Washington Tees Off On Facebook; Senate to Hear from CU’s on Pot Banking and Main Street is where the $ is

Today is the last day of the blog until I return from a week’s vacation on July 29th. Here is some info I wanted to make sure you knew before I head to Cape Cod this weekend.

Facebook cemented its status as the latest company everybody loves to hate. The US Senate Banking Committee held a hearing yesterday Scrutinizing Facebook’s plans to introduce a block chain cryptocurrency for Consumers sometime next year. As expected. reactions to the plan ranged  from polite skeptical to hysterical.

In the polite skepticism category is this quote in the American Banker from committee chairman Mike Crapo “Despite the uncertainties, Facebook’s stated goals for the payments systems are commendable,” Crapo said. “If done right, Facebook’s efforts to leverage existing and evolving technology and make innovative improvements to traditional and nontraditional payments systems could deliver material benefits, such as expanding access to the financial system for the underbanked, and providing cheaper and faster payments.”

In the hysterical category is this quote from the committee’s ranking senator, Democrat Sherwood Brown: “Facebook is asking people to trust them with their hard-earned paychecks,” said Brown. “It takes a breathtaking amount of arrogance to look at that track record and think, you know what we really ought to do next? Let’s run our own bank and our own for-profit version of the Federal Reserve for the world.”

With all due respect to the senator, a company started in 2004 as a dorm room platform to categorize coeds that grew into the world’s dominant communication platform is entitled to a little breathtaking arrogance. Besides, this country has been breathtakingly slow and arrogant to adopt payment system Innovations. It’s time to give the private sector a turn. The sky is not going to fall. It isn’t time to start the campfire with dollar bills

Upcoming hearing on Cannabis Banking

Speaking of the Senate Banking Committee, it will be holding a cannabis banking hearing on July 23rd and the concerns of credit unions will be front-and-center.

Rachel Pross, the chief risk officer of Maps Credit Union in Oregon,  is scheduled to be the lead speaker on the committee’s second panel following comments by senators Gardner and Merkley, both of whom represent States that have legalized cannabis.

The Credit Union has been on the cutting edge of providing banking services to marijuana businesses. In testimony before a House committee earlier this year Pross explained that the credit union has been providing these services since 2014 when Oregon voted in a referendum to legalize cannabis.

The conventional wisdom is that the House has the votes to pass legislation permitting  states which have legalized marijuana, to continue to do so without violating federal law but it will take a much bigger lift to get this done  in the Senate.

 Consumer Banking Heats up as Investment Banking Cools

The all-important earnings season, when publically traded company’s announce and put their best spin on their quarterly earnings is here. If current trends continue expect the big guys to continue to move aggressively to expand their consumer banking presence.

There is no better bellwether for the state of U.S. banking than JPMorgan Chase so here is a link to information about it second quarter earnings report. Page 3 of the press release demonstrates that  the behemoths are growing by capitalizing on consumer banking. The WSJ points out this morning that while the American consumer is generally in a good mood businesses which generate money for investment are much less sanguine about the economic outlook. Expect to face even more competition.

 

 

July 17, 2019 at 10:06 am Leave a comment

Are You Truncating Your Employee’s Social Security Numbers?

It’s not often I put “IRS” and “commonsense” in the same sentence but on July 3rd the Internal Revenue Service finalized commonsense regulations giving employers permission  to truncate Social Security numbers on W-2 forms.

Employers are required to provide to the Social Security Administration a copy of each W-2 they provide to their employees. This is the form that tells you how much money you earned.   Before these  July changes,  IRS regulations explicitly prohibited employers  from providing this information using a Truncated Taxpayer Identification Number. Who knew? Now employers can truncate but they don’t have to.

Even this arcane and esoteric measure is not without its critics. According to the IRS, tax preparers are concerned that it will increase the instances of information being recorded with the wrong SSN and other groups argue that the change should be mandatory. I will not even pretend to have an opinion on that one but I do believe that this is something that is worth looking into To me, anything that minimizes the use of a complete social security number is worth looking into.

Former CEO indicted

Late last week former Melrose CEO Alan Kaufman was indicted on federal charges of bribery in relation to favorable loans and marketing deals he allegedly entered into with a member who gave him among other things lavish vacations, and free housing. Some news speaks for itself.

July 16, 2019 at 9:33 am Leave a comment

US Woman score Again:Governor Signs Major Changes to NY’s Wage Discrimination Laws

The clock is now ticking for employers to prepare for two major changes to employment law in New York state which, not coincidently, were signed into law, the day that NYC held a parade for the US Woman’s Soccer team.   Make sure your HR person knows about these changes; they are big deals which will require additional training for anyone handling interviews or promotions.

NY law bans paying someone less for work which requires equal skill, effort and responsibility, and which is performed under similar working conditions because of their sex. Governor Cuomo signed S.5248 B. which extends this ban to paying an individual less because they belong to a protected class.  New York has a broad range of protected classes ranging from disability to sexual orientation.

The bill also expands the scope of what constitutes an  illegal pay disparity. Under existing law it is illegal to pay someone less for a job which requires equal skill,   effort and responsibility, and which is performed under similar working conditions. This prohibition has been amended to prohibit paying someone   less for “substantially similar work” “when viewed as a composite of skill, effort, and responsibility, and performed under similar and  working conditions”

You might want to call in the salary consultants on this one. This bill takes effect   in 90 days

The second law, Senate 6549, deals with an issue that I have already discussed with you folks. It prohibits employers from inquiring about a job applicant’s salary or wage  history when considering whether or not to offer someone a job or promotion.   This prohibition will not prevent a job applicant from voluntarily disclosing their salary for purposes of negotiation provided they are not prompted to do so. Employers will be able to confirm this voluntarily disclosed information.

 

This bill was signed on July 10th, not coincidentally the same day as the Victory Parade for the US Women’s Soccer Team in NYC and takes effect early Next year.

 

July 15, 2019 at 9:49 am Leave a comment

Five Things You Need To Know As You Start Your Credit Union Day

Usually gleaming anything useful from the congressional testimony of Fed Chairman is about as easy as interpreting hieroglyphics without the use of the Rosetta Stone but yesterday was a glaring exception. Most importantly for credit unions all the major news outlets that I read this morning agreed that Jerome Powell was all but announcing that the Fed will be cutting short-term interest rates soon.

In his testimony he deemphasized the latest encouraging jobs report and made it abundantly clear that the uncertain times we live in are impacting the economy. Specifically, he noted that “crosscurrents have reemerged. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data. In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

Translation: inflation is in check and while the economy is growing it could use the boost offered by a rate cut which will be particularly beneficial to workers on the lower end of the economic pay scale.

Powell to Trump: Hell no I won’t go

Another incredibly blunt moment of the Chairman’s testimony came in response to a question from House Financial Services Chairman, Maxine Watters who asked him how he would respond if the President was to ask him to resign. Powell has of course been a prime target of the President’s tweet tantrums lately. “My answer would be no,” Powell responded, making it quite clear that any effort to remove him would result in a messy, messy legal dispute.

Powell to Facebook: Not so fast

Powell was also in a targeted mood when it came to throwing cold water on the plans of Facebook and other companies to introduce a crypto currency (See Monday’s blog). According to the American Banker, Powell responded to lawmaker questions on the issue by bluntly opining that the project can’t go forward until regulators are satisfied that the companies have a better feel for the full range of issues ranging from potential money laundering to the creation of a systemically important currency which conceivably could have the potential of dealing a body blow to the entire world’s economy.

Reg CC Update

The NCUA recently provided this notice reminding credit unions, among other things, that the monetary thresholds promulgated under Reg CC have been updated. You might want to make sure that your cooperating system got the message.

A Good Read

Finally, although it’s not directly related to credit union land, here is a great article by Greg Ip of the WSJ delving into one of my favorite issues: is there a skills gap in the American economy?

July 11, 2019 at 9:27 am Leave a comment

Fed Raises Red Flag On Synthetic Identity Fraud

The savvy and hardcore compliance readers of my blog are going to spot how clever this morning’s headline is.

Yesterday, the Fed published a white paper on Synthetic Identity Fraud which it proclaimed the fastest growing cyber fraud in America. Here comes the clever part of the headline. By highlighting the issue, the Fed wasn’t waving a red flag of surrender but simply putting financial institutions on notice that they should be analyzing their exposure to this problem and seeing what steps they can take to guard against it.

After all, under 12 CFR 748, your credit union, be it state or federal, is responsible for having a program in place that identifies the “red flags of identity theft.” This regulatory requirement mandates that your credit union “monitor, evaluate and adjust as appropriate” your information security program “in light of any changes in technology.” Yesterday’s report puts you on notice and is precisely the type of information you should be demonstrating at least someone in your credit union is aware of.

That being said, the white paper has given me the same feeling I get every time I see somebody showing up at a party two hours late who acts as if it is only officially starting now that he has arrived. Maybe it is because I overslept this morning or maybe it’s because I’m only halfway through my first cup of coffee but there is little in this report that should surprise those of you tracking these issues.

So, what exactly is the report referring to? “Synthetic identity fraud is a crime in which perpetrators combine fictitious and sometimes real information, such as SSNs and names, to create new identities to defraud financial institutions, government agencies or individuals. However, industry experts tend to disagree on the classification of synthetic identity fraud and related mitigation approaches. Through ongoing analysis and by facilitating industry feedback, the Federal Reserve plans to work with the industry to determine how the classification of synthetic identity fraud best aligns with other fraud categories in the U.S. payments ecosystem.”

In other words, whereas fraudsters have long pretended to be other people, the growing use of online banking and internet commerce has made it easy for people to build seemingly legitimate credit identities for totally fake individuals. Over time they build up good credit and then take the financial institution for all its worth by maxing out on credit advances that they have no intention of repaying. The paper points out that in most of these cases financial institutions are left holding the bag. The cost of these heists are growing.

What can be done about this? This is where the report comes up a little short. Since even a synthetic identity needs a social security number the most immediate step we could take is urge the government to expand the use of technology that allows financial institutions to confirm the identity of persons using a social security number. A pilot-program is already in the works and they are looking for institutions interested in taking part.

What the growing use of synthetic identity also underscores is how federal courts have too narrowly interpreted standing when it comes to bringing data breach lawsuits. If courts continue to insist on plaintiffs showing harm beyond the fact that personally identifiable information may have been stolen by fraudsters then many consumers will have no effective means for holding merchants and others responsible for preventable data breaches. This is yet another example of why Congress has to step in and create national data security standards once and for all.

July 10, 2019 at 9:33 am Leave a comment

Report Highlights Role of Brokers, NCUA, in Medallion Crisis

A much anticipated report of the medallion lending industry by New York City Mayor Bill de Blasio released yesterday heaped criticism on the role medallion brokers played in providing inadequate assistance to drivers who purchase NYC medallions but also implicitly criticized NCUA for being too inflexible in allowing credit unions to modify medallion loans. The report comes in response to an extensive investigation of the taxi medallion industry after a series of articles by the New York Times criticized lending practices in the years prior to Uber and Lyft.

According to the report nearly 2/3rds of surveyed drivers reported that their loan is held by a credit union or is insured by a credit union subsequently taken over by the NCUA. Nevertheless, according to the survey respondents “credit unions taken over by the NCUA are often the least willing to work with drivers struggling to afford monthly loan payments.”

The report also contains a lot of troubling statistics for anyone hoping to see medallion prices stabilize at least without further movement towards modifications. For example, the survey drivers reported a median medallion purchase price of $340,000 with approximately $500,000 still owed on the loan. In addition, a sizable portion of medallion holders indicate that they are considering filing for bankruptcy.

But the major focus of its ire  was on the role that brokers play in helping drivers obtain medallions. According to the report, while there is no requirement that a broker could be used to arrange a medallion purchase, the vast majority of owners do in fact use a middle man. If the report is accurate, many drivers should be asking for their money back from these brokers. They often failed to explain the complicated terms of these transactions, didn’t bother putting their broker arrangements in writing and often fail to disclose when they had conflict of interest such as having a monetary interest in a medallion for which they are seeking a servicer.

Oddly missing from the report is any mention of Uber or Lyft. While it is perfectly legitimate to investigate the past practices of the medallion industry, it is strangely myopic to investigate the short comings of the medallion industry without even referring to the two companies which undermine what had been one of the most stable industries for the past seven decades. It’s kind of like investigating the Great Recession without mentioning mortgage-backed securities.

 

July 9, 2019 at 8:59 am Leave a comment

Why Facebook’s Currency Is a Good Idea

The most interesting and potentially consequential thing that happened over the holiday week was that the House Financial Services Committee sent a letter to Facebook’s CEO formally requesting that he put the brakes on their plans to introduce libra, a cyber currency which Facebook plans to administer along with 24 other companies including PayPal and MasterCard.

According to the Luddites, I mean Congressmen, the proposed new currency and digital wallet which Facebook plans to start offering the middle of next year. Facebook’s proposal involves massive “risks” on an unprecedented scale. In addition, the crypto currency could provide an “under regulated platform for elicited activity and money laundering.” Hearings will follow shortly.

It’s time for everyone to take a deep breath and come back down to Earth. The plans of Facebook and its partners are the logical inevitable evolution of currency. In addition, in the short to medium term this has very little to do with creating a revolutionary new currency and almost everything to do with capturing a larger portion of payment transactions. This is a big deal but hardly revolutionary.

First, the only reason we use paper currency today is because crypto currency wasn’t around thousands of years ago when we started seeing a large scale need for the secure exchange of credit that businesses and consumers could rely on. Currency is nothing more or less than a contract, albeit one backed by the full faith and credit of governments, that the paper you have in your pocket will be accepted and honored by the total stranger down the street.

In many ways it has become grossly inefficient. In his book “The Curse of Cash” Professor Kenneth S. Rogoff points out that contrary to popular belief “demand for most advanced country currency paper notes has been rising steadily for more than two decades” precisely during the time period you would expect debit cards to be making money obsolete. According to Kenneth S. Rogoff, by the end of 2015 1.34 Trillion worth of US currency was being held outside US banks. Furthermore, the bulk of this cash is in denominations of $100 or more. This is not an abstract problem. India’s Prime Minister was so concerned by the use of high denomination currencies to facilitate illegal activity that he literally took large denominations out of circulation.

And let’s all stay calm. Facebook’s “currency” is only going to be valued to the extent that it can be converted into common currency. What is so telling to me about Facebook’s announcement isn’t that Facebook wants to create a crypto currency but that its founding members include MasterCard, PayPal and Visa, companies that specialize in facilitating transactions. What really is going on here is not some idealistic quest to create a world without cash but rather an aggressive and smart business move to take a larger chunk of the money to be made off facilitating business transactions. This isn’t something to be feared, it is the free market at its best. If they succeed we will have a better, safer system and if they don’t, all the armchair reactionaries can say I told you so.

Does this represent a threat to your credit union? Yes it does. But the threat is no different than any other multitude of other challenges confronted by the industry as technology once again revolutionizes the way banking is done.

Which brings me back to the Luddites. I would have a lot more sympathy for regulators and our elected representatives if they didn’t insist on moving so slowly in updating our payment system. What Facebook is doing is commonsensical to anyone with a smartphone. I can now go weeks without going to an ATM secure in the knowledge that so long as my smartphone is charged up I can just about pay for anything I need. In fact, Sweden   has already gone a long way towards  phasing out cash. If anything, Facebook’s innovation is, if anything, long overdue.

July 8, 2019 at 9:04 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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