What Credit Unions Can Learn From Lending Club Woes

There are two prevalent attitudes in the credit union industry when it comes to technological innovations.  In the one group are relative newcomers to the banking world like myself – I’ve only been doing this for a mere 10 years – who see technology fundamentally changing where and how banking is done.  The other group is the crusty curmudgeons who pine for the days when underwriters didn’t use computers to figure out who qualified for a loan, but rolled up their sleeves and did their own due diligence. 

The last few weeks have been heady times for the curmudgeons.  Leading marketplace lender Lending Club forced out its CEO amid allegations of undisclosed interests and inaccurate loan information.  The stock has taken a tumble and its supply  of investors anxious  to snap up its loans is drying up.  Score one for the curmudgeons.  I can just see the smirk widening across their faces as they read their morning news in the WSJ.  They got more good news last night with reports that New York State’s Department of Financial Services is expanding its investigation of the marketplace lending industry beyond Lending Club. 

But then again, what do the recent lows of online marketplace lenders really tell us about the direction lending is headed?  Not as much as you might think. 

First, sophisticated computer algorithms fueled by Big Data will revolutionize banking by allowing lending decisions to be made instantaneously based on information which no human could process in a lifetime.  There is going to be more lending without collateral and participation agreements to spread out this risk is going to be crucial

Second, lending is going online.  This is true not only of the consumer looking to refinance credit card debt or student loans but also extends to the small business owner.  For small business lenders, quick and expanded access to needed capital is a lot more attractive than trudging down to the old brick and mortar. 

Third, New York State’s efforts notwithstanding, the Internet has accelerated the nationalization of lending.  For credit unions, this means that the industry must continue to push for greater field of membership flexibility.  It also means that federal regulators have to take the lead in proposing appropriate regulations, Congress has to strengthen preemption laws and Courts have to do a better job of explaining the interplay between federal and state regulations.  In an age when a consumer in New York can qualify for a loan issued by a bank in Utah that is subsequently bundled and sold to a non-depository institution based in Chicago, a state by state approach to regulation will be both ineffective and will inhibit legitimate financial evolution.  For those of you that are interested in more background on this issue, here is a white paper issued by the Treasury Department.

On that note, your faithful blogger will be back on Tuesday.  Enjoy your long weekend and remember, if there is more than one guy standing around the barbecue, you can guarantee the burger is going to be overcooked.      

May 26, 2016 at 8:46 am 1 comment

Assembly Passes Onerous Abandoned Property Bill

The Assembly passed a package of bills yesterday that would make New York’s cumbersome foreclosure process even more inefficient and costly and most likely exacerbate some of the very problems it is seeking to address.

Most importantly, the Assembly passed A6932a/S4781a, introduced at the request of the Attorney General, “the New York State Abandoned Property Neighborhood Relief act of 2016.”  I’ve already talked about this bill extensively.  It makes lienholders responsible for abandoned property on which they have not foreclosed; however doesn’t do enough to expedite foreclosures on these properties or clarify precisely how much maintenance credit unions and banks will be responsible for. 

By the way, municipalities often have first lien priority on abandoned property because of unpaid tax bills.  This bill is a backdoor means of shifting responsibilities to banks and credit unions that are ultimately the responsibility of localities.

Another bill, A1298/S5242 wouldn’t streamline New York’s requirement for judicially supervised settlement conferences, a proposal that would be in everyone’s best interest.  Instead, it expands the explicit scope on these get-togethers by explaining that resolutions can include, but are not limited to, loan  modifications, “short sales” and “deeds in lieu of foreclosure.”  This goes into the “wow, why didn’t I think of that” category.  Lenders have already considered and used these alternatives.  There is no need to put this language into statute unless the Legislature believes it knows more about loss mitigation than the lender losing money on a delinquent mortgage.  A second possibility may be that it is seeking to give judges greater authority to force lenders to accept “good faith” resolutions.

Finally, if the Legislature is going to propose all these new obligations on lenders, one would hope that it isn’t also inclined to make it even more difficult to foreclose.  But, alas A247 would do just that.  This bill makes it easier for defendant’s to raise a defense that a foreclosing lender lacks standing.

Taken as a whole, this package of reforms will increase legal protections for delinquent homeowners, make lienholders responsible for homes they don’t own and make foreclosing even more litigious and time consuming.  Lost in all of this is the simple fact that delinquent homeowners are in homes they can no longer afford.  Fortunately, none of these bills have been passed by the Senate yet.  We will have to see if cooler heads prevail in the closing weeks of the session.   

 

May 25, 2016 at 9:00 am Leave a comment

Albany Considers RideSharing Options

How best to regulate the burgeoning Ridesharing industry is one of the key issues of unfinished business as the Legislature seeks to make a quick election year exit out of Albany and prepare for the pivotal November elections for control of the State Senate. The issue is also of more than passing interest to many credit unions that want to make sure that their members who choose to become Uber or Lyft drivers   have adequate insurance  in the event of an accident and because Albany’s actions may well impact the value of taxi medallions financed by some institutions.

Capital Tonight’s Morning Memo reports what has been rumored for weeks: that the legislature is considering backing away from the idea of imposing a statewide system of  ridesharing insurance regulation and is instead moving toward  allowing individual localities to authorize the purchase of required insurance policies.  It reports that Assembly Democrats conferenced on the issue yesterday.  It also quotes a Uber spokeswoman as saying that:  “ While a statewide comprehensive regulatory framework is best for New Yorkers who are demanding ridesharing…allowing ridesharing activity to be covered by insurance policies that are up to ten times higher than local cab companies would allow communities to start welcoming flexible economic opportunities and better transportation options.”

It’s always dangerous to speculate about what may or may not happen in Albany before an actual bill has been introduced. After all, many strange things can happen in the wee small hours of the morning when most of the really important stuff gets negotiated.   But we may have the makings of a classic political compromise.  Upstate Mayor’s like Albany’s Kathy Sheehan argue that ridesharing would be a boom to local businesses whose patrons are handicapped by a lack of transportation options. Conversely ,  NYC Mayor Bill de Blasio  has been less than enthusiastic about Ridesharing.  NYC’s  established system of Medallion cabs could be undermined by  statewide regulation of livery  insurance

Whether any of these machinations have an impact on the price of medallions remains to be seen. Here   some of the latest sales information provided by the NYC Taxi and Limousine Commission.

http://www.nyc.gov/html/tlc/downloads/pdf/april_2016_medallion_transfers.pdf

May 24, 2016 at 8:45 am Leave a comment

More Regs On the Way

All’s quiet on the Western Front today, but there’s plenty of proposed regulations on the horizon that will keep your vendor on speed-dial and make small financial institutions wonder how they are supposed to generate income.

The Bureau that Never Sleeps (CFPB) published its semiannual list of rule-making priorities in a blog Wednesday.  I won’t go over the whole list, as you can read it yourself, but I will point out a couple of areas that could really have an impact on your credit union’s operations. 

The Bureau is still in the process of determining what additional regulations are needed for overdraft services for checking accounts.  Depending on how this is drafted, this could be the one that requires your credit union to make the most significant changes.  For instance, imagine if the CFPB proposes capping overdraft fees, requires additional opt it protection for members to access overdraft services, and mandates the order in which checks must be processed. 

Another area it is considering regulating is one that hasn’t gotten a lot of attention in credit union land:  debt collection.  Most debt collection regulations currently apply to third party collectors.  I wouldn’t be surprised to see the Bureau impose more debt collection requirements directly onto banks and credit unions.  Even if they don’t, debt collection is fast becoming a regulatory land mine and its increased complexity will impact all lenders.

That’s all folks.  Have a nice weekend.

May 20, 2016 at 8:10 am Leave a comment

Regulators Stress Account Reconciliation

This one goes into the “don’t shoot the messenger” category, particularly when the messenger is in a good mood because it sounds as if some warm weather is coming.

Yesterday evening, the NCUA joined with the other merry band of financial regulators to issue a joint edict, I mean “guidance” detailing the responsibility of financial institutions to properly reconcile account discrepancies.  They pointed out that the failure to do so could constitute a violation of federal regulations as well as a deceptive practice.

What are they talking about? Take me for instance.  I am a bank teller’s worst nightmare. The Rosetta Stone is easier to read than my handwriting.  In the Middle Ages, before direct deposit took off, I used to deposit my meager starting salary  at a branch down the block from my apartment in Washington. I used to dutifully fill out the deposit slip, place it in an envelope with the check, and either deposit it with a teller or at the ATM.  If I deposited more than one check, it wasn’t uncommon for me to round off the deposit.  I didn’t think fifty cents was such a big deal   As time went by, however, I got so many notices from the branch that this sweet teller I used to deal with occasionally became increasingly frustrated and unfriendly.  She eventually explained to me, albeit in much nicer terms, that, my shoddy deposit slips never added up and those were messing up the computer system.  I was a little surprised, and in all honesty a little flattered, to find out that my  salary could inconvenience such a big bank, although I didn’t tell her that as I could tell she wasn’t amused.  After all, it wasn’t a big deal to expect customers to accurately record deposits.  Can’t members be held accountable for accurately recording their own deposits?

If only this guidance was around when I was depositing my checks, I could have explained to the exasperated teller that “in some instances, financial institutions do not research or correct all variances between the dollar value of items deposited to the customer’s account and the dollar amount that is credited to that account, resulting in the customer not receiving the full amount of the actual deposit.” Regulators expect them “to have deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”

https://www.ncua.gov/regulation-supervision/Pages/policy-compliance/communications/letters-to-credit-unions/2016/04-enclosure.pdf

Why are regulators coming out with this edict now as opposed to several decades ago when I could have indignantly responded to my exasperated teller? Pure speculation on my part, but I bet some class action lawyers or AGs  are considering  lawsuits claiming that banks are saving money by not trying hard enough to reconcile deposits.

Payday Lending Reg Coming in June

On June 2, the CFPB is expected to formally issue a proposal to regulate payday loans. The Bureau That Never Sleeps has scheduled a field hearing in the “Show Me” state on small dollar loans. As The American Banker points out, the CFPB typically uses these events to unveil new regulations.  (Of course,   the fact that the Bureau has already decided what it is going to do before it holds these hearings makes them more like Chinese show trials than hearings, but I digress).

The big question is how the regulation will impact the ability of credit unions to offer payday loan alternatives that are currently sanctioned and encouraged by the NCUA.  Inquiring minds also want to know how the CFPB is going to balance enhanced regulation against the demonstrable demand for these loans.  Too tough an approach will cripple the payday lending industry; too light an approach will send the usual suspects in the Consumer Advocate class howling that the Bureau has gone soft.

http://www.consumerfinance.gov/about-us/blog/save-date-kansas-city-missouri/

 

May 19, 2016 at 9:23 am Leave a comment

DOL Finalizes Major Revisions to Overtime Rules

It’s alive! The U.S. Department of Labor finalized regulations increasing the minimum salary level for an employee to be exempt from overtime pay requirements from $455 a week to $913 a week. This means that when the regulations become effective in December, unless your supervisors make at least that amount, they must be paid the overtime rate of time and one-half for each hour they work over 40.

In addition, under current law there was an exception from  overtime pay for highly compensated employees (HCE) who make at least $100,000 annually but whose duties don’t qualify them for exempt classification. This regulation increases the HCE threshold to $134,000. Check with your HR person on this one as there are exceptions that apply to certain professions.

The minimum salary threshold will be updated every three years beginning in 2020. It will be adjusted so that it is equal to the 40th percentile of full-time salaries for workers in the lowest wage region (which is currently the South). As originally proposed, the exempt employee threshold would have been adjusted annually to equal the 40th percentile of full-time salaried workers nationally. This would have resulted in a threshold of over $50,000, which is the number I used in a recent blog. Nevertheless, if and when this regulation becomes effective, it will mark the first time that the exempt employee threshold is automatically updated on a periodic basis.

Why do I say “if and when this regulation becomes effective?” I’ve always thought that this regulation was, in part, politically motivated. I strongly suspect that it will become a major campaign issue with the Donald pledging to annul the regulation and Hillary pledging to ensure that it goes forward untouched.

But with the regulation now finalized, you must find out, if you don’t already know, how many of your currently exempt employees make less than this threshold, how much overtime they work, and if it makes more sense to bump their salaries so that you may continue to classify them as exempt employees, pay them overtime or make sure they don’t work more than 40 hours a week.

Incidentally, there is some good news in all this. Up to 10% of the standard salary level can come from non-discretionary bonuses, incentive payments and commissions, provided they are paid at least quarterly. Furthermore, the final regulation makes no changes to the way in which employers classify exempt and non-exempt employees based on the duties they perform. Many of us were concerned that the Department would institute a rigid test under which employers would have to document that a supervisor spends at least 50% of her time carrying out supervisory responsibilities. This would have harmed many small credit unions.

Finally, when you are done reading this blog, it’s time to reach out to your HR professional so that you can understand precisely how this regulation will impact your credit union. On that note, get to work and enjoy your day.

May 18, 2016 at 8:21 am Leave a comment

Zombie Property Bill Advances

Momentum appears to be growing for zombie property legislation. Legislation has advanced to the Assembly floor (A.6932A/ S.4781A) that would make mortgage lenders responsible for maintaining “vacant and abandoned” property on which they have not yet foreclosed.  It would also make lenders responsible for property they are in the process of foreclosing on because the borrower has failed to maintain the property.

The bottom line is that financial institutions would be on the hook for maintaining property even if they haven’t completed or even started New York’s byzantine foreclosure process, an obstacle course that takes several years to complete.

This is a lousy idea for several reasons. For instance, it effectively denies the lender the right to determine whether or not vacant and abandoned property is worth foreclosing.  It also creates even more foreclosure complexities and opens the door for lenders to indirectly subsidize maintenance projects for which localities should be responsible.

The sponsors deserve credit for proposing to streamline foreclosures for zombie property. However, if legislators feel the need to go forward, the legislation should be amended to mitigate its shortcomings. Most importantly, the legislation should clearly stipulate that “vacant and abandoned” property is not subject to foreclosure defenses so that lenders can at least quickly obtain title to property for which they are responsible.  Currently, the legislation is needlessly ambiguous on this point.  It creates a streamlined foreclosure for vacant property, but also provides that this fast track system “shall not abrogate any rights or duties pursuant to this article.”  Why not?  The property is abandoned.

Furthermore, the fast track won’t apply in instances where the defendant has responded to the foreclosure. This makes sense, except the legislation should make clear that if a homeowner mounts a foreclosure defense only to subsequently abandon the property, lenders can still fast track the foreclosure.

There also needs to be responsible parameters describing what proper maintenance entails. Anyone involved in mortgage lending has heard stories of foreclosed property being gutted by the delinquent homeowner.  Should a foreclosure come with a huge price tag for repairing these properties? I don’t think so.

Happy Days For MBL Lenders

NCUA sent out a notice yesterday reminding credit unions that they no longer have to get a personal guarantee when making Member Business Loans. This change is the first step in implementing amendments to give credit unions greater flexibility when making MBL loans.  Remember NCUA still considers personal guarantees a good idea, so you should have a policy explaining the circumstances under which they will not be required by your credit union.

https://www.ncua.gov/newsroom/Pages/personal-guarantee-waivers.aspx

 

 

May 17, 2016 at 9:46 am Leave a comment

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Authored By:

Henry Meier, Esq., Deputy 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.

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