Gillibrand Proposes Data Protection Agency

Data protection is the legislative equivalent of the weather: everyone talks about it but no one does anything about it. So I was pleased to see that Senator Gillibrand unveiled a bold proposal yesterday to create a Data Protection Agency.

As of ten minutes ago the text of the bill was not yet available online but, according to her press release the DPA’s core responsibilities would be giving Americans greater control of their own data by creating and enforcing data protection rules—ensuring fair competition “within the digital marketplace” and preparing America for the Digital Age by advising Congress on emerging privacy and technical issues. This last proposal is a bit unsettling since I kind of thought that Congress knew we were already in the Digital Age and was reading up about it.

You don’t have to be Nostradamus to figure out that the agency would promulgate a California/European regulatory regime on companies and crackdown on potentially anti-competitive practices of Facebook, Google and Amazon. It would be overseen by a Director serving a five year term.

Now it’s way too early to say whether this is a good or bad idea. But let’s be honest, given the current political divide in Congress, this proposal has as much chance of becoming law any time soon as Donald Trump does of giving up tweeting for Lent. But in the eight years since U.S. Attorney for the Southern District in New York, Preet Bharara, warned of a WWII style cyber-attack against this country, the situation has only gotten worse, not better. We’ve grown so used to the idea of cyber breaches that news that the Chinese government stole personally identifiable information from almost half of America’s citizens is met with a shrug. Anything that wakes us up and gets us talking about taking on data protection issues on a national level is a step in the right direction even if some of the specifics need to be refined.

On that note, enjoy your Presidents’ Day Weekend. I will be back on Tuesday.

February 14, 2020 at 9:09 am Leave a comment

A Tale Of Two Budgets: Why It Matters To Your Credit Union

Nothing underscores the sharp differences between Congress and the New York State legislative processes more than the differences between how legislators in New York and Congressmen in Washington decide how to spend money.

Senate Budget Chairman, Republican Mike Enzi, greeted President Trump’s proposed $4.8 trillion dollar budget by announcing that he would not bother holding a hearing on the proposal. According to the Wyoming Senator, “nobody has listened to the President in the 23 years that I’ve been here.”

Meanwhile, New Yorkers and legislators anxiously awaited the Governor’s budget proposal with an increasing number of legislators grousing that he has too much power.

Why am I talking about this now? Because the Governor has proposed legislation in his budget, such as one addressing financial abuse of the elderly and disabled, that would have a direct operational impact on credit unions. In addition, the distinctions are important to understand as the lobbying season goes into high gear. Besides, I really enjoy the subject, so humor me a little.

Article I, section 9 of the U.S. Constitution provides that “no money shall be drawn from the Treasury, but in consequence of appropriations made by law”. In other words, the power of the purse belongs to Congress, not the President which is why the senator can be so dismissive of the President’s proposal and the President can devise a budget plan catering to his political supporters secure in the knowledge that it has not practical consequences. Given the give and take of the political process, for much of the last century, the President and Congress would ultimately engage in negotiations that resulted in a functioning spending plan. On paper the Federal fiscal year begins on October 1st and there are twelve subcommittees with jurisdiction over virtually all discretionary spending on the Federal level each of which crafts a bill for Congress to pass and the President to sign or veto.

But the system has largely broken down—a trend which pre-dates the Trump Administration. Appropriation bills are cobbled together in a last second omnibus appropriations bill, assuming one can be agreed to. Today the Federal Government is run by a series of continuing resolutions which are short term spending plans intended to keep government functioning until the President and Congress reach a final agreement.

Meanwhile on the state level the Legislature has no choice but to consider the Governor’s spending plans. As early as 1915, Henry Stimson proposed amending the state’s constitution to give the Governor the responsibility of implementing a unified executive budget. At the time, appropriations were made with little regard for the overall impact on state spending.

Stimson’s initial efforts failed but in 1927 Article 7 section 4 of the State Constitution was enacted.

In contrast to the Federal Constitution, this provision provides that the Governor must propose a budget for the upcoming fiscal year and that the “…legislature may not alter an appropriation bill submitted by the governor except to strike out or reduce items therein, but it may add thereto items of appropriation provided that such additions are stated separately and distinctly from the original items of the bill and refer each to a single object or purpose.”

This is incredibly powerful language. It means that the Governor’s executive budget has the force of law unless it is acted on by the Legislature which only has the ability to reduce or increase suggested appropriations. In addition, a series of important cases in the early 2000’s further strengthened the Governor’s hand by holding that the Governor’s budget powers applied not only to the actual amount appropriated but to the language accompanying an appropriation. That is why you have seen every Governor since George Pataki put more and more of his legislative priorities in his proposed budget.

The Governor has the right to amend his proposals and that is what will be taking place up until April as staff persons and legislative leaders haggle over the state’s spending priorities. But the legal structure means that the Governor starts these negotiations from a position of strength. The legislature could simply refuse to enact a budget by April 1st, but unlike the Federal Government the political consensus in New York has been that the public has little appetite for a government shutdown.

February 13, 2020 at 9:46 am Leave a comment

Time to update your CTR Reporting Procedures

Ok, so it’s not the most exciting topic in the world, but there are few BSA requirements as fundamental as filing transaction reports for currency transfers (CTRs) in excess of $10,000. On February 10th the Financial Crimes Enforcement Network (FinCEN) issued an administrative ruling updating CTR procedures when filing CTRs involving DBAs and Sole Proprietorships. The issue is trickier than it might seem at first because a sole proprietorship is a single person operating as a separate legal entity but in a personal capacity. This ruling is intended to codify precisely who the legal entity is for purposes of filing the CTR. The ruling also addresses similar concerns regarding businesses operating under a “doing business as” designation.

By the way, every time I deal with CTRs I’m reminded of just how antiquated this requirement is. Since everyone knows a financial institution has to report these cash transactions, then how useful is this requirement in terms of catching the bad guys? Everyone agrees that it’s time to update the reporting threshold, but unfortunately the threshold is embedded in statute. Perhaps this is smoothening we can talk about when we go to meet with our Congressional Representatives in a week and a half.

Again, I know this is not the most exciting issue in the world but on a practical level, it would be a big help for financial institutions big and small.

February 12, 2020 at 9:11 am Leave a comment

Let’s Deal With the Medallion Mess, Once and For All

First, this is one of those blogs where I want to remind you that the opinions I express are mine, and mine alone, and do not necessarily reflect the viewpoints of the Association.

In a letter to the NCUA last week, NAFCU explained to NCUA that its members have expressed concerns about how NCUA will ultimately determine what a fair sales price is for Medallion loans and stressed that “ultimately, if it is determined that a fairly-priced transaction is not feasible at this time for the entire portfolio of medallion loans, the NCUA should consider exploring other avenues to achieve a fair price in the most expeditious way possible.” Since the letter came shortly after a New York City task force urged NCUA to hold off on prematurely selling medallion loans, the comments have been seized on as signaling a split within the industry over what to do about these loans.

In fact, while there are undoubtedly differences between credit unions and within the industry about what to do, the fact that we are finally having this discussion is in everyone’s best interest. NAFCUs letter underscores the need for urgency. Simply put, doing nothing is not an option and the longer regulators, legislators and credit unions dither around about how to resolve these issues, the worse off everyone, including the medallion loan borrowers, are going to be. Conversely, there still is a window, albeit a shrinking one, for these same parties to come together and come up with a plan which mitigates the potential harm of a premature sale of medallion loans. Both sides have a point. Time is running out. But we should wait until the end of the legislative session to see if there is a way we can minimize the inevitable damage that will result from the sale of medallion loans.

First, if history is any guide, the price of medallions is going to continue to fall unless legislators’ step in. Since the beginning of the medallion crisis there has always been an assumption that at some point prices would stabilize. After all, the argument went, even if the prices of medallions were grossly inflated, surely tourists would continue to see a value in flagging the iconic yellow cabs as they check out the sights of New York City.

But this increasingly quixotic thinking is belied by the facts. According to the Task Force report, in May 2008 independent medallions sold for more than half a millions dollars and a package of two corporate medallions sold for $1.3 million. In contrast, by November 2019, the average sale price for medallions was $164,518, with a median price of $200,000.55. Throughout 2019, prices hovered around $200,000 and 66% of the medallion transfers that took place in 2019 were due to foreclosures.

We’re not putting the Uber genie back in its bottle. Your average consumer is more than willing to ditch the higher priced, often discourteous service, one receives in a yellow cab in return for a cheaper, better Uber ride.

Given this reality, of course the sooner the medallions can be sold the better. But it makes no sense to pull the plug precisely when the New York State Legislature, the New York City Council and maybe, just maybe, NCUA have the opportunity to take a comprehensive approach to dealing with this issue once and for all in a way that stabilizes prices. Let’s see what reasonable heads can agree on before pulling the plug. For instance, a public/private partnership which funds medallion purchases could potentially stabilize prices. What’s the harm of waiting a few more months?

February 10, 2020 at 10:19 am 1 comment

Key Case on Mortgage Foreclosures Before New York’s Highest Court

Greetings People.

Our good friends at the New York Mortgage Bankers Association gave me a heads-up the other day that an extremely important case dealing with New York’s six year statute of limitations is going before New York’s Court of Appeals, which is New York’s highest court. Regardless of what the court ultimately rules, for those of you who deal with delinquent mortgage loans it underscores how clearly and unequivocally you should be entering into agreements which freeze foreclosure actions so that you can continue to negotiate with the delinquent homeowner. This is one area of the law where the lender should beware.

The facts of this case show just how convoluted foreclosure actions have become in New York State. I read both briefs- which are excellent by the way- and no one challenges the fact that the homeowner has been repeatedly delinquent on his mortgage loan payments. Nevertheless, in our efforts to provide greater protections to homeowners, delinquency is increasingly immaterial to foreclosure litigation.

Freedom Mtge. Corp. v Engel has its roots in a $225,000 mortgage that Herbert Engel entered into in 2005. The defendant did not make a payment due on March 1st 2008, and in July of that year a foreclosure action was commenced. The action hit a glitch in January 2013 when the defendant homeowner contended that he was never properly served the papers triggering this action because the summons and complaint were not sent to the proper address. Freedom Mortgage disagreed but entered into a stipulation in which the homeowner accepted service of the foreclosure papers and the foreclosure action would be discontinued “without prejudice” as both parties worked to “amicably resolve the dispute and the issues raised in it without further delay, expense or uncertainty”.

Well, things didn’t exactly work out as planned. Two years later on February 19th, 2015 Freedom Mortgage once again moved to foreclose on the property. The defendant argued that the action was time-barred; after all, the initial foreclosure was commenced in 2008. In contrast, Freedom Mortgage pointed out that it had agreed to dismiss the initial foreclosure without prejudice. But the appellate division concluded that the stipulation the parties entered into in 2013 did not constitute “an affirmative act” to deaccelerate the mortgage note i.e. insist that the entire outstanding amount of the mortgage loan be paid immediately.

Now that the case is going to the court of appeals, the court will be able to provide much needed guidance on precisely when and how lenders can enter into stipulations discontinuing foreclosure actions without putting themselves in jeopardy of losing the right to foreclose on property. This is good news not only for lenders but for borrowers as well. If Mr. Engal successfully avoids paying off his mortgage loan, his victory will actually make it more difficult for consumers facing difficulty paying off their loans to enter into modification agreements.

On that happy note, enjoy your weekend. Yours truly is headed down to God’s Country- Long Island- to celebrate my Mom’s 85 years, a good chunk of which has been spent putting up with me. Peace out!

February 7, 2020 at 9:11 am 1 comment

Are you ready to comply with federal securities law?

There is much more in NCUA’s proposal to update the use of secondary capital by credit unions than meets the eye. If the regulation is finally promulgated as is, it will aid complex credit unions which will be able to use subordinated debt to satisfy their very unique risk-based capital requirements. The problem is that the regulation will make it much more difficult and cumbersome for low income credit unions to utilize this option to comply with their own net worth requirements, and to use secondary capital as part of their strategic development plans. In the blog, I continue to refer to secondary capital, but if this regulation is finalized, it will be referred to as subordinated debt.

Why are these new changes going to have such an impact? Because NCUA unequivocally has determined that what we currently refer to as secondary capital is, for legal purposes, a security instrument under state and federal law. As a result, in the preamble the Board “emphasizes that any issuance of a Subordinated Debt Note by an Issuing Credit Union must be done in accordance with applicable federal and state securities laws. Given the complexity of the securities law framework, any credit union contemplating an offer and sale of Subordinated Debt Notes needs to engage qualified legal counsel to ensure its compliance with securities laws before, during, and after any such offer and sale.”

If this sounds complicated, it is. There are about 15 blogs I could do on the topic, but as a preview of what this means, going forward, when you issue subordinated debt, NCUA expects your credit union to “prepare and deliver an Offering Document to potential investors even though there are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Section 3(a)(5) exemption, and there generally are no SEC-mandated disclosure requirements for offerings of securities pursuant to the Rule 506 private placement exemption as long as all purchasers in the offering are ‘accredited investors.’” Needless to say, you’re going to have to retain the services of a lawyer who specializes in securities law, and probably an accountant who does as well. In addition, this goes well beyond the scope of knowledge of even our most savvy compliance people.

The good news is that none of this applies to credit unions that currently hold secondary capital. The bad news is that it does apply to any credit union that seeks out secondary capital in the future. For larger credit unions which have to comply with the risk based capital requirements, which take effect in 2022, the expense may be worth it, but my concern is that for the vast majority of low income credit unions which have traditionally used secondary capital to satisfy net worth requirements, the cost will be too great. Cynics will say that this outcome will be just fine with NCUA, which has grown increasingly skittish about the way some credit unions are using secondary capital. At the very least, this represents a big change for credit unions, and the industry should start thinking about creative ways it can cost-effectively address some of the issues raised by NCUA in a way that allows low income credit unions cost-effective access to this resource. After all, for almost 25 years, NCUA has apparently allowed credit unions to access secondary capital in violation of federal securities law.

 

February 6, 2020 at 9:11 am Leave a comment

Hood Clarifies NCUA Position on Bank “Mergers”

In a recent column in the American Banker, (subscription required) NCUA chairman Rodney Hood clarified some important issues related to the small but increasing number of bank/credit union combinations. Typically I try not to pay too much attention to banker hyperbole since there really are more important things for credit unions to worry about than the fact that banker associations don’t like them. But given the extent to which misinformation is increasingly confusing issues surrounding credit union acquisition of bank assets, I was glad to see the Chairman address some important misconceptions.

First and foremost, credit unions can’t merge banks into them. Instead they can enter into purchase and assumption agreements in which they agree to purchase some or all of a bank’s assets. As the Chairman explains “when speaking of credit unions “acquiring” banks, these credit unions are actually purchasing bank assets and certain liabilities in market based transactions. These purchasers could include loans and deposits” but cannot include stock.

This is more than a legalistic distinction. It means for example, that when assessing whether or not to go forward with an acquisition, credit unions have to take into account the compatibility of the financial institution’s customer base with its existing field of membership. In fact, describing these transactions as mergers is like describing an estate sale as a real estate transaction. When a bank, or any other corporation for that matter, completes a merger, it is generally stepping in the shoes of the previous company and taking on all its obligations. In contrast, when conducting a purchase and assumption (P&A), the purchaser is only taking legal responsibility for the assets it purchases.

Then there is the policy issue. Specifically, is there something inappropriate about credit unions purchasing bank assets? Unlike an increasing number of my fellow Americans, I actually believe that the free market works pretty well. Why shouldn’t community banks have the choice of maximizing their assets by entertaining acquisitions by credit unions as well as banks? If I were running a community bank I would welcome any potential purchaser who is going to treat my customers well and give me the best value for my business.

One more thing, the banking associations would be doing a lot more for their average community bank member if they went to congress and advocated for changes in the law which gave them the ability to compete once again against larger banks. Of course this won’t happen. Besides, it is so much easier to obsess about a relative handful of credit union P&As than it is to acknowledge that larger banks are gobbling up smaller banks out of existence.

NCUA to meet with Task Force

The Credit Union Times is reporting this morning that NCUA has agreed to meet with the New York City Taxi Medallion Task Force which released its recommendations for the industry this past Friday. This can only be good news as any resolution of this issue is going to involve NCUA.

 

 

 

 

 

 

 

 

February 5, 2020 at 9:34 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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