Are CUSOs Friend or Foe?

Part of the deluge of regulations proposed by NCUA in recent weeks is, depending on your perspective, either a wolf in sheep’s clothing or a lamb in sheep’s clothing. Either way, it gets to a policy issue that all credit unions should have an opinion on.

What I am talking about is NCUA’s proposed rule that would permit CUSOs to originate any type of loan that a federal credit union may originate. It would also give NCUA the ability to expand the list of permissible CUSO activities without going through the notice and rulemaking procedure. On a practical level, the regulation would permit CUSOs to make car loans, purchase retail installment contracts and, in NCUA’s own words, “engage in payday lending.” A similar request was made in 2008 but rejected by the board.

So why does yours truly consider this such an important issue for the industry to debate? Because when I started learning the issues, I always thought of CUSOs as compliments to and not competitors against credit unions. As compliments to credit unions, they are a wonderful mechanism to pool resources and cost-effectively provide a broader range of services to their members that would not otherwise be available. Since my original indoctrination, I have grown increasingly perplexed and a little bit frustrated (albeit not anywhere near as frustrated as I am by my New York Giants) by the resistance of credit unions to engage in this type of activity. 

There’s a second, more practical reason for CUSOs which supporters of this proposal recognize: non-depository institutions are growing in significance and are only going to get larger. For example, if I predicted 15 years ago that non-depository institutions would originate the majority of mortgages in this country, you would have said I was nuts. Today, technology has fundamentally changed the way things are done. CUSOs provide the most practical mechanism for credit unions to at least try to compete in this new world. Not only can a CUSO invest in the resources necessary for smartphone lending, but they aren’t constrained by field of membership restrictions. 

I don’t know what side of the debate I come down on, but this is not an issue that the industry should decide without robust consideration of both the pros and the cons. 

Sorry, Bills fans!

I’m sorry the joyride came to an end, Bills mafia. On the bright side, you can look forward to years of high-level football with a great coach and one of the best young quarterbacks in football. Unfortunately for you folks, so can Kansas City Chiefs fans. 

January 25, 2021 at 9:39 am Leave a comment

New York to LIBOR’s Rescue!

The rulers of the financial world typically frown on the state getting involved with their business. But when it comes to LIBOR, you can hear a huge sigh of relief emanating from Wall Street this morning. As readers of this blog know, LIBOR is a discredited benchmark that has been the gold standard for contracts that use indexes. In the credit union world, LIBOR has been used by some for adjustable rate loans, and in the world of high finance, it has been used for complicated derivatives. 

Despite the fact that readers of this blog have known for years that LIBOR would come to an end, perhaps as early as this year, apparently some of the folks on Wall Street haven’t gotten around to adjusting to this new reality. But they’re in luck, because tucked away in the Governor’s Article VII budget language is a provision which will amend New York State law to ensure the continued validity of contracts that rely on LIBOR adjustments even after it is obsolete. Since so many financial contracts are executed in New York, this news benefits the financial industry at large. 

Has the CU Industry Been Impacted by the Russian Cyber Attacks?

Since at least last March, the Russian government has engaged in the most comprehensive series of cyber attacks in the internet era. The attacks, which may still be ongoing – the scope of which is still being determined – raised the very real prospect that a foreign government hostile to the United States has infiltrated the inner workings not only of corporations, but of financial institutions as well. Unfortunately, despite a letter from CUNA on the potential scale of the problem, the NCUA has done little to inform credit unions about the extent to which NCUA itself may have been victimized and the steps credit unions should take to protect member data.

As Michael Ogden succinctly put it in this CU Times piece

“We do not know if the NCUA has been impacted. We do not know if the NCUA is conducting its own investigation or audit of its network systems. We do know the Treasury Department, the Commerce Department, the State Department, the Pentagon and the Energy Department have all been compromised. We do know from reports that other federal regulatory agencies have also been compromised.”

This is one of those situations where what you don’t know can hurt you. It’s time for some clarification from our regulator.

January 21, 2021 at 9:34 am Leave a comment

Three Cheers for the 20th Amendment!

I’m exercising blogger privilege today, and in honor of the quadrennial transfer of power, I’m dedicating this blog to an issue that has absolutely nothing to do with credit unions. Regardless of where you fall on the political spectrum, what cable news channel you watch, or what radio station you tuned into this morning, I hope we can all agree that the interregnum, the period between election and today, has been one of the wackiest since 1876. Imagine if all this mayhem didn’t end until March 4th, and a lame duck Congress filled with members who had lost re-election were still in charge. This is where the 20th Amendment comes in.

1932 was a particularly momentous year. The Depression was raging on, President Hoover was historically unpopular but doubling down on his economic policies, and internationally, previously democratic countries were beginning to backslide. Fortunately, Congress agreed that it made no sense for the country to continue to suffer during the huge delay between election day and the new administration. By early 1933, 28 states had already ratified the amendment, although it did not take effect until Roosevelt’s second term. As a result of its passage, this year’s Congress was sworn in on January 3rd, and by March 4th, we will be well on our way to seeing how successful the new administration is going to be in charting a new course for the country.

January 20, 2021 at 9:36 am Leave a comment

Three Things to Ponder As You Start Your Credit Union Week

Good morning, folks. Here are some things to keep in mind as you start what promises to be an extremely eventful truncated week. 

Meet the New Boss

With the Supreme Court ruling that the director of the CFPB serves at the pleasure of the President of the United States, President-elect Biden has announced his pick to head the Bureau. Even with the Supreme Court ruling, no one in government has as much power to shape the regulations of the consumer financial sector than will Rohit Chopra.

Judging by the press reports I read over the weekend, there are few regulators who will have as much running room at the start of the Biden presidency as the CFPB. The conventional wisdom is that the CFPB was made “toothless” (New York Times) under the parting director Kathy Kraninger. While this is not true, perception is reality, and the list of top priorities is already emerging. Get ready to work on proposals dealing with overdrafts, student loan disclosures, mortgage forbearances and payday loans. All this will be in addition to a much more aggressive use of regulation through enforcement action. 

NCUA and CFPB Enter Into A MOU

David Baumann of the Credit Union Times reported Friday that the CFPB and the NCUA had agreed upon a Memorandum of Understanding. According to the NCUA, the purpose of this agreement is “to improve coordination between the agencies related to the consumer protection supervision of credit unions over $10 billion dollars in assets.” But we won’t know for sure, at least for a while, as the NCUA is making the CUTimes file a FOIA request to learn the contents of the memo.

Under the Dodd-Frank Act, the Bureau has direct supervision over institutions with $10 billion or more in assets. An institution is subject to this supervision once it reports four consecutive quarters of $10 billion or more in assets. If I was at or near this threshold, I sure as heck would want to know what was in the MOU. After all, institutions have a right to know what’s expected of them; what regulators are overseeing them, and precisely with whom their supervisory information is being shared.

It’s Budget Day at the Capitol!

For New York Legislative geeks, today is like Christmas morning. You finally get to know what surprises are under the Budget tree, and there’s sure to be a few lumps of coal. Many of the big picture items are already being debated, such as online gambling and marijuana banking. And of course, the great wild card in all of this is the extent to which Congress will be able to ease New York’s fiscal woes. Goody gumdrops. 

Merry Christmas, Happy New Year, and enjoy your day.

January 19, 2021 at 9:43 am 1 comment

NCUA Proposes Net Worth Mandate Relief

In a deceptively busy day in the world of regulatory and legal oversight, the NCUA moved to provide credit unions with $50 million or more in assets with an intriguing form of mandate relief; entered into an agreement with the CFPB about the supervision of the growing number of credit unions eclipsing the $10 billion asset threshold; after much delay, is proposing to add a new category to the CAMELS rating system; and is proposing to grant additional authority to CUSOs. Of all these developments, the one which intrigues me the most has to do with the incredibly arcane but vitally important world of risk-based net worth and capital requirements, so grab an extra cup of coffee and join me as I dive into the weeds.

The key to understanding yesterday’s regulatory proposal is to keep the distinction between Risk-Based Capital (RBC) and risk-based net worth requirements straight. All credit unions are subject to the Prompt Corrective Action (PCA) framework. Federal law also requires, however, that NCUA have a more complex capital framework for “complex” credit unions. For more than two decades, federal law has given NCUA the authority to define what makes a credit union complex, and currently, credit unions with $50 million or more in assets still qualify for the complex distinction. This means that they have to comply with both baseline PCA requirements as well as the risk-based net worth requirements. In 2015, NCUA opened a whole new can of worms when it updated the risk-based net worth requirement to include a Risk-Based Capital requirement. Originally, NCUA simply increased the threshold to $100 million for the complex credit union distinction where it previously required “assets that exceed $50 million and its risk-based net worth requirement exceeds six percent.” As things stand today, if your credit union has $500 million or more in assets, it will be subject to the RBC requirements starting in January 2022. 

What does this mean for credit unions with more than $100 million in assets but less than $500 million, which are still subject to the erstwhile risk-based net worth requirements? This brings us to yesterday’s NCUA Board Meeting. Among the proposals put forward by Rodney Hood in the waning days of his Chairmanship is a proposal to raise the asset threshold for compliance with the risk-based net worth threshold from $100 to $500 million. The rationale for this increase is to maximize the amount of capital credit unions have on hand to lend out as the economy continues to reel from the impact of the pandemic. With or without a pandemic, it’s past time we recognize that a $100 million credit union shouldn’t be subject to the same requirements as a $500 million credit union. 

On that note, enjoy your weekend with a special shout out to you Buffalo Bills fans as you tune in Saturday night to watch the best football game of the week. 

January 15, 2021 at 10:01 am 1 comment

Why Your Credit Union Should Be Looking at a CDFI Designation

If I have one request of my faithful blog readers today, it is that you schedule time in the near future to consider whether or not your credit union should seek certification as a community development financial institution (CDFI). Here’s why.

First, NCUA announced that it would be opening a streamlined CDFI application round starting on January 24th. Don’t assume that your credit union is too big to qualify for the certification.

Secondly, yours truly has found no downside to getting your CDFI certification. Not only are you eligible for grants, but as we have seen with the rollout of the newest round of the PPP, CDFIs are increasingly getting regulatory and legislative priority over more traditional lenders.

Third, let’s look at the big picture. NCUA has also recently issued a letter urging multiple SEG credit unions to more aggressively pursue expanding into underserved communities. On the state level, the Legislature passed historic legislation allowing credit unions to receive public deposits from the Comptroller’s office in return for opening a branch in an underserved area. I know last year was a lousy year, and let’s be honest, 2021 isn’t exactly getting off to a better start – but what all these initiatives have in common is a desire on the part of regulators and lawmakers to see financial institutions in general, and credit unions in particular, take more aggressive steps to integrate underserved persons into the financial mainstream.

Which brings me to the last reason I want you all to at least examine whether or not you qualify for CDFI designation. In the coming years, the industry is going to be under a microscope like never before. Every credit union that makes legitimate efforts to participate in these programs is not only helping itself and its members, but the industry and our mission as a whole.

January 14, 2021 at 9:30 am Leave a comment

RDC Litigation Trending Against Financial Institutions

Here is a blast from the past. Yesterday, Wells Fargo lost another round in their uphill legal battle with USAA over the validity of various patents related to remote deposit capture (RDC) technology. The outcome of the litigation is crucial to many credit unions in New York State and around the country which face the prospect of entering into licensing agreements with USAA. 

This issue has actually been floating around since June 2018, when USAA sued Wells Fargo alleging that it was violating various patents relating to remote deposit capture technology. Many credit unions have received letters from USAA requesting that they enter into licensing agreements in order to continue using the RDC technology. The Wells Fargo litigation is the key test of the strength of USAA’s patent claims. This latest decision from the patent board follows an earlier decision by a district court in Texas that allowed USAA to continue its patent infringement claims against Wells Fargo. 

Of course, many credit unions have utilized this technology by working with vendors including MiTek – in another important case that’s still pending, MiTek filed a lawsuit in California district court seeking a judgment that it was not violating USAA’s patents. Many credit unions included indemnification clauses in their vendor agreements, however, it’s possible given the scope of these claims that vendors will not be able to satisfy their obligations. The bottom line is that you may want to check in with your outside counsel, and you should be preparing for the financial impact of having to pay licensing fees in the future. 

January 13, 2021 at 9:35 am Leave a comment

PPP Open For Business – For Some

You may have seen this press release from the Small Business Administration, announcing that the Paycheck Protection Program was once again open for business, but there’s a good chance that your credit union was unable to process loans. 

The SBA announced that it was providing an exclusive window to community financial institutions. This means that unless your credit union is a CDFI or MDI, an NCUA designation which includes this list of credit unions, it is not eligible to begin processing these loans (for those of you scrolling, you can find the SBAs definition at 15 U.S.C. 636 (a)). The steps taken by the SBA are in part an understandable response to the first PPP rollout. Remember all of those articles about how the big banks and their favorite clients dominated the process? The hope is that smaller institutions, which tend to give more loans to small businesses, will be more willing and able to participate if they’re guaranteed access. Still, it does mean that many credit unions are largely excluded from this first stage of the rollout.

Credit unions with less than $10 billion in assets will have exclusive rights to lending out from a pot of no less than $15 billion that’s been set aside. However, community banks with the same asset size limits are also included in this pot, as well as institutions chartered under the Farm Credit System. The good news to take away from this is that your credit union will not have to wait in line behind big banks with infrastructure set up specifically for this type of process. (Section 1102(b) of the CARES Act (Public Law 116–136)). 

First Virtual State of the State

The Governor gave the first part of – hopefully – his only virtual State of the State address yesterday. We will be looking through his proposals, but right now, it seems like the issue that could have the greatest impact on credit unions is his plan to legalize the sale and distribution of marijuana on the state level.

January 12, 2021 at 9:58 am Leave a comment

SBA sets the stage for credit unions to take lead on PPP

The SBA has issued guidance and regulations in the last three days laying the groundwork for a continuation and expansion of the Paycheck Protection Program. What’s most striking to yours truly is just how much the SBA is establishing a regulatory framework to encourage community-based lenders to take the lead in making these loans, particularly when it comes to minority and women-owned businesses. 

Most importantly, the SBA issued this guidance which describes specific set-asides for “new and smaller borrowers, for borrowers in low- and moderate-income communities, and for community and smaller lenders.” These include:

  •  $15 billion across first and second draw PPP loans for lending by community financial institutions; 
  •  $15 billion across first and second draw PPP loans for lending by Insured Depository Institutions, Credit Unions, and Farm Credit System Institutions with consolidated assets of less than $10 billion; 
  • $35 billion for new first draw PPP borrowers; and 
  • $15 billion and $25 billion for first draw and second draw PPP loans, respectively, for borrowers with a maximum of 10 employees or for loans less than $250,000 to borrowers in low-or moderate-income neighborhoods. SBA has determined that at least 25 percent of each of those set-asides will go to each one of the groups: loans to borrowers with a maximum of 10 employees and loans less than $250,000 to borrowers in low-or moderate-income neighborhoods.

In addition to this guidance, there were two important interim regulations issued. By being designated “interim,” these regulations take effect immediately upon being published in the Federal Register. One of these regulations consolidates the existing PPP regulations, and makes amendments mandated by the recently-passed federal legislation. Keep in mind that the legislation expanded the uses that PPP loans could be put to while still qualifying for loan forgiveness. 

Some large credit unions and banks have faced litigation related to the payment of agent fees. Specifically, several unsuccessful class-action lawsuits have been brought against financial institutions for refusing to pay fees to agents who assisted borrowers in submitting PPP loan applications. The updated regulations make it crystal clear that financial institutions are not on the hook to agents unless they entered into a contract with them to cover their fees. 

A third new regulation issued by the SBA deals with the eligibility of businesses to take out a second round of loans. Consistent with the legislation, institutions seeking to take a second draw will have to meet several criteria, including demonstrating a 25% reduction in gross income over the last year. 

Tier I Super Bowl Prediction

It’s that time of year again when yours truly tells you who will win the Super Bowl – a prediction so accurate that it is certified for use as Tier I capital by all the federal financial regulators and New York’s Department of Financial Services. The Baltimore Ravens will win the Super Bowl, defeating none other than the Ageless Wonder, Thomas Edward Patrick Brady, Jr., who asked Bill Belichick during a pre-game interview if he was enjoying his time off.

On that note, enjoy your weekend.

January 8, 2021 at 9:31 am Leave a comment

Georgia On My Mind

Hello, folks. Your blurry-eyed blogger has gotten off to a slow start this morning after watching John King and his magic wall detail what appears to be Senate victories that will put Chuck Schumer in charge of a 50/50 split Senate. Before I get to my regularly scheduled information, I can’t help but offer a few thoughts on what is occurring. 

Most importantly, with the exception of Georgia, no state stands to benefit more from the election results than New York. First, it raises the very real possibility that the Congress could agree on another round of stimulus funding, which trades liability protection for businesses for increased aid to state and local governments. With New York State facing a deficit of approximately $15 billion, this could translate into lower property taxes. We might also see a push to reinstitute the deductibility of state and local taxes in excess of $10,000, which was repealed as part of Congress’ federal tax cuts. 

Secondly, having a New Yorker in charge of the Senate is a big deal. In fact, keeping in mind that the President has changed his residency to Florida, Senate Majority Leader Schumer will become the highest-ranking New York Democrat since FDR. Not only that – the Senator is uniquely qualified to represent New York having worked in the Assembly and the House of Representatives before moving over to the Senate. He is New York politics through and through, and he has consistently told any credit unions that will listen that they’ll lose their tax-exempt status over his dead body. But even as we ponder what may happen, there are still a lot of new developments that your credit union will be responsible for implementing operationally. On that front, here is some good news. As I explained in this blog, the National Defense Authorization Act included legislation championed by New York Congresswoman Carolyn Maloney, which will make businesses responsible for identifying beneficial owners as part of the account-opening process. Under existing regulations, your credit union is responsible for finding out this information as part of the process. Under Section 6403, regulations will now be promulgated imposing reporting requirements on individuals identified as “beneficial owners,” a designation earned by any individual that “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The Treasury has two years from the date of passage to implement necessary regulations.

January 6, 2021 at 11:32 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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