Groundbreaking legislation. Political intrigue. Indecipherable regulations. If you get chills of excitement just thinking about these topics, this is the blog for you! Henry Meier is taking on the latest laws, regulations and political issues that impact New York credit unions, so read often and join the conversation!
With apologies to those of you who have the temerity to consider football boring, yesterday afternoon the credit union industry was granted the legal equivalent of a referee reversing his call based on an instant replay review. Not just any ruling, instead of the game being over, NCUA can continue to fight to reclaim funds on behalf of credit unions.
Specifically, I am referring to a ruling by the Court of Appeals for the 10th Circuit which revived a lawsuit NCUA brought against Barclays Capital, Inc. seeking more than half a billion dollars for the role it played in issuing mortgage-backed securities sold to the now defunct U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. NCUA is essentially claiming that the bank violated security laws by failing to accurately disclose the quality of mortgages in mortgage-backed-securities purchased by these entities. As you all remember, these and other securities tumbled in value in less time than it took House Republicans to demonstrate that they still don’t know how to govern.
If successful, NCUA would use these funds to offset credit union premiums paid into the Temporary Credit Union Stabilization Fund. All this is a rather long winded way of saying that the success of this and other lawsuits could directly impact your credit union’s bottom line.
Things looked bleak for the home team until recently. Barlays successfully argued in federal district court in Kansas that NCUA waited too long to bring its lawsuit. The court ruled that NCUA only had three years from the date it was appointed Conservator in 2009 to bring a lawsuit. Yesterday’s ruling reverses that decision. It increases the likelihood that, barring a successful appeal by the bank to the Supreme Court, Barclays will ultimately agree to settle up with NCUA.
I’ll save you most of the gory legal details – if you really want to know the difference between a statute of limitations and a statute of repose, I’ve included a link to the decision. Suffice it to say that NCUA’s lawsuit was saved because the court ruled that Barclays lawyers had to honor a pledge not to challenge NCUA’s right to bring the lawsuit after three years had passed.
What is a Complex Credit Union, Anyway?
In its revised Risk-Based Capital Proposal, NCUA broached the idea that more than asset size be used to determine whether a credit union is complex and therefore should be subject to the enhanced RBC framework. I’ve always been frustrated that the industry throws around terms such as systemic risk without actually trying to define what that means in the context of the credit union industry. In her speech last night, Federal Reserve Board Chair Janet Yellen provided an overview of the Fed’s efforts to regulate the truly systemically important financial institutions. She defined large institutions for regulatory purposes very simply as “those firms whose distress would pose significant risk to financial stability.”
Why do I like this definition? Because NCUA has implicitly decided to define financial risk as any risk that could cause a loss to the Share Insurance Fund. In contrast, if it only concentrated on the relative handful of credit unions whose downfall could materially impact the entire industry, an RBC framework could be devised with a much higher compliance threshold, a much more sophisticated RBC framework, and potentially greater flexibility for the credit unions subject to its oversight. I know this won’t happen, but hey, I can dream.
Sign Up Time for the J. Mark McWatters Show
For those of you who want to take advantage of NCUA’s decision to enter the 21st Century and simulcast its board meetings over the Internet, NCUA has posted a sign up link for the March Board Meeting to its website. Given the combative stance taken by newest board member McWatters, this might actually be entertaining. I’m actually considering pitching a Cross-Fire like show to CSPAN that would feature the arch-conservative McWatters debating financial regulation with everyone favorite bank-bashing liberal, Massachusetts Senator Elizabeth Warren or maybe a “Big Brother” show in which the two have to live in the same house with each other and debate the morning news over breakfast. For the political geek set, this could be reality TV at its best.
Enjoy your day, they tell me that the weather is supposed to get nice any day now.
One of the things that I have learned about the credit union industry since I joined it about eight years ago is that there are few places as alert to subtle changes in communities as is the credit union branch. By- and-large you really do know your members.
So there are few people as well positioned as your average credit union employee to sense when an older member is being exploited or is becoming confused.
So I emphasize with New York’s Department of Financial Services , which recently issued a Guidance urging financial institutions to make greater use of existing federal and state laws that allow financial institutions to report suspected cases of elder abuse. According to the Department NY has the third largest elderly population in the country but financial institutions are underreporting suspected abuse.
The Department “recommends that financial institutions in New York make greater efforts to protect the elderly from financial exploitation by adopting red flag protocols, enhancing staff training, and reporting suspected financial abuse to Adult Protective Services (“APS”) or other authorities.” I added the underline. The Department goes onto describe existing legal protections for financial institutions as well as best practices for financial institutions to follow.
Credit unions want to help and protect their members but we don’t need more Guidance. The single best step regulators can take to aid detection of financial abuse is to authorize the wider and faster distribution of SARS or the creation of state level facsimiles.
Financial institutions already use SARS to report elder abuse. The Manhattan DA’s office already extensively uses them to investigate elder abuse. Using SAR reporting as a model regulators could prioritize disseminating SARS involving elder abuse to local police and prosecutors and state legislators could give financial institutions reporting suspected elder abuse to local welfare agencies the identical protections they currently get for reporting SARS These steps would quickly aid the elderly without imposing additional mandates on financial institutions,
Here is the Guidance
It’s nice to have a strict constructionist in high places but….
NCUA board member Mark McWatters told CU Times that he would vote against any Risk Based Capital plan that includes capital levels for both Adequately Capitalized and Well capitalized credit unions. McWatters’s line in the sand makes board member Rick Metsger and not Chairman Matz the most important figure in the RBC debate. It also highlights yet again the question of NCUA’s authority to mandate that complex credit unions be anything more than adequately capitalized.
This may sound boring but as a CEO and reader of this blog pointed out to me recently, the distinction is a crucial one for those credit unions ultimately subject to an RBC framework since they will have much more flexibility if they only have to worry about being Adequately capitalized. Under the latest NCUA RBC proposal for a complex credit union to be Well Capitalized it would have to have a Net-Worth Ratio of 7% or greater and an RBC ratio of 10.0 or greater. To be Adequately Capitalized that same credit union would have to have a Net-Worth Ratio of 6% or greater and an RBC ratio of 8% Remember NCUA is proposing that only credit unions with $100 million or more in assets be subject to am RBC requirement.
The industry certainly has a good faith basis for questioning the extent of NCUA’s powers-if it didn’t NCUA would not have spent money on a legal opinion letter addressing the issue-but the argument is by no means a sure-fire winner for credit unions. Let’s not lose sight of the fact that NCUA has responded to industry concerns by proposing a vastly improved though by no means perfect RBC framework. Rather than obsessing about legalities the industry should be patting itself on the back for a successful lobbying effort and focusing on ways to make the revised RBC proposal even better. Here is a link to the article,
Financial institutions and advocates of a vibrant electronic payment system won a crucial early victory in a federal courthouse in New York last week. Specifically, a federal judge dismissed a lawsuit seeking to sue Bank of America for honoring ACH debit transactions to pay for payday loans. The court ruled that the bank did not violate its account agreement or engage in unfair or deceptive practices when it followed electronic clearinghouse rules.
Why is this ruling so important? Because the lawsuit is an outgrowth of an attempt by New York’s Department of Financial Services to brow-beat banks and credit unions into refusing to process payday loans. To understand the importance of this case, look at the number of ACH debit transactions your credit union will process today. Imagine if you could not rely on the representations made by the bank originating the transaction that the debits are legally authorized. Conversely, imagine if your member could hold you responsible for every ACH transaction, even if they have contractually agreed to let a merchant pull money from their account. My guess is that the ACH system would grind to a halt, and quickly.
In Costoso v. Bank of America (14-CV-4100), a plaintiff took six payday loans with out-of-state lenders. As is common with almost all payday loans, when she entered into these agreements, she agreed to authorize the payday lenders to request that payments be electronically debited from her account over the ACH network. The plaintiff argued that the bank violated its own account agreement and various New York laws by processing payments for loans that violated New York’s interest-rate cap on non-bank lenders of 16%. She pointed to language in the account agreement stipulating that the bank would strictly adhere to NACHA operating rules, which governs ACH transactions. These rules require financial institutions to block ACH transactions that it knows to be unlawful or unauthorized.
The court rejected this argument. In a crucial passage that all NACHA members should memorize, the court held that even if the defendants were obligated to comply with NACHA rules with respect to debits on consumer accounts, “defendants may rely on the representations of the original depository financial institutions, the bank that processes the ACH debit for the payday lender.” This sentence reaffirms one of the most important lynchpins of the ACH network.
I can already hear consumer groups bemoaning this decision. So, let’s be clear on what it does not do. It does not legalize payday loans in New York. Perhaps future plaintiffs should sue banks that knowingly hold accounts for out-of-state payday lenders who offer such loans in New York. In addition, the ruling means that credit unions and banks don’t have to hesitate before honoring a member’s request that payments to their health club, for example, be automatically debited from their account. This is good for consumers.
Say what you want about your most successful despots and dictators they are almost all keen observers of the human condition. Take for instance Lenin who once explained that, “Give me four years to teach the children and the seed I have sown will never be uprooted.”
He is onto something that should serve as a reminder\wake-up-call to your credit union about the importance of engaging kids in the financial system. It’s good for the kids and good for business. It’s good for the kids because the sooner people start learning that money doesn’t magically grow in Daddy’s wallet but almost as magically via compound interest the better off they will be. It’s good for business because brand loyalty starts to develop early. Today’s seven year old with his two dollar deposit may very well be the erstwhile member, who turns to the credit union for her first mortgage twenty years from now.
So I was happy to see that the NCUA joined with other financial regulators in issuing a joint guidance on school branching. I’ve always been a little surprised by how little legal guidance is actually available on the topic so anything is a step in the right direction The Guidance does a good job of explaining how federal laws can be complied with in a school setting. That being said NCUA could have done a much better job in the Guidance of answering some of the basic questions as well as highlighting its own resources
For instance where exactly do federal credit unions get the right to conduct banking activities on school grounds anyway? According to the Guidance the development of financial literacy programs is consistent with the mission of credit unions to promote thrift. It explains that “Applicable state law and the appropriate state supervisory authority determine branch application requirements, if any, for state-chartered credit unions.” It is odd to me that NCUA didn’t also reference that federal credit unions have the right, but not the obligation, to accept minors as members.
For state chartered credit unions interested in providing branching services you have to start with your state law. For instance in NYS a state chartered credit union may open up a student branch with the approval of a school’s governing body. N.Y. Banking Law § 450-b (McKinney). Membership is available to all the kids.
Does this mean that credit unions can offer normal branches on school grounds? This part of the blog is just my opinion but the answer is no. NCUA authorizes federal credit unions to offer student branches in order to promote thrift. NYS law specifically defines a student branch offered by state charters as “pertaining to the in-school services and financial education offered to students.” There has to be an educational component to your student branching activities. After all, how is an FCU promoting thrift by students or a NY CU helping to educate students if they just happen to go to a school with a branch?
I think credit unions would be well advised to follow one of the criterion used by banking regulators when approving banking activities on school grounds. Specifically branch applications on school grounds are not required for banks when:
“The principal purpose of the financial literacy program is educational. For example, a program is educational if it is designed to teach students the principles of personal economics or the benefits of saving for the future and is not designed for the purpose of profit-making.”
What form would that education take? That might include getting students to help run the branch or having employees come in to talk about how the credit union works but it does mean that these are not normal branches
Another Guidance oversight is that it didn’t reference an informative 1999 NCUA opinion letter on student branching in which it answers these practical but important questions:
How do we show the accounts on the FCU books?
Should the accounts be in the student’s name with parent co-signing?
Should the accounts be in parent’s name as [or in] trust for the student?
Should the accounts be reflected as custodial accounts?
On that curmudgeonly note I wish you all a fine weekend.
Here is the Guidance:
Should CEO’s have to personally attest to the adequacy of their Anti Money Laundering programs the same way top executives have to vouch for the accuracy of their financial reports under Sarbanes-Oxley? That is an idea being considered by Benjamin M. Lawsky, NY’s Superintendent of Financial Services for the State of New York’who outlined his proposal in a speech on “Financial Federalism” at Columbia law school yesterday.
A recurring theme of Lawsky’s public comments of late has been his frustration with the unwillingness of major financial firms to change their practices even after they have been subjected to huge fines. The former federal prosecutor argues that more has to be done to hold specific individuals and not just the corporations they run responsible for malfeasance that takes place on their watch.
For my money nowhere is this truer than in the area of BSA and AML enforcement. Just this morning BankingLaw360 reports that Citigroup Inc. and its Banamex USA unit are under investigation by the Treasury and California regulators over their compliance with anti-money laundering requirements and the Bank Secrecy Act.
The truth is that even as the smallest of credit unions have made attempts to comply with BSA requirements some of the most legally savvy, technologically advanced corporations in the world have chosen to ignore some of the most basic AML\BSA requirements. It’s a national scandal that has gotten nowhere near the attention it deserves. They write a big check when they get caught and then go about their business as if nothing ever happened. Fines alone aren’t working.
Lawsky’s solution is to bring about more personal accountability:
“First, we are considering random audits of our regulated firms’ transaction monitoring and filtering systems, employing the same methodology our independent monitor used to spot deficiencies.
Second, since we cannot simultaneously audit every institution, we are also considering making senior executives personally attest to the adequacy and robustness of those systems.
This idea is modeled on the Sarbanes-Oxley approach to accounting fraud.”
In theory I love the idea, Our nation’s BSA framework is only as effective as our largest banks are willing to make it. Executives should generally understand what transactions are being red flagged and why.
But if this proposal gets implemented I don’t want to see smaller institutions get sucked into the vortex. Just as Sarbanes Oxley’s personal attestation provisions only applies to larger corporations a BSA attestation mandate should only apply to the largest banks. The evidence shows that the vast majority of credit unions and smaller banks have committed resources to complying with federal anti- money laundering laws. It’s the big guys who need to be reminded that violating the law isn’t in their personal or corporate best interest.
The entire speech is worth a read. Here is a link. http://www.dfs.ny.gov/about/speeches_testimony/sp150225.htm
Is another minimum wage hike on the way?
Governor Cuomo is pushing hard for legislation that would increase the State’s minimum wage to $11.50 in New York City and $10.50 elsewhere. Even if this wouldn’t directly impact your credit union’s pay scale remember that NY law generally shields the higher of 240 times the state’s minimum wage or the federal minimum wage from levy and restraint by private sector creditors even for those members who don’t have government funds directly deposited into their accounts. (N.Y. C.P.L.R. 5222). So as the minimum wage goes up so too does the amount of money in a member’s account shielded from creditors. That’s right: The more money Government mandates people get paid the more money people get to shield from their creditors. Here is an article on the Gov’s minimum wage push.
Greetings from the Land of the Never Ending Winter where the blog time temperature of 12 degrees is a sure sign that Spring is right around the corner.
The US Department of Labor took an important step for same-sex couples on Monday when it released final regulations changing the definition of a spouse under the federal Family and Medical Leave Act (FMLA). The FMLA generally provides employees working in places with more than 50 employees with the right to 12 weeks of unpaid leave to care for a spouse or other dependent. Under existing regulations, the determination of whether or not a person is married is based on the laws of the state in which the employee currently resides. So, for example, an employee’s marriage to a same-sex partner in New York, while perfectly legal in the Empire State, would not qualify that employee for FMLA benefits if he or she is a resident of Michigan, where same-sex marriages have not yet been recognized. Monday’s announcement means that FMLA eligibility will now be based on the laws of the state in which the marriage took place. In other words, the DOL’s new regulation will instead extend spousal recognition to any individual married in a state that recognizes same-sex marriage.
This proposed change will probably have its most practical benefits for credit unions that have employees in multiple states. Incidentally, a case is currently pending before the Supreme Court in which the Court will directly address whether state law bans on same-sex marriage violate the federal constitution (DeBoer v. Snyder, No. 14-571, 2015). The changes announced Monday take effect 30 days after publication in the Federal Register. As I’ve explained in this blog in the past, I am not an HR expert and this is particularly true when aspects of employee benefits are being discussed. If you think the DOL changes could impact your credit union’s operations, please follow up with your HR attorney or expert.
By the way, I have never seen such a radical shift in public attitude toward a divisive social issue than I have with regard to same-sex marriage. Think of it: as late as October of 2008, President Obama would not come out in favor of same-sex marriage and only three states, Connecticut, California and Massachusetts, recognized these unions. According to the preamble of the regulation, as of February 13, 2015, 32 states and the District of Columbia have extended the right to marry to both same-sex and opposite sex couples.
By many measures these are both the best of times and worst of times for credit union membership. On the one hand credit union accounts exceeded the 100 million mark and there has been a sharp increase in members identifying credit unions as their primary financial institution in the aftermath of the Mortgage Meltdown; on the other hand membership declined in 2014 at credit unions with $500 million or less in assets and an estimated 85% of credit union members also have accounts with banks.
Two things are going on here: First, as I argued yesterday, the industry as a whole has not done a good enough job of distinguishing its brand from banks or of demonstrating the value of its brand.
A second reason is that it’s harder to switch financial institutions than it should be. More should be done to let consumers seamlessly dump their bank for better service. Our relatives in England are providing an example of how this might work and credit unions should push for adoption of a similar model in the U.S.
In 2011 a UK Government commission on banking reform proposed making it easier for consumers to switch banks. After an infrastructure investment of more than a billion dollars and some arm twisting a system started in 2013 under which It takes no more than seven business days to switch accounts to a new bank. Members choose when they want the transfer to take place and the switch is handled between the two banks.
As someone who believes that a truly free market is often the best way to cure bad business practices the results have been moderately encouraging, According to Reuters”the number of Britons switching bank accounts grew by 12 percent to 1.16 million in 2014, marking progress in the government’s push to boost competition,” The ultimate goal of some in Britain is to make switching banks as easy as switching cell phone providers.
The key point is that there are things that can be done to make walking away completely from a bank and into the waiting arms of a friendly neighborhood credit union easier if regulators are willing to provide a nudge. I refuse to believe that 85% of people would still bother with bank accounts if they didn’t think that switching everything to their credit union would be a hassle.
A second idea that I am stealing from our British forefathers is something the CFPB can and probably will help with.
Tesco is Great Britain’s Wal-Mart. It has used great service and low prices to dominate the super market industry in England; nevertheless it has so far proven unsuccessful in its efforts to establish itself in retail banking. One of its top executives has a simple formula for the company’s supermarket success and why it has struggled to translate this approach to banking:
“If you look at supermarkets in the UK, it’s a perfectly good example of a market where there are a relatively small number of large players, and yet it’s highly competitive,” Higgins says. “There are very high levels of switching, because the market’s very transparent, and there are no obstacles to moving”. In contrast in banking customers often don’t realize how “raw a deal they are getting”
The answer is more transparency. Which brings us back to the CFPB, It appeared that one of the first initiatives the CFPB was going to undertake was to simplify account opening disclosures. In 2011 Raj Date issued the following statement:
“The CFPB has the ability to simplify checking account disclosures – an idea that some consumer groups and some banks have already been developing. Making the costs transparent is good for consumers and good for competition. It allows consumers to compare the checking account options from large banks, community banks, and credit unions and pick the one that works best for them. “ (Here is the complete article http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11412311/Tesco-Bank-chief-The-main-difference-between-supermarkets-and-banking-is-the-lack-of-transparency.html )).
My guess is that this initiative was pushed to the back burner because of the need to implement Dodd Frank’s mandates. Now that the frenzy has subsided the CFPB should put forward proposals that couple traditional account agreements-which are and should remain extensive legal contracts-with basic fact sheets that let members make comparisons between accounts.