The 100 day milestone of the experiment called the Trump Presidency combined with a Saturday deadline for the country to either expand its borrowing authority or default on the credit card payment called the national debt is conspiring to make this one of the most intriguing political weeks since the election.
Back from its two week Spring break, the House of Representatives will begin to focus in earnest on the roll-out of CHOICE Act 2.0, the radical blueprint for regulatory reform. A Hearing is scheduled for Wednesday, April 26th at 10:00 am. While I am somewhat skeptical that the Senate will have the ability to grapple seriously with the issues raised by this Legislation any time soon, it will provide a wonderful opportunity for credit unions to continue to make the case that Dodd-Frank has done more harm than good when it comes to credit unions and true community banks.
Part 2 of the State Legislative Session kicks off as Assemblymembers and Senators reconvene after their break. Not coincidentally, this coincides with our Annual State Governmental Affairs Conference. The Executive and Legislature have each signaled an interest in taking a fresh look at some old classics. Whether you like politics or find it more distasteful than a glass of orange juice after brushing your teeth, we participate in the most highly regulated financial industry in the country. Everyone reading this blog has an obligation to engage policy makers at the state and federal level in our efforts to provide relief. Besides, on Tuesday morning, you’ll hear a presentation from E.J. McMahon, the Research Director of the Empire Center for Public Policy. I’ve always been a big fan of his since he’s the only man I know in Albany who has been able to make a living being an unabashed Conservative.
As part of this frenzy to solve all the world’s problems in the first 100 days of his Administration, President Trump surprised friends and foes alike when he announced on Friday that he would outline plans for the mother of all tax reform on Wednesday. No one honestly believes that this will be accompanied by anything resembling Legislation anytime soon, but depending on who you talk to on Capitol Hill, if Congress does get serious about a major tax overhaul, everything is on the table.
There may be a lot of sizzle this week, but with Congress’ spending authority about to run out, there will be some serious brinksmanship. This is a particularly common and dangerous game of chicken in which opposing parties threaten to let the nation default if they don’t get a major priority included in the debt extension agreement. The conventional wisdom, as reflected in the Sunday papers, is that the Wildcard this year is the Administration. Democrats and Republicans have quietly worked toward an extension agreement but Budget Director and former-Congressman Mick Mulvaney threw a fly in the ointment when he suggested that President Trump would not sign off on a deal unless it included funding for a Border wall. This is a poison pill for Democrats. By the way, everyone knows that a default on the national debt would be an absolute disaster, but the more commonplace this game becomes, the more likely we are to see it spin out of control.
Last but not least, keep an eye on the outcome of the French elections. Now that the French have decided on the two finalists who will face off for the Presidency, we have another important referendum on whether or not the world still supports the post-WW II order based on free markets and Democratic values or whether people are so angry that they want to blow it up and start from scratch even if they have no ideas for its replacement. Don’t fool yourself, the same debate rages on in this country.
Yours truly has a busy schedule this week, I will be checking back in with you on Thursday.
Yesterday over 20 state regulators and the CFPB took action against Mega-Servicer Ocwen for its continuing inability to address sloppy servicing practices.
Ocwen fueled its amazing growth (as of December it serviced approximately 1,393,766 loans with an aggregate unpaid principal balance of approximately $209 billion) by specializing in sub-prime loans.
Since the vast majority of credit unions are out to help their members, as opposed to squeezing every last penny out of them, there is a natural tendency to view news reports such as this one as simply one more example of “Lenders Gone Wild”.
That being said, Ocwen’s legal troubles hold lessons that all lenders would be wise to pay attention to. Most importantly, your compliance regime is only as good as your IT department. Let me explain.
Front and center in the CFPB’s complaint is the servicer’s alleged inability to properly use its major platform, REALServicing and its sub-systems, to manage its servicing responsibilities. The CFPB contends that Ocwen’s employees failed to put accurate borrower information into the system, but “Even when the information in REALServicing has been accurate, REALServicing has generated inaccurate information about borrowers’ loans due to system deficiencies. Because of these system deficiencies, Ocwen has had to rely upon manual processes and workarounds that have themselves resulted in errors in borrowers’ loan information. “
Ocwen’s problems are not new, it entered into a consent decree in 2013 including one with the DFS. A particular concern has been Ocwan’s inability to properly reconcile escrow accounts. In fact, according to a Cease and Desist order filed by North Carolina, the company informed regulators in January that it would cost $ 1.5 billion dollars to make borrows whole. Not surprisingly, the CFPB contends that Ocwen is wrongly relying on a “deficient servicing platform” that has exacerbated its use of inaccurate loan information.
Here are some questions for you to ponder this weekend. Does your credit union have the ability to spot mistakes in your core operating systems? Does your compliance team have enough coordination with your IT people to ensure that new regulations are being properly translated into computer code? Do you exercise adequate oversight over your third party vendors? For instance, how quickly can you get out of contracts? Is there someone in your credit union charged with auditing your key vendor contracts and software providers on an ongoing basis? As a a new colleague of mine likes to say “garbage in … garbage out.”
As readers of this blog know, the Legislature authorized Transportation Network Companies such as Uber and Lyft to start operating in New York State locales beyond NYC as part of the recently approved budget. Thanks in no small part to the efforts of the Association, the legislation includes some important protections for credit unions. However, there are still additional steps that I would take to maximize your credit union’s collateral protection, particularly as ridesharing is taking hold at the same time that the 72 month car loan has become common place. Remember this is just one person’s advice and not a substitute for running this by your own counsel.
Ever since plans were laid for TNC networks to come to New York, insurance has always been a big issue. Remember that your typical car insurance policy contains a livery exception, meaning that a driver isn’t insured for accidents that happen while logged into the network to pick up passengers. The legislation addresses this issue by mandating that TNC drivers applying to join a network be informed of the need for additional insurance and mandating that the TNC’s make sure that these drivers are, in fact, properly insured.
While these are important protections, in talking to credit unions I am suggesting that there are still additional steps they should consider taking. Most importantly, I would amend your car loan language with a provision informing the borrower that the use of a vehicle being financed in a TNC without the insurance mandated under NYS Law shall constitute a breach of the lending agreement and may result in the entire amount of the loan being due immediately.
What does this accomplish that New York State’s Law cannot? For one thing it is more expansive than the protections afforded by the law since its prohibitions would apply even to members who are not currently logged in to a TNC Network but who are TNC drivers.This is important because if you have reason to believe that a member is operating as a TNC driver you can call the loan without waiting for an accident. It also provides an additional notice to your members that special TNC insurance is required. Finally, it provides you some level of protection in the event that your member somehow gets to join a network without getting adequate insurance. But under this later scenario I would consider going after the TNC Company for your losses. New York’s TNC legislation takes effect in approximately three months.
By the way, since we are on the subject of TNC’s, I had the pleasure of dropping off my two daughters at Kennedy Airport Monday morning for a flight down to North Carolina. For those of you, who haven’t had the “pleasure” of going to Kennedy, think of those chaotic scenes in third world capitals where a mass of humanity ignores all laws. The one thing noticeably absent from this scene was anything more than a handful of traditional yellow cabs. If I had taken this trip just 5 years ago they would have been everywhere. With the caveat that I have always been accused of being a skeptic when it comes to the future of the medallion industry, all you have to do is go to NYC to realize that the medallion industry as we know it is destined to become an exhibit in the Smithsonian. I am also happy to report that my two kids didn’t witness paying passengers being dragged off the plane and assaulted.
On that upbeat note enjoy your day!
Expect “debt collectors” to have more interest in buying your delinquent loans as opposed to simply contracting for a percentage of collection recoveries if, as expected, the Supreme Court rules in favor of Santander Consumer USA, Inc.
Oral arguments were heard on the case yesterday, in an important collections case, and we can expect a ruling sometime in June. You can also expect states like New York to take a renewed interest in strengthening state level restriction on debt collection practices.
The FDCPA was passed by congress to deter abusive debt collection practices. It was intended to crack down on third-party collectors which is why it does not apply to banks and credit unions which are collecting on their own loans. The question is who exactly is a debt collector under 15 U.S.C.A. § 1692a (West). Under the statute, a debt collector is any person….”who regularly collects or attempts to collect, directly or indirectly debts owed or due or asserted to be owed or due another.” Santander purchased billions in car loans and set about collecting on those that were delinquent. Borrowers alleged that their aggressive collection practices violated the FDCPA, but when they tried to sue Santander for violations it successfully argued before the Court Of Appeals for the Fourth Circuit. Their argument was that since it was collecting on debt it owned, the statute didn’t apply to its activities.
According to press reports, justices weren’t buying the argument of the borrowers yesterday, who argued that Santander was taking advantage of a loop hole that is inconsistent with congress’s intent when it passed the FDCPA.
No matter how the Federal Law is interpreted, New York is one of several states that has a state level DCPA modeled after the federal law. In a brief submitted to the Supreme Court, New York joined several such states in arguing that existing state level prohibitions aren’t adequate. The brief noted for example, that New York’s debt collection statute (NY General Business Law § 600 et. seq.) has traditionally been interpreted in reference to the federal law and that it does not permit consumers to bring a lawsuit.
Stay tuned – this provides another classic example of how a change in direction in the federal level is often met with push back on the state level.
I just went through my email folder containing ideas for future blog content and there are two things I would like to share with you before heading off to God’s country (i.e., Long Island to visit my family).
First, I have been remiss in failing to inform my faithful readers that the New York State Department of Financial Services recently approved a Wild Card application that will allow state chartered credit unions to limit the oath taking requirements to board members. Let me explain.
Section 468 of the New York State Banking Law requires each “director, officer and member of a committee” to own a credit union share and to take an oath of office when appointed. In recent years this requirement has become increasingly burdensome to state chartered credit unions; it has been interpreted as applying not only to board directors but also to individuals such as lending officers.
The approval of the Wild Card power, under which state chartered credit unions have no greater oath obligations than their federal counterparts, is important not only because it helps state charters operationally, but because it is another example of how Superintendent Vullo is backing up her public commitment to helping makes the state charter option as attractive as possible. Remember, all credit unions in New York State, irrespective of their charter type, have an interest in a strong dual-chartering system.
The second thing I would like you to know was that NCUA recently released a supervisory letter to examiners updating the risk factors that should be considered when evaluating credit union compliance programs. The update reinforces a guidance issued by NCUA 15 years ago when it began to implement a risk focus examination process designed to eliminate the need for annual examinations of well performing credit unions. With the NCUA once again expanding its examination timeline it makes sense to revisit the criteria once again.
On that note, I will be back on Tuesday – enjoy the weekend
The inspiration for today’s sensationalistic headline comes from this article in the CU Times, which is reporting that Donald Trump has selected Neomi Rao to head the White House Office of Information and Regulatory Affairs, within the Office of Management and Budget. Don’t get me wrong, the NCUA isn’t going anywhere anytime soon, but as Jonathon Adler commented in the Washington Post this may be the most important position you have not heard of. In this role she will be able to put thumbs up or thumbs down on every regulation which must be approved by the White House.
Rao’s nomination warms the heart of conservative legal geeks, such as myself. She is the founding director of George Mason’s Center for the Study of The Administrative State and she has not been afraid to argue that independent agencies are unconstitutional regardless of how they are structured. If she is right this means that even the NCUA is unconstitutional.
As I explained to a group of credit union folks last night at the Southern Tier Chapter dinner, while I am pessimistic about seeing major regulatory reforms passed by congress anytime soon, love him or hate him we have already seen a major shift in regulatory priorities under President Trump, and this shift will only gain momentum as the terms of directors of independent agencies expire. Remember that Richard Codray’s term ends in July 2018.
Ideas matter. Cass Sunstein held this position in the opening days of the Obama Administration and his view that regulations could be used to nudge consumers to make the right choices continues to be hugely influential. The selection of Ms. Rao mean’s that those of us who believe that the existing regulatory system bears little resemblance to powers actually authorized under the constitution are no longer simply obscure bloggers in need of an additional cup of coffee.
Hensarling Talks Up CHOICE 2.0
Confirming what we had already heard from CUNA, the House Financial Services committee publicly announced yesterday that it would be introducing the second version of Chairman Hensarling’s Regulatory Reform Proposal by the end of the month
CHOICE 2.0 is not in bill form yet, but is likely to include substantial mandate relief including measures to scale back the powers of the CFPB. While this is of course positive news, in comments last week Senate Banking Committee Chairman Mike Crapo indicated that major legislation dealing with regulatory reform is unlikely to become law anytime soon.
On that note enjoy your day!
Since the Governor and Legislature agreed to gradually raise New York’s minimum wage starting in January of this year, inquiring minds have wanted to know how financial institutions should comply with the Exempt Income Protection Act (EIPA) which shields a minimum amount of money in a member’s account from being restrained or levied to pay off a debt based on a multiple of the minimum wage.
The good news is that, the newest member of the Association’s compliance staff, Sarah Hodgens, gave me a heads-up that the state has issued guidance to financial institutions in how to comply with the law. The bad news is that the guidance creates more work for employee’s responsible for complying with those ubiquitous levy and restraint notices.
The problem is that when the EIPA was drafted the state had a uniform minimum wage so every account holder could be dealt with using the same thresholds. Now that the state has regionally based minimum wages (which also vary for NYC depending on an employer’s size) complying with the law has gotten even trickier.
New York mandates that an amount equal to the greater of 240 times the state or federal minimum hourly wage (whichever is greater) is exempt from levy and restraints. N.Y. C.P.L.R. 5222 (McKinney). There are certain narrow exceptions, and the exemption ceiling is even higher if federal funds are direct deposited but none of this matters for the purposes of today’s blog.
The guidance explains that when a financial institution receives one of these notices it should use “reasonable due diligence” in trying to obtain the most current information regarding the employment address of the account holder and, if applicable, the most current information regarding the size of an account holder’s employer located in New York City. It should use this information to calculate the size of the account exemption. If your credit union can’t get this information it may use the highest minimum wage in the state to determine the size of the exemption which means as of right now, at least $2,640 is exempt. Remember this threshold amount goes up every December until 2021, when it reaches $15.
The good news is that your credit union now has a clear roadmap with which to comply with levy and restraints, which is vitally important given that this is probably the most common operational issue your credit union deals with, from a compliance stand point. The bad news is that the guidance raises more questions such as what precisely is “reasonable due diligence” when it comes to establishing a member’s address? Can a credit union be found in contempt of a levy or restraint order for failing to exercise it? Finally, how are you supposed to know how many people are employed by your delinquent member’s NYC employer?