Did The CFPB Just Do a Power Grab?

Today the CFPB will be publishing in the Federal Register an interpretive ruling explaining why it has the authority to examine the institutions it directly supervises for compliance with the Military Lending Act. Since most of you work for credit unions that have less than $10 billion in assets this document won’t have an impact on your operations, but here’s why you should care:

The Military Lending Act was passed in 2006 as a narrowly focused piece of legislation to protect our service men and women from some of the most egregious predatory lending in existence at the time. After all, there should be a special place in hell for people who specialize in ripping off the underpaid men and women who protect us. Unfortunately, the MLA has been transformed via the rulemaking process from a reasonable piece of legislation into a regulatory monstrosity replete with its own Military APR and its own interest rate cap. But that is water under the bridge.

Another unique aspect of the MLA is that it is not included in the expansive list of federal consumer financial protection laws which congress explicitly listed when it passed the Dodd-Frank Act. Nevertheless, this did not become an issue until 2018 when the CFPB announced that it would no longer conduct MLA examinations as part of its oversight over the institutions it directly supervised because it lacked the legislative authority to do so.

Let’s be honest, to his critics, Mick Mulvaney’s oversight of the CFPB is remembered about as fondly as Voldemort’s rule over Hogwarts.  In our polarized political world the idea that an agency would unilaterally limit its own power was of course met with howls of outrage even though Congress could have and should have easily amended existing law to give the CFPB examination authority. Besides, the CFPB still had the authority to bring enforcement actions against lenders who violated the MLA. 

The language is pretty clear, or so I thought.  §125 provides in part (1) IN GENERAL —The Bureau shall have exclusive authority to require reports and conduct examinations on a periodic basis of persons described in subsection (a) for purposes of— (A) assessing compliance with the requirements of Federal consumer financial laws; (B) obtaining information about the activities subject to such laws and the associated compliance systems or procedures of such persons…

Congress took the time to list precisely what laws were to be considered Federal consumer financial laws and the MLA wasn’t put on the list.

It ends up that we didn’t need to change a law, we simply needed to change administrations. In its interpretive ruling the CFPB explains how, notwithstanding the fact that Congress drafted a definitive list of statutes over which the CFPB would have examination authority, the MLA is also within the CFPB’s scope of authority.

This is the latest example of the CFPB stretching its already enormous powers. The problem is that we live in a nation of laws, not regulations. The same people who complement the CFPB today will be the same people criticizing the CFPB for ignoring the role of Congress next time a Republican administration takes over the CFPB.  It’s time for everyone to remember that in a republic, the ends don’t justify the means.  We simply don’t get to ignore the laws we don’t like or the processes we have in place to change them. 

June 23, 2021 at 9:24 am Leave a comment

Juneteenth Creates Compliance Glitch For Mortgage Lenders

The passage of legislation making Juneteenth a national holiday resulted in a compliance glitch which the CFPB could, and hopefully will, fix as early as today.

This issue sent me back to the preamble to the 2013 final TRID regulations. As the CFPB explained, neither RESPA nor TILA defines the term “business day.” As a result, for reasons that have never been clear to me, Regulation X which implements RESPA and Regulation Z which implements TILA contain separate definitions of a business day.

Most importantly, Regulation Z applies a definition of business days which includes calendar days except Sunday and legal public holidays specified in § 5 USC 6103. This is the section of law amended by Congress last week. As a result, from a strict compliance standpoint, June 19th was a national holiday and not a business day for disclosure purposes. This means that your credit union runs the risk of making loans that are out of compliance with federal regulations.

Yours truly is hopeful that common sense will prevail. Hopefully the CFPB will issue guidance clarifying that for purposes of complying with federal regulations. Lenders will not be deemed to be out of compliance for counting Juneteenth as a business day in 2021.

NY to Release Diversity and Inclusion Document to State Regulated Institutions

The Department of Financial Services will shortly release a memorandum to state chartered institutions explaining the department’s expectations as it relates to diversity and inclusion in the workplace. This publication is similar to one issued last October related to climate change initiatives. Its purpose is not to impose specific mandates at this time but to begin a discussion about the requirements that should be imposed on banks, credit unions, and mortgage lenders. When it comes to the efforts they are making to bring more diversity to middle and upper management. Stay tuned.

June 21, 2021 at 9:33 am Leave a comment

Updated COVID Guidance To Which Your Credit Unions Should Pay Attention

On June 10th, OSHA published updated guidance called for by the Biden administration intended as general workplace recommendations for employers and industries not subject to specific OSHA mandates.

The most important line in the document is that “Unless otherwise required by federal, state, local, tribal, or territorial laws, rules, and regulations, most employers no longer need to take steps to protect their fully vaccinated workers who are not otherwise at-risk from COVID-19 exposure. This guidance focuses only on protecting unvaccinated or otherwise at-risk workers in their workplaces (or well-defined portions of workplaces).” In other words, you have a continuing obligation to protect individuals who are not vaccinated.

For many of us the last year has been a crash course in OSHA regulations. Federal law requires all employers to provide workers with a safe and healthy workplace “free from recognized hazards that are causing or likely to cause death or serious physical harm.”  The pandemic falls into this category. Some industries, such as healthcare, are subject to specific health and safety regulations implemented by OSHA. The guidance to which I am referring is a generic guidance issued for the benefit of all industries not subject to those more specific requirements.

For example, it stresses that “employers should take steps to protect unvaccinated or otherwise at risk workers in their workplaces from the continuing risk posed by COVID. Such steps may include but are not limited to measures we are all very familiar with at this point such as granting paid time off for vaccinations, which is a legal requirement in NYS, and implementing physical distancing for unvaccinated workers in all communal work areas.

The issuance of this regulation raises further questions as to the need for a new law passed in New York which requires employers to adopt workplace health and safety standards for protections against airborne infectious diseases. Employers will have the option of adopting sample policies to be provided by NYS. It’s not clear to me how these policies will be much different than the suggested OSHA guidelines. Then again, New York’s law has a lower standard for imposing legal liability against employers who violate these policies and requires that employers with 10 or more employees give their employees the option of creating workplace safety committees.

On that note, enjoy your weekend. If you’re looking for something to do this morning I will be hosting a webinar looking back at some of the key legislation passed in the recently concluded legislative session.

June 18, 2021 at 9:18 am Leave a comment

Bank Preemption Takes Center Stage

There is currently a case before New York’s Court of Appeals for the Second Circuit that could have a direct impact on your credit union’s bottom line even if you don’t have the great fortune of living in New York. The issue is whether or not federally chartered banks are subject to a New York law mandating that lenders provide interest payments to borrowers with mortgage escrow accounts. If the court upholds two lower court rulings, federally chartered credit unions should be prepared to also provide interest payments. NCUA preemption standards are less stringent than those typically exercised by the OCC.  The cases being appealed are Hymes et al. v. Bank of America NA, case number 21-403, and Cantero v. Bank of America NA, case number 21-400, in the U.S. Court of Appeals for the Second Circuit.

I have blogged about these cases before, and I just wanted you to know that I am not the only one paying attention.  Law360 reported that the OCC has weighed in with an amicus brief.   The issue is the applicability of New York General Obligation law 5-601 which requires banks and credit unions to pay interest on mortgage escrow account balances. The statute has been around for decades, dating to the early 80’s when high inflation rates chipped away at member’s savings. But since the law’s inception, courts have ruled that its provisions don’t apply to federally chartered institutions.  The OCC argued that in refusing to preempt New York’s law, the lower courts adopted a legal standard which violates long standing precedent.

If you think you got it bad…

If you’ve been obsessing about your credit union’s influx of cash, you are not alone.

Yesterday, the FDIC released this report detailing the impact that the unprecedented influx of cash has had on banks. The report was required as part of a restoration plan that had to be imposed on banks after they fell below their statutory deposit baseline.

What struck me about the report is just how much financial institutions have riding on the assumption that this glut of money is a short-term phenomenon.  Obviously, if people start spending money again now that the COVID restrictions have been lifted, the savings glut will be a short-term glitch that we can reminisce about over drinks when we look back at the pandemic. But what happens if inflation continues to rise and consumers are weary to spend too much money as the economic outlook remains uncertain? Hopefully we will not have to find out.

June 16, 2021 at 10:09 am Leave a comment

NY’s POA Changes Have Taken Effect: Now What?

The changes to New York’s Power Of Attorney laws officially took effect on June 13th marking one of the most important operational changes that NY credit unions have seen in a number of years. In my previous blogs on the subject I have emphasized the fact that the changes are designed to encourage acceptance of POAs. This goal is accomplished by mandating that institutions accept POAs that “substantially conform” to New York State Law and allowing courts to award attorney fees to individuals who have to go to court to prove that a POA is valid. In this blog yours truly wants to point out that there are still steps you can take to protect both the credit union and your members.

Under the old Power Of Attorney, certain banking transactions could only be carried out by an agent if a POA was accompanied by a Statutory Gift Rider. Remember that this rule still applies to POAs created before June 13th. The amendments eliminate the requirement that POAs contain a separate SGR form. But, when it comes to making changes to existing accounts such as changing the title on the account or adding a new joint tenant, the authority to makes these changes has to be included in the modifications section of the new form. In other words, the modification requirements are being used in much the same way as the SGR requirement previously was (NY general obligation law section 5-1502D).

Let’s say a relative of one of your members comes in with a POA they pulled off the internet. Under the new law a person that is asked to accept an acknowledged Power Of Attorney may request “an opinion of counsel as to any matter of law concerning the power of attorney if the person making the request provides in a writing or other record the reason for the request.”

And remember, even with these changes there are still grounds for denying a POA. A list of examples in New York State Law where such reasonable grounds would exist includes the refusal to provide the credit union with an original Power Of Attorney document or certified document and a good faith referral of the principal and the agent to the local adult protective services unit [New York general obligation law 5-1504(2)].

The bottom line is that your credit union still has the ability to assure itself that a POA is a valid document. That being said, given the changes to the law and the increased risk of noncompliance, decisions on whether or not to accept POAs should not be made by frontline staff.  They should instead reflect a uniform application of your updated Policies and Procedures.

June 15, 2021 at 9:18 am Leave a comment

The Good, The Bad, and The Ugly as Albany’s Session Comes To A Close

Early this morning, the NYS Legislature came to its unofficial end as the Assembly passed the last measures of an extremely active session. Here is a first look at some of the key legislation that will impact CUs if it is approved by the Governor.

In a major legislative accomplishment, credit unions successfully lobbied for legislation which will allow them to participate in the Excelsior Linked Deposit program. The program gives lenders access to state deposits in return for making qualifying small business loans of up to two million dollars. Just how long have credit unions been seeking to participate in the program? Well, one of our volunteer board members lobbied for passage of the bill by showing legislators a letter he wrote in support of credit union participation to the Governor… Governor Pataki.

Credit Unions came up short on legislation which would allow municipalities to place their funds in credit unions but for the first time in at least 15 years, legislation has been voted out of the Senate and Assembly Banks committees. This means that the finance committees will be hearing from plenty of credit unions over the next year.

Finally, credit unions successfully lobbied for passage of legislation which will help bring banking into the 21st century by authorizing the use of remote online notarization. This bill is a win for consumers in general and the elderly and disabled, in particular, who will now be able to more easily get their documents notarized without having to go to a branch. The legislation would also make it easier to sell mortgages on the secondary market.

Now for the bad news. The legislature passed a measure to cap the interest that can be charged on judgements related to consumer debts at 2%. As drafted, the new interest rate would apply to judgements which have been filed but not yet executed prior to the bill becoming effective. If you think that is a recipe for a confusing mess, you’re correct.

Earlier this year, New York’s Court of Appeals wrote a series of decisions restoring a level of common sense to New York’s foreclosure process. The legislature passed a series of measures which chip away at these rulings. For example, Assembly 2502A imposes additional pleading requirements on lenders seeking to foreclose that could otherwise be waived by a homeowner.

Another bill passed by the legislature would extend CRA requirements to licensed mortgage bankers. Crucially, this bill would not apply to credit unions. It would apply to mortgage CUSOs.

Looking ahead, the table has been set for a debate over legislation to impose a California-style data protection framework on NYS. Legislation has been introduced and the Association is seeking to exempt GLB compliant institutions. Get your talking points ready for the trip to Albany next winter.

June 11, 2021 at 9:50 am Leave a comment

When Does Your Credit Union Make ACH Credits Available?

The repeated rounds of stimulus checks and the practices of many FinTechs have underscored the fact (subscription required) that there is often a time lapse between the time a credit union receives ACH credits and the settlement date that the originator (ODFI) stipulates those funds be made available.  Does your credit union make these funds available immediately?  If so, is it increasing its own risk?

These are the questions NACHA is asking financial institutions to consider as it analyzes the existing payment framework and considers placing more responsibility on financial institutions that choose to credit accounts prior to the specified settlement date. 

Here is a very basic example of what I am talking about.  The federal government sends out a high volume of ACH credits reflecting payments on tax refunds, social security payments and those stimulus checks.  According to NATCHA, the settlement date can often be three or four business days after these funds are received by your credit union.  My sense is that many credit unions make these funds immediately available.  Technically, however, the credit union is actually advancing its own money assuming that it can simply reclaim its advances when the credits actually become effective.  Legally, this assumption is a safe one to make.  While there are exceptions to every rule, a bedrock principle of the NATCHA system is that the originator of an ACH is warranting that the money will be available on the settlement date.  (See NATCHA rules Subsection 2.4.1) 

Crucially, these warrantees are made at the time that a file is transmitted, not at the specified settlement date.  This means that if a receiving depository financial institution advances its own funds to make funds such as directly deposited paychecks available sooner than the settlement date, it has recourse against the originating institution in the event there are insufficient funds at settlement. 

In its request for comment, NATCHA is asking if the existing rules do not adequately allocate the risk of loss.  It points out, for example, that files are occasionally sent in error and creating lag time between when a file is transmitted and when it becomes available for use gives the originating institution time to request that its payment be reversed.  But this is a classic example of a seemingly arcane compliance debate that has big implications for consumers and customer service.  It seems to me that there are now millions of consumers out there who expect payments to be made available to them immediately.  The existing framework creates a black and white rule putting the originating financial institution on notice of its responsibilities the second it hits the send button. 

But this is just the opinion of one middle aged attorney who is distracted by dreams of watching his Islanders beat the Boston Bruins tonight.  The Association will be sending out a request for comments on this proposal to gauge credit union sentiment.  We’re curious to learn your thoughts.

June 9, 2021 at 9:50 am Leave a comment

Muddled Economic Outlook for CUs Continues to Challenge Industry

The economy continues to send out mixed signals when it comes to the environment in which credit unions will be operating for at least the next year. Unfortunately, the conditions seem to be ideally suited to accelerate the bifurcation of the industry between those credit unions large enough to compensate for historically low interest rates with increased lending and those primarily dependent on investment income.

That is the take of this armchair-economist-wannabe of the NCUA’s first quarter summary of the industry’s financial performance. It paints a picture of an improving economy which will nonetheless continue to squeeze the profits of many small to medium sized credit unions.  For example, credit union share deposits rose 23 percent over the last year to $1.69 trillion (incidentally, money market accounts were up 28.5 percent.) Unfortunately, the statistics underscore that loan demand has not increased nearly fast enough to make money off these deposits. The industry’s loan-to-share ratio currently stands at 68.8 percent down from 81.1 percent in the first quarter of 2020. In the aggregate, credit unions are seeking higher yields by putting some of this money into longer term investments. Investments with maturities of 5-10 years rose $54.4 billion to $86.5 billion. Investments with maturities greater than 10 years increased to $9.4 billion.

The bottom-line is many credit unions continue to be caught in a classic vice in which the economy is growing but not fast enough to nudge up interest rates. Furthermore, the consumer is saving more money than ever before and has even dramatically decreased credit card debt over the last year.

In contrast, the number of federally insured credit unions with assets of one billion dollars increased to 388. These intuitions experienced a net worth increase of almost 14 percent. They now hold 72 percent of the industry’s combined assets and experienced robust loan growth at 8.3 percent.  In contrast, net worth for the industry as a whole decreased from 11 to 10 percent. 

Not surprisingly, consolidation is continuing. The number of federally insured credit unions declined to just over 5,000.  There are now 3,167 federal credit unions and 1,901 state chartered credit unions.

June 7, 2021 at 10:10 am Leave a comment

Court: NY Jumps Gun on FinTech litigation

For the second time in less than four years, a federal court ruled yesterday that New York committed the legal equivalent of a false start when it filed a lawsuit against the Office of the Comptroller of the Currency (OCC) after it announced that it would begin accepting charter applications from non-depository FinTechs interested in obtaining federal bank charters. If you think you’re suffering from deja vu, you’re not. In 2017, a district court dismissed an earlier lawsuit New York’s Department of Financial Services filed against the OCC on the same grounds.

One of the key legal issues in banking is whether or not the OCC has the authority to grant federal bank charters to FinTechs even if they do not accept deposits. In the early 2000s, the OCC promulgated regulations permitting companies to apply for bank charters provided they engage in activities such as executing payment transactions. If the OCC has this power, it will enable many FinTechs to provide services traditionally regulated by the states, such as payday lending and perhaps even mortgage banking.

In Lacewell v. Office of Comptroller of Currency NYS is arguing that the OCC is acting beyond its authority by considering granting charters to non-depositories. It claims to be harmed by the revenue it would lose from licensing non-depositories and that New York consumers will be harmed by banking products which aren’t subject to New York’s consumer protection laws, such as its cap on interest rates.

But in yesterday’s ruling the court held that in the absence of a charter actually being granted, New York could not demonstrate it had been harmed enough to give it access to the federal courts.

Enjoy your weekend, folks!

June 4, 2021 at 10:03 am Leave a comment

Are Overdrafts Fees An Endangered Species?

Overdraft fees have recently been put under the microscope once again and it does feel like the pieces are falling into place to see new restrictions placed on this product.

First, there is the news that overdraft fees dropped dramatically during the pandemic. The Wall Street Journal reported yesterday that overdraft revenue fell in 2020 for the first time in six years. The paper reports that banks and credit unions brought in $31.3B in overdraft revenue in 2020, a drop of almost 10 percent from the previous year. This is hardly surprising since the huge influx of savings has given many consumers a bigger financial cushion.

An even more intriguing development is highlighted in today’s American Banker which notes the growing numbers of banks that are offering overdraft fee alternatives. On Wednesday, Ally Financial announced that it will permanently stop charging overdraft fees. According to the AB “these firms are reducing or eliminating their reliance on overdraft fees at a time when regulatory scrutiny seems likely to increase, and as competition from lower-cost alternatives is on the rise.”

These changes are taking place in a political environment focused on issues of economic equality like never before. In 2017 the CFPB issued a report concluding that overdraft services are disproportionately used by individuals with lower credit scores who have less access to credit. The report didn’t have much of an impact but in 2021 this is precisely the type of factoid that is galvanizing individuals to push for changes to the banking system.

Finally, there is the ubiquitous class action litigation involving the accuracy of overdraft disclosures. While I think much of this litigation can be preempted with appropriate changes to account agreement language, judges are scrutinizing overdraft practices like never before. 

What does all this mean? It means that your credit union should begin preparing for the day when the revenue it receives from overdraft fees is dramatically reduced. Unfortunately, this is easier said than done. A report released in May by the Brookings Institution highlighted anecdotal evidence that small lenders and credit unions have grown increasingly dependent on overdraft fee income.

On that happy note, enjoy your day.

June 3, 2021 at 9:06 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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