Hemp, Opioid Guidance Issued

 

Two recently issued guidance documents, one from FINCEN the other from NCUA, are intended to provide assistance  to credit unions and other financial institutions in ensuring  that their BSA programs appropriately address the impact of these drugs on banking services. I’ll leave it up to you to decide for yourselves how helpful you actually find them.

First, there is the interim guidance issued by the NCUA providing an update and overview of the legality of providing hemp-related banking services. The guidance was issued as NCUA and other banking regulators face increasing pressure from Members of Congress who continue to hear complaints from home state hemp farmers in states like Kentucky that banking services are still difficult to secure.

The confusion on the part of the famers stems from the fact that late last year Congress included removing hemp from the Schedule I list of controlled substances in the 2018 Farm Bill. However, even though hemp is no longer on the list, the Department of Agriculture is responsible for promulgating regulations outlining the responsibility of states and Indian tribes that wish to make hemp production legal.

Furthermore, under the 2018 law, states have the right to decide whether or not hemp is going to be legal in their jurisdictions. Nothing can really happen without the Department of Agriculture coming out with the regs. Of course, Congressmen could simply explain that to their constituents, but it’s so much easier to push the blame onto banking regulators and their lawyers.

By the way, let’s remember that hemp is not cannabis, even though it is a closely related cousin. As a result, even when hemp is being legalized, an important part of your compliance mission will be to make sure that you are dealing with companies providing legal hemp products and not companies trying to sneak illegal cannabis in through the back door.

The second guidance, issued by FIN-CEN, is intended to give financial institutions assistance in detecting and reporting suspicious activities related to opioid production and distribution. It does this by highlighting the red flags commonly associated with the sale of these drugs “by Chinese, Mexican and other foreign suppliers.”

On that note, enjoy your day.

August 22, 2019 at 9:24 am Leave a comment

What Yesterday’s Ruling Means for CUs

Yesterday’s decision  by the Court of Appeals for the District of Columbia represents the most important legal victory ever achieved by credit unions. If it is upheld on appeal, not only does it give federal credit unions the flexibility they need to continue to grow, it creates an analytical framework, which, if adopted by other courts, empowers NCUA to move aggressively to protect the economic viability of the industry going forward.

In making its ruling the Court explained: “We review the rule not as armchair bankers or geographers, but rather as lay judges cognizant that Congress expressly delegated certain policy choices to the NCUA. After considering the Act’s text, purpose, and legislative history, we hold the agency’s policy choices “entirely appropriate.”

First, the ruling is important because it will allow community-chartered FCUs to grow more easily. Since the passage of the Credit Union Membership Access Act of 1998, the growth of community credit unions has been constrained by the requirement that credit union communities be well defined and “local”. In a string of decisions, the banking industry has used this language to stifle credit union expansion, culminating in field of membership restrictions so restrictive that NCUA basically deprived itself of any discretion when reviewing applications for community expansions.

NCUA relies primarily on geographic determinations devised by the OMB in analyzing community charter expansion requests. As explained by the Court, a Core Based Statistical Area comprises at least one urban cluster, or core, of 10,000 or more people and adjacent counties with substantial commuting ties to that core. Think of NYC and its surrounding suburbs. A Combined Statistical Area is a conglomerate of two or more adjoining Core Based Statistical Areas, each of which has substantial commuting ties with at least one other Core Based Statistical Area in the group. Think of the DC area.

In 2016, the NCUA recognized that its existing FOM requirements were too restrictive. It passed a series of amendments to its chartering manual that redefined the definition of a “local community”. Under these changes, a local community is one that encompasses the whole or a portion of a Combined Statistical Area so long as it does not exceed 2.5 million people. Regardless of how many people lived in the CBSA.  Secondly, NCUA concluded that a Core Based Statistical Area could house a credit union community without also serving the area’s urban center. It also allowed a community to stretch over  Finally, the NCUA also changed the definition of what constitutes a rural district.

The banks argued that in 2016 NCUA abused its discretion by giving itself the power to authorize local communities which could conceivably stretch from Maryland to Pennsylvania. They argued, and the lower court agreed, that any area larger than a county was not local.

In contrast, in its ruling, the Court held that NCUA has “vast discretion” to define what a “local” community is and that “local” does not mean small. It explained that “The NCUA sensibly reads the term “local” to mean simply that the community, regardless of shape or size, should be neither “broad” nor “general.”

Beyond its immediate operational impact, the ruling could have important consequences for future debates over what NCUA can do and why. For example, the latest line of attack on the industry is that NCUA has allowed credit unions to grow too big and that these credit unions have grown too detached from their core mission. The Court takes this argument head on: “We recognize that there may be some tension between the Act’s principal purposes: A credit union with exceedingly close ties among its members is unlikely to have a large enough customer base to thrive economically. To the extent that such tension exists, the Act leaves to the NCUA to strike a reasonable balance. Congress was well aware that a viable credit union might serve a relatively large geographical area”.

The decision is not a complete victory for the industry. Most importantly, the Court ruled that NCUA had to do a better job of explaining why credit unions should no longer be required to serve the core population centers of Core Based Statistical Areas. Furthermore, it cautioned that communities could be designed to discriminate by gerrymandering around minority communities.

Finally,, the Court also repeatedly cautioned that not every single community that might be approved under these regulations will automatically pass the legal smell test. Expect the bankers to go back to court the second they see a credit union authorized to go forward with a large expansion.

But even these negative qualifiers come with silver linings. For instance, the Court is so confident that the NCUA can justify its decision to no longer mandate that credit unions serve e core areas, it is allowing the regulation to remain in effect as NCUA works to respond to this ruling. Furthermore, banker litigation is as inevitable as is the change in seasons. While they may continue to challenge large community expansions and individual agency determinations under these new regulations, the ruling means that credit unions can start making plans for expansion with much less uncertainty.

One final note of caution. The battle has been won but the war is not over. The bankers will undoubtedly attempt to get the Supreme Court to hear this case. If they succeed in doing so, the industry, of course, runs the risk that the Court will rule against NCUA just as it did in 1998.

August 21, 2019 at 12:01 pm 2 comments

When does the Foreclosure Clock Begin to Run?

Good morning, people. On Friday, I promised you all a blog on what I, and many others, consider to be one of the most important cases to be decided by New York’s Court of Appeals in quite some time. In addition, although the Court’s decision will only be legally binding within New York, with similar litigation taking place around the country anyone who provides mortgage loans should be pay attention to the outcome. Besides, the case involves the interpretation of standard mortgage loan documents provided and used by Fannie Mae and Freddie Mac.

Everyone would, I hope, agree that New York has a six year statute of limitations for commencing foreclosure actions. Everyone would further agree that the six year statute of limitations doesn’t start to run until there is a default on the mortgage loan and the lender affirmatively decides to accelerate the entire mortgage debt. Finally, when a homeowner defaults on a mortgage payment, the lender has the option of demanding payment simply for the unpaid installment or, provided procedural provisions are satisfied, demanding payment on the entire note. But what’s conceptually quite easy to understand is proving quite vexing to implement in an era when it is not uncommon for financial institutions and members to be in discussions over delinquent mortgages for several years.

In Bank of N.Y. Mellon v. Dieudonne, 2019 NY Slip Op 01732 (March 13, 2019, 2nd Dept), the foreclosure action at issue in this case has its roots in 2009. A previous foreclosure action was commenced but, for reasons not made clear in the decision, it was halted. As a result, when the bank once again decided to foreclose on the property in 2016, the defendant argued that the action was time-barred. This is where the case gets real interesting.

Look at your standard Fannie Mae NY mortgage document. Paragraphs 19 gives a delinquent borrower the right to pay arrears on a mortgage until five days before a foreclosure sale . In contrast, paragraph 22 gives the lender the option of demanding payment on the entire note upon delinquency. Bank of N.Y. Mellon argued that even though it decided to commence a foreclosure action in 2010, since that previous foreclosure was halted prior to the time the homeowner could have paid off the amount then owing, the bank could not have made an unequivocal demand for full payment. In other words, the statute of limitations on a foreclosure action under the standard Fannie form does not begin to run until the point at which a foreclosure action is executed because, notwithstanding the bank’s demand for full payment, the borrower still has the contractual right to make payments against their arrears.

Needless to say, there’s a lot of potential foreclosures out there riding on the outcome of this case. The Second Department, which covers Long Island, Queens, Brooklyn, Staten Island, and the lower Hudson Valley, sided with the homeowners. It acknowledged that the mortgage gave defendant the right to de-accelerate the debt that was due to the bank. It held, however, that this does not change the fact that the bank also had the right to demand full payment under the mortgage and that it exercised this right. Other courts have reached different conclusions within the State and now we await arguments and a decision before New York’s highest court.

August 20, 2019 at 8:47 am Leave a comment

Four More Laws You need to Comply with for the Honor of Living in NY

In 2006 the legislature passed The Home Equity Theft Prevention Act. Home prices were exploding, particularly in and around NYC and there was no shortage of “equity purchasers” who specialized in “saving” homes in foreclosure by paying off delinquencies.  Unfortunately, many of these often elderly homeowners didn’t realize that they were signing away their deeds under terms which made it highly unlikely that they would be able to stay in their homes after all.  This legislation  signed by the Governor immediately extends these protections to homes with delinquent mortgage loans.

Be aware of these changes if you start discussing a deed-in-lieu of foreclosure with your delinquent member. I understand the goal of the law but I am concerned that we are entering into the land of unintended consequences.

If your credit union provides mortgage loans four condos or coops then your abandoned property obligations just got more expensive.

The Governor signed legislation making it the obligation of the servicer of these mortgage loans to continue to pay Homeowner Association and Co-op fees in the event they become abandoned. This bill took effect when it was signed into law on August 14th.

But wait, there’s more. The Governor also  signed legislation which places specific mandates on financial institutions transferring mortgage loans that are in the process of being modified. Specifically a borrower must be provided  with a written list of all documents relating to such application for modification that were provided to the bank or financial institution taking over the mortgage.   The bill also provides that a new servicer is obligated to abide by the terms of any previous mortgage modification undertaken avoid foreclosure. The legislation applies to all mortgages entered into starting November 12th 2019, which for those of you scoring at home means that it was signed on August 14th and takes effect in 90 days.

Finally here is one for your HR person. I wanted to give you a heads-up that on August 9th the Governor signed high profile legislation making it illegal for employers to ban “the  wearing of any attire, clothing, or facial hair in accordance with the requirements of his or her religion, unless, after engaging in a bona fide effort, the employer demonstrates that it is unable to reasonably accommodate the employee.” Have this one ready by October.

August 19, 2019 at 11:14 am Leave a comment

The Most Important Cases of the Year?

I may be exaggerating slightly to get your attention, but this morning I want to highlight two cases that are getting more than their fair share of attention within the mortgage industry. Incidentally, they are two of the cases that I will be discussing with those of you who have the good sense to attend the Association’s annual Compliance & Legal Conference, September 12th and 13th. Anyone reading this blog would find the material useful. (How’s that for a shameless plug?)

One of the key changes ushered in by Dodd-Frank and its concomitant deluge of mortgage regulations is that any time a lender makes a mortgage loan they have a legal obligation to make a good faith determination that a consumer has the ability to repay the mortgage. As a friend of mine just pointed out, this is supposed to be the whole point of our underwriting, but in the glory days of the mortgage-backed security, underwriting took a back seat to origination, because there was such a high demand for mortgage-backed securities. After all, what could possibly go wrong? By the way if you are looking for a good movie to watch or a good book to read, I would suggest The Big Short, which lays out the whole problem.

But what exactly is a Qualified Mortgage? As compliance geeks know the CFPB has created a category of Qualified Mortgages. These are mortgages that meet certain underwriting requirements or loans that are eligible for sale to Fannie, Freddie and the other government-sponsored-entities. These Qualified Mortgages get a safe harbor, which means they have an automatic defense against claims that the loans never should have been made in the first place.

But let’s say a mortgage doesn’t qualify for a safe harbor designation. Analysts, including yours truly, raised the prospect of an explosion in litigation and foreclosure defense work picking apart an underwriting file so that a judge can decide if a lender really should have made a mortgage loan that it now wants to foreclose on.

Which brings us to the first case I want to highlight in today’s blog. Elliott v. First Fed. Cmty. Bank of Bucyrus is getting a lot of attention as one of the first cases to squarely deal with how courts are going to decide on whether or not a lender had a good faith basis for making a loan. The case was highlighted in this morning’s American Banker (you will need a subscription to read this). It involves a divorced husband who was able to get the bank to refinance his mortgage loan after the couple separated.

The American Banker points out that the case was won by the bank, which is good news for lending institutions as we start seeing case law develop about what is and is not a Qualified Mortgage. But still, there is plenty in the decision to make the crusty lawyer in me sick to my stomach. For example, the judge had to analyze the way in which the bank determined the borrower’s debt-to-income ratio as laid out in the Appendix to Part 1026. The judge also had to assess the bank’s assumptions in refinancing the loan after originally deciding not to do so. While everything the court did is entirely appropriate, to me the case underscores that Dodd-Frank has effectively made Judges de facto underwriters. Furthermore, even by losing, the defendant has delayed the foreclosure proceedings against him. If this is considered a good outcome, any one of you who provide mortgages to individuals outside of the safe harbor parameters should think twice or have a fairly high risk tolerance.

Decisions like these also demonstrate why foreclosures are taking so long, particularly in states like NY, which supplement federal protections with a panoply of state borrower protections. In fact, a key case currently pending before the Court of Appeals, which is New York’s highest court, will decide if a mortgage document used throughout the industry should be interpreted in a way that gives lenders more time to bring foreclosure actions or should instead be interpreted as having no impact on commencing a foreclosure action once the statute of limitations has begun to run. I’m going to talk to you more about this case, Bank of N.Y. Mellon v Dieudonne, on Monday. In the meantime don’t get so excited with anticipation that you don’t enjoy your weekend.

August 16, 2019 at 10:03 am 1 comment

What Chairman Hood’s Pot Pronouncement Means to Your Credit Union

In an August 5, 2019 interview with the CU Times, Chairman Rodney Hood added another wrinkle to the legal/regulatory framework encasing marijuana banking when he proclaimed that Credit Unions were free to make a business decision about whether or not to offer cannabis banking services. He further explained that NCUA would not penalize these Credit Unions so long as they follow the appropriate BSA requirements along with adequately addressing safety and soundness concerns. While, the Chairman statements are welcomed, there is still much, much more that needs to be clarified when it comes to providing marijuana banking services.

First the Chairman’s comments should be followed up with a Letter to Credit Unions clarifying precisely what NCUA’s stance is. This is necessary because NCUA stance on marijuana banking has been somewhat inconsistent. For example, in 2014 it explained to Credit Unions that they would be permitted to engage in marijuana banking in states where marijuana is legal provided they followed FINCEN’s guidance on marijuana banking. But when Fourth Corner Credit Union in Colorado, a state chartered institution created specifically to provide marijuana banking services, applied for share insurance from the NCUA, the NCUA denied their request. Eventually, the Credit Union sued both NCUA and the Federal Reserve Bank of Kansas with the Credit Union settling after agreeing to very restrictive terms.

And let’s remember some core issues remain to be resolved regardless of what stance NCUA takes on the issue. Most importantly, even though Congress voted to block federal prosecutors from bringing enforcement actions against institutions providing marijuana services in states where it is legal, marijuana possession remains unequivocally illegal as a matter of Federal law. This would be true even without Jeff Sessions’ decision to revoke the Cole Memorandum, which laid out the conditions under which financial institutions would not be prosecuted for providing banking services to Marijuana related businesses.  This means we are a new Treasury Secretary away from having no Federal guidance as to how marijuana services can be “legally” provided.

Where does this leave your Credit Union? Pretty much in the same place it was a couple of weeks ago. To be sure SAR reports show that many Credit Unions have already decided that the benefits of marijuana banking outweigh the risks. But for those of you who are still gun shy Hood’s announcement, in my ever so humble opinion, without more, should not change your calculus.

August 12, 2019 at 9:50 am Leave a comment

Judge Invalidates NY Title Insurance Restrictions; DFS, 10 Other States Start Investigation of Usurious Lending Practices

I have good news for those of you who offer Title Insurance through a CUSO and bad news for those of you who offer loan advances circumventing NY’s Usury Laws. I’m assuming none of you fall into the second category.

Title Insurers won an important victory yesterday, but how long lasting it is remains to be seen. The NY Law Journal is reporting that a Manhattan Supreme Court Judge has struck down dreaded Insurance Regulation 208, which caps title insurance fees and limits entertainment expenses on the Title Insurance Industry. When I can find a copy of the decision I will add it to the Blog. Some of my most ardent readers follow this issue more closely than Donald Trump watches Fox and Friends.

But don’t get too excited, in fact, you may be experiencing déjà vu. This is not the first time the judge has struck down these regulations. An earlier decision was reversed by the Appellate Division this past January and you can bet that this decision will again be scrutinized by the Appellate Courts. According to the Law Journal the judge based her ruling on arguments raised by the NY Land Title Association which, were not addressed in the previous round of litigation. This time around the judge concluded that parts of the regulation violate the due process rights of Title Insurers, because they do not adequately explain what constitutes illegal activity.

 

This is turning into quite an interesting battle. The industry looked like it was on the verge of getting the Legislature to repeal these Regulations in the last session, but the effort stalled short of a goal line.

 

The second bit of news I want to bring to your attention deals with the age old question when is a loan a loan? The answer is not as easy as you might think. Late last year Bloomberg Business Week reported on how Lenders were evading NY’s Usury Laws to offer businesses predatory loans. I predicted at the time that the Attorney General and DFS would quickly start investigating the practice.

 

Well I wouldn’t call their response quick, but yesterday Department of Financial Services Superintendent Lacewell announced that she will be taking the lead in a joint multi-state investigation of these questionable lending practices.

 

The law is not as clear as it should be. NY law caps loans at 25% Annual Interest but “To constitute a loan the agreement must provide for repayment absolutely.” As explained, in this December 6, 2018 decision by NY’s First Department Appellate Division. The Lenders reported on by Bloomberg circumvent this requirement by entering into agreements to receive a percentage of a Businesses’ future income. Since the future income is not guaranteed the advance is not a loan.

 

I’m just a simple County Lawyer, but this seems like an issue crying out not only for Judicial, but Legislative review. In the meantime, I hope that the defendants in the upcoming investigation are well versed in what does and does not constitute an Unfair, Deceptive, or Abusive Act or Practice.

 

On that happy note, enjoy your weekend we really don’t have too many of these left before summer ends.

August 9, 2019 at 9:55 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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