology allowed financial institutions to automate overdraft decisions and financial institutions started charging fees for providing overdraft protection.  Financial institutions began to incorporate this practice into their account agreements and market them to their members. 

But marketing what used to be an ad-hock process into a financial product raised legal and regulatory concerns when that bank or credit union paid a check. For example, when that bank or credit union paid a check for Mrs. Jones’ granddaughter on the assumption that it would get the money back at a later date, wasn’t it extending credit, and if so, why wasn’t it providing more disclosures?   Never mind that some members absolutely loved this service.  For instance, Mrs. Jones’ granddaughter hardly knows what a checkbook is and couldn’t balance her account if her life depended on it.  After all, there are apps for this type of thing.

Responding to these concerns, in 2005, NCUA joined with bank regulators in issuing this guidance explaining the conditions under which financial institutions could provide overdraft protection services to their members and customers without running afoul of state usury laws or federal consumer protection laws, such as the Truth In Lending Act (TILA). The guidance established a common sense framework under which both federal and state credit unions were allowed to charge overdraft fees. The guidance also explained the conditions under which credit unions could offer overdraft lines of credit, but crucially, it explained that lines of credit triggered disclosure requirements under TILA. The OCC also authored an influential opinion letter for banks in 2007 in which it further explained that overdraft fees were part of a bank’s account maintenance activities for which fees could be charged, as opposed to debt collection activity subject to additional state and federal laws. 

Although overdraft fees remain controversial on a policy level, the fundamental premise of the above guidance remains good law.  Overdraft fees are not interest, so long as they are properly disclosed. In addition, members must affirmatively agree to overdraft protections when it comes to their debit cards. 

But just the other day, the Court of Appeals for the Tenth Circuit decided a case which took direct aim at this regulatory framework.  In Walker v. BOKF, National Association, 2022 WL 1052068 (C.A.10 (N.M.), 2022) involves an overdraft product under which the bank’s customers are charged an initial overdraft fee and an additional Extended Overdraft Fee of $6.50 per business day if the account remains overdrawn after five days.

The plaintiff in this case does not challenge the bank’s right to charge the original overdraft fee. He instead argues that the reoccurring charges for nonpayment amounts to interest. Interest which far exceeds the state interest rate cap of 8%. 

Stop yawning kids.  This argument takes direct aim at the core legal premise which allows financial institutions to charge overdraft fees. Remember how the bank used to honor Mrs. Jones’s checks even though there wasn’t enough money in her account? If the bank’s actions where actually classified as a loan, then virtually any fee would exceed NCUA’s interest rate cap not to mention state usury laws. The case in question was not challenging overdraft fees, but if the plaintiff in this case was successful, the next round of litigation would challenge the premise that overdraft protections are fees and not loans. The case is also crucial because it invites the courts to rule that bank regulators misinterpreted the law in 2005 and 2007 when they decided that overdraft fees should not be considered interest. Fortunately for us, the argument was rejected.

So what is the moral of the story? First, if you offer any products which charge both a fee and then recurring charges if the account remains overdrawn for a period of time, prepare yourself for a potential legal challenge.  Litigation like this does not happen in a vacuum. 

But here is an even scarier thought.  Right now the CFPB is considering taking action against so-called Junk Fees.  The distinction between interest rates and fees is a regulatory distinction developed long before the CFPB was conceived by an obscure Harvard law professor by the name of Elizabeth Warren. If the CFPB decides to aggressively challenge the existing regulatory framework, it most likely has the legal authority to do so. What one regulator can give, another can simply take away. Congress may have to be the ultimate arbiter of the overdraft debate.

On that happy note, yours truly is heading south in search of warm weather.  I will return a week from Monday.

April 14, 2022 at 9:32 am Leave a comment

Is Your CU Ready to Take On Inflation?

It’s been a long time since we’ve seen inflation rising this fast.  So long in fact, that virtually an entire generation of credit union leadership has come and gone without ever having to deal with the impact that inflation can have on their institutions.  Here are some lessons from history that I gleamed from NCUA’s 1981 credit union report

I’m assuming for the purposes of this blog that the inflation that we are experiencing today can no longer be considered a transitory blip caused by temporary factors like supply chain stress.  While I will leave it up to the economists to explain the technical reasons for inflation, with China insisting on locking down its economy to fight COVID; the end of the war in Ukraine nowhere in sight and a red-hot labor market, the ingredients for inflation will be in place for months to come.  So, what can history teach us? 

  • Don’t be slow to react to interest rate sensitivity.  In the late 70s, money market funds became widely used as they offered consumers a way around Regulation Q, a depression era regulation which capped interest rates on checking accounts.  According to the report, large credit unions were slow to react to this increased competition with the result that in the late 70s, credit unions experienced “severe” outflows of member savings and a liquidity crunch. 

Today, members have even more opportunities to seek out higher returns.  The money market industry is now fully mature and a much higher percentage of Americans invest in the stock market than they did in the early 80s.  In fact, there are even predictions that the FDIC might see a drop in funds for the first time since WWII.  Presumably the same trends will impact credit unions.

  • Get ready to offer more share certificates. Federal credit unions paid more than $300M in dividends to their shareholders in 1981 which was a 25% increase in the amount paid in 1980.  The increase was fueled by share certificates on which credit unions paid $1.3B in interest dividends in 1981 compared to $711M in interest dividends paid in 1980.
  • Are your members going to be more or less loyal to their credit union than they were in 1981?  In 1981, 88% of all members were in occupational credit unions and another 6.6% were in associational common bond institutions.  Today, community and multiple common bond credit unions are the engines of the industry.  Will members be more likely to leave these institutions than their parents were to stop using their employer CU, particularly given the increasing use of technology?  If the answer is yes, then will we see profit margins shrink for these institutions? 
  •  Expect even more mergers. The early 80s also witnessed increased merger activity which posed new challenges for the Share Insurance Fund which was then only 11 years old.  The fund suffered losses that resulted primarily from a “major increase of costs due to merger and liquidation expenses” which increased 33% between 1979 and 1981.

Only time will tell, but if history is any guide, there is a bumpy road ahead for the industry.

April 13, 2022 at 11:51 am Leave a comment

Human Trafficking and the FCRA

Last week the CFPB proposed regulations implementing a federal law which amends the Fair Credit Reporting Act (FCRA) to help victims of human trafficking recover from their abuse by helping them gain access to credit.  As currently proposed, the regulation does not impose any new obligations on credit unions but I would certainly make sure that anyone in your credit union who accesses credit reports, or furnishes information to Credit Reporting Agencies (CRAs) is aware of these pending changes.

Section 6102 of the National Defense Authorization Act amended the FCRA by adding a new section 605C which generally prohibits CRAs from including information in credit reports resulting from “any adverse item of information about a consumer that resulted from a severe form of trafficking in persons or sex trafficking if the consumer has provided trafficking documentation to the consumer reporting agency.” Credit unions are furnishers of information contained in credit reports and users of this information, under the FCRA, but are not credit reporting agencies.

CRAs are going to be responsible for collecting the appropriate documentation and ensuring that they update an individual’s credit report.  The obligations of CRAs will be triggered by the receipt of “…a determination that a consumer is a victim of trafficking made by a Federal, State, or Tribal governmental entity or a court of competent jurisdiction or documents filed in a court of competent jurisdiction indicating that a consumer is a victim of trafficking; and government documentation demonstrating that an individual has been victimized by trafficking.” 

Once an individual’s identity has been established, the CRAs will be responsible for using this, or additional, information provided by the victim to remove adverse information from a credit report.  As currently drafted, precisely how this responsibility is going to be performed should be further clarified, but again, a credit union is not responsible for performing this obligation.

One aspect of the regulation that could involve your credit union, involves the receipt of a notification that a credit report contains information affected by human trafficking.  Specifically, the Bureau is seeking comment on whether a CRA should be required to notify a furnisher about the consumer’s submission to prevent a CRA from furnishing a consumer report containing any adverse item of information about a consumer that resulted from trafficking.

Presumably, this would include a mandate that furnishers update their policies and procedures to ensure that they cease providing the impacted information to the CRAs.  We will have to wait and see what is in the final regulations.

April 12, 2022 at 9:53 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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