Meet Walmart, Your Friendly, Small Town Community Banker

Walmart signaled just how serious it is about expanding its offerings in the consumer banking sphere with the announcement that it lured away Omer Ismail to run its new FinTech joint venture.  On the off chance you don’t know who Omer Ismail is, he has been one of the key architects behind Goldman’s Marcus online consumer bank. 

Last month, Goldman announced that it was starting a joint venture with online FinTech Ribbit Capital.  As Bloomberg reported in breaking the news this morning, “Walmart’s move — depriving one of Wall Street’s elite firms of the talent atop its own foray into online banking — underscores the seriousness of the retailer’s intent to intertwine itself in the financial lives of its customers.” 

Stay tuned.

Surcharge Bans Continue to Fall

A federal court in Kansas last week became the latest court to strike down a state level ban on merchant surcharges for the use of credit cards.  This trend is hardly surprising following the Supreme Court’s ruling in Expressions Hair Design that a similar ban in New York State triggered First Amendment scrutiny. The case is CARDX, LLC, Plaintiff, v DEREK SCHMIDT, in his official capacity as Kansas Attorney Gen., Defendant., 20-2274-JWB, 2021 WL 736322, at *1 [D Kan Feb. 25, 2021]

Yours truly continues to be perplexed as to why so many consumer groups consider surcharging good policy.  The reality is that there after these laws are struck down, there is nothing that requires merchants to pass on the increased revenue to consumers paying cash.  This is a lesson that many New York consumers have already learned the hard way.

On that note, enjoy your day.  Who knew that 46 degrees could feel so balmy?  I, for one, am breaking out the sunscreen!

March 1, 2021 at 9:04 am Leave a comment

Could Your Vendor Hold Your Data Hostage?

In states across the country, including New York, data protection is all the rage. If Governor Cuomo has his way, the Department of Financial Services will be establishing a bill of rights, which will include the right of consumers to exercise control over what personal information is collected, and the right to have this information “returned and destroyed.” But the emerging legal framework presupposes that your credit union knows where your information is located and has control over how it is used. Recent events have underscored that this assumption is far from accurate, and that existing contract language can only go so far to protect the interests of your credit union and its members. 

First we have the high-profile example of FiServ being unable to provide core services to credit unions in the Northeast because of a winter storm in Texas. A less well-known but equally important development is a recent legal action in which Caliber, a prominent national servicer of mortgage loans, went to federal court and alleged that the provider of its core technology, Sagent, responded to Caliber’s decision to migrate its services to a new core processor by threatening “to hold Caliber’s data hostage, causing massive and irreparable damage to Caliber’s business and relationships, as well as to hundreds of thousands of mortgage borrowers across the country.” Far from working in good faith to help Caliber to migrate over to a new system, Sagent insisted that the company enter into a new contract with even more onerous terms than the previous agreement. The case has since been settled. What would your credit union be able to do in the same situation? Imagine how much more difficult your decision could be two years from now if this type of negotiation takes place as you’re trying to comply with new state data portability requirements. 

I’ve talked to a couple of legal colleagues about lessons to be drawn from this case, and obviously it underscores the importance of the contract drafting process. Just like any good coach knows the day they are hired, they will someday be fired. You should draft your major vendor agreements with an eye towards the day when you will want to migrate services to another company. As a result, it is crucial that when addressing issues relating to transitioning to a new vendor that respective requirements are made as specific as possible. Among the issues which should be addressed are the cost involved with a transition of services, a clear delineation of what information belongs to your credit union and a stipulation that your information will be maintained according to commercially reasonable standards. The importance of this last requirement was underscored in the Caliber dispute. Sagent argued that it was not able to transfer information to the new vendor. 

Caliber is a sophisticated company well aware of how to draft a good contract and still had trouble transitioning to a new vendor. Perhaps it is time for the credit union industry to reconsider its opposition to legislation allowing NCUA to have more oversight over CUSOs and other third-party vendors. My concern is that your average credit union simply does not have the negotiating leverage to insist on the baseline protections needed to ensure that it can have easy access to member data and enter into cost-effective agreements.

On that note, enjoy your weekend – see you all on Monday.

February 26, 2021 at 9:38 am Leave a comment

CFPB Puts Brakes on Mortgage Reform

Late last year, the CFPB passed a series of regulations making dramatic changes to the definition of qualified mortgages (QM) under TRID. Now, to the surprise of no one, the new leadership of the CFPB is holding off on these final regulations. This can get kind of confusing, so pay attention.

The regulations to which I am referring were finalized by the CFPB on December 10th of last year. One of the regulations created a new category of qualified mortgages, under which mortgages held in a lender’s portfolio for 36 months, which also met certain other criteria, would qualify as qualified mortgages. This distinction provides lenders with increased protections in the event the legality of the loan is challenged in a foreclosure. In finalizing the regulation, the CFPB had decided that regulations would not retroactively apply for this expanded QM definition, but also decided that the regulation would take effect March 1, 2021. In a statement yesterday, the CFPB indicated that it is going to let this regulation take effect, but that it is considering a new round of rulemaking that would amend this regulation. 

A second key development involves everyone’s favorite friend, the QM patch. The patch is that “temporary” provision, under which mortgages eligible for sale to the GSEs are classified as qualified mortgages. Also on December 10th of last year, the CFPB finalized amendments to this regulation which would replace the QM patch with a new QM definition classifying mortgages as qualified provided the interest rate terms of the loan are comparable to similar mortgages.

Currently, credit unions must be in compliance with this second regulation by July 1, 2021. In its statement yesterday, the CFPB indicated that it would also be considering making amendments to this regulation and most likely delaying the mandatory compliance deadline. 

February 24, 2021 at 9:49 am Leave a comment

Key Changes Made to New York Foreclosures, SBA Loans

Yours truly is discharging his duty to faithfully provide you with the most pertinent information to start your credit union day this morning by giving you a heads up on two recent developments that may impact your operations. First, I want to provide a snapshot of a vitally important recent decision by New York’s court of appeals clarifying how to calculate the statute of limitations for residential foreclosures in New York State. Spoiler alert: this is actually good news for New York lenders. Secondly, I have a few thoughts on the Biden Administration’s announcement yesterday of sudden and dramatic changes to the Paycheck Protection Program, with the aim of increasing the number of small businesses gaining access to these loans. 

Anyone who provides mortgage loans in New York State should make sure that they receive a summary of the decision issued late last week by New York’s court of appeals in Freedom Mortgage Corp. v. Engel. New York already has one of the longest, most complicated foreclosure processes in the country. This case resolved a series of issues which had threatened to make the foreclosure process even more difficult to execute for lenders. For example, there are two basic ways for commencing a mortgage foreclosure action in New York State and triggering the six year statute of limitations. One way is to actually go to court and file a foreclosure action. A second way is to send a delinquent borrower a notice of default. One of the questions addressed by the court of appeals was how to distinguish between putting a borrower on notice that they may be subject to a foreclosure action if they don’t make payments, and a notice that actually commences a foreclosure action. This distinction is crucial because an increasingly large number of defaults in New York take more than six years to resolve, and delinquent borrowers are claiming that the lender can no longer foreclose on their property. Fortunately, the court of appeals ruled that “even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder’s time to commence an action to foreclose on the real property, which should be a last resort.” 

A second issue that has been hotly debated in New York courts is what actions stop a foreclosure action. For example, can a lender who is afraid that the statute of limitations is going to run out withdraw a foreclosure action and commence a new action in the future if they are unable to come to an agreement with the delinquent homeowner? Using wonderfully unequivocal language designed to provide lenders and borrowers in New York State a bright line rule that is easily understood, a voluntary discontinuation of a foreclosure action by withdrawal of the foreclosure complaint constitutes a revocation of the foreclosure. A lender can subsequently bring a new action with an entirely new six-year statute of limitations, even if the lender withdrew the previous action specifically to avoid having the statute of limitations run out. 

Shifting Gears to the Biden Administration and PPP

The Biden Administration announced that, starting tomorrow, SBA would be imposing a two-week window during which the agency will only accept PPP applications with 20 or fewer employees. The exclusive window will also be coupled with changes expanding who is eligible to receive PPP loans by stipulating that student loan debt and certain prior criminal convictions should not be part of the underlying criteria that constitute an effective strike against an applicant’s eligibility. I will have more to say on this as the process gets underway. While I understand what the Biden Administration is trying to accomplish, I’m more concerned with the speed with which they expect these changes to take effect. At the risk of sounding like an aging elementary school teacher in a 1950s sitcom, haste makes waste. 

On that note, peace out people. Enjoy your day.

February 23, 2021 at 9:56 am Leave a comment

What We All Can Learn from One of the “Biggest Blunders” in Banking History

Imagine going to work one day and realizing that you wired 100 times more out of an escrow account than you were supposed to.

That’s pretty much what happened to CitiBank in August 2020. Now, a federal judge has ruled that CitiBank isn’t entitled to get the money back in what he describes as one of the “biggest blunders in banking history.” Next time your employees grumble about all those policies you make them follow, tell them about this case. 

CitiBank was responsible for dispersing payments that Revlon owed on a loan it had been given by a syndicate of creditors who were anxious that the company was near bankruptcy. An employee at CitiBank was supposed to wire $7.8 million to the lenders. Instead, the employee wired them $900 million of its own money. This gracious payment represented the total amount of principal in interest that Revlon owed to its lenders. CitiBank recognized their mistake within hours and explained the situation as well as requesting the excess funds be returned. But then the lawyers got involved, and most of the lenders refused to give the money back. CitiBank sued.

Let’s put this in context. One of the first questions I remembered answering from a credit union when I joined the Association was what right a credit union had to withdraw a deposit that it had mistakenly put in the wrong member’s account. Fortunately, the answer to this question can be found in basic contract law concepts. Whether you call it a mistake of fact or unjust enrichment, New York has long recognized that individuals are not entitled to make windfalls from other people’s mistakes, unless the person receiving the mistaken funds reasonably relied on the representation that the money was hers to spend, and changed her position accordingly. This is an extremely high standard to meet.

So, our friends at CitiBank thought they were on solid ground when they demanded the erroneous payments back from the creditors and sued when they refused to pay. But wire transfers, which are regulated by Article 4A of the UCC are, in our circumstances, subject to a different rule. In fact, in 1991, New York’s Court of Appeals examined a similar set of facts and explained that, under some circumstances, courts should use the discharge for value rule. Under this rule, “When a beneficiary receives money to which it is entitled and has no knowledge that the money was erroneously wired, the beneficiary should not have to wonder whether it may retain the funds; rather, such a beneficiary should be able to consider the transfer of funds as a final and complete transaction, not subject to revocation.” In reaching this decision, the Court of Appeals examined the legislative history behind the rule and concluded that one of its primary goals was to encourage the certainty of electronic fund transfers between banks and businesses. As a result, a heavy responsibility was placed on banking institutions when executing wire transfers. 

But, CitiBank argued, it quickly put the creditors on notice that a mistake had been made and that it wanted its money back. Even though the bank took this action within a day of the error, the court concluded that this wasn’t fast enough. On appeal – and I guarantee you with $1 billion at stake, there will be an appeal – the Court of Appeals for the second circuit can provide guidance on why the discharge for value rule as applied to wire transfers is superseded by timely notice of a mistake. 

On that note, enjoy your weekend secure in the knowledge that although you may not be perfect, you are not that CitiBank employee.

February 19, 2021 at 9:39 am 1 comment

Four Key Issues to Know As You Start Your Credit Union Day

This morning has provided your faithful blogger with a treasure trove of important tidbits to pass on to you as you begin your credit union day. So with the caveat that many of these issues are worthy of future expansion, here goes…

Wells Fargo Folds and Settles Patent Litigation

In one of the highest-profile patent litigation cases in more than a decade, according to Law360, Wells Fargo has agreed to pay $300 million to USAA to settle claims that it violated patents related to remote deposit capture technology. The litigation was seen as a key bellwether of the extent to which financial institutions would have to enter into licensing agreements regarding this technology. Yours truly is no patent attorney, but this announcement should trigger a call to your legal counsel to discuss next steps for your credit union, particularly if it has been subject to a letter from USAA requesting that it license its RDC technology. 

Biden Administration Announces Additional Mortgage Forbearances

The Biden Administration announced yesterday that it was extending mortgage forbearance opportunities for certain government-backed mortgage loans. As a result of the announcement, the Department of Housing and Urban Development, the VA and the Department of Agriculture will extend mortgage forbearance and foreclosure relief, which were otherwise due to expire in March, until June 30th of 2021. Similar steps were recently announced by Fannie Mae and Freddie Mac. New York State has also extended forbearances for non-federally backed mortgage loans for individuals impacted by COVID-19. Let’s hope that the additional stimulus that Congress is expected to provide to consumers will allow policymakers to phase out these protections by the end of this year. Believe it or not, a properly functioning mortgage lending system is in the best interest of consumers.

New York’s Department of Financial Services Issues Cybersecurity Fraud Alert

The DFS issued a cybersecurity fraud alert informing its regulated entities that it has “recently learned of an aggressive campaign to exploit cybersecurity flaws in public facing websites to steal non-public information.” Although the guidance primarily focuses on websites designed to give consumers quick insurance quotes, the DFS is also reporting that similar attacks have been lobbed against mortgage companies. The focus of these threats is apparently to steal information such as licenses, which consumers are sometimes asked to provide when getting instant quote information. DFS is reporting that at least some of the stolen information is being used to engage in fraudulent attempts to obtain pandemic-related unemployment benefits in New York. Remember, under New York’s cybersecurity regulation (NYCRR 500.1 (g)), information that is considered “non-public” includes a name, number, personal mark or other identifier which can be used in conjunction with a social security number, drivers license, account, credit or debit card number in identifying an individual. Incidentally, you should pass this on to your vender to make sure they are aware of your New York State-based obligations. 

NCUA IG Investigates Consumer Complaint Process

As many readers of this blog know, Board Chairman Todd Harper supports increasing NCUA’s scrutiny of credit union compliance with consumer protection laws. Many individuals, including your faithful blogger, have questioned what evidence there is that compliance with consumer protection laws is lacking within the industry. An esoteric report recently issued by the inspector general investigating NCUA’s complaint review process may take on exaggerated importance in this debate. I haven’t read the entire report yet, but the inspector general is suggesting that NCUA should do a better job of making sure that examiners are aware of complaints issued against a credit union. 

On that note, enjoy your day. I would also like to extend a special thank you to the Buffalo Sabres. Two nights ago, my NY Islanders did not surrender a single shot on goal to the Sabres. This was the first time the Islanders had ever shut a team out this way since they started in the early 70s. In the immortal words of Wayne Gretzky, “you miss 100% of the shots you don’t take.”

Image result for michael scott wayne gretzky

February 17, 2021 at 10:02 am Leave a comment

HUD Prohibits Gender Identity and Sexual Orientation-based Discrimination

In one of the first examples of the dramatic impact the Biden Administration will have on housing policy, The Department of Housing and Urban Development (HUD) announced Friday that it was interpreting the Fair Housing Act as prohibiting discrimination against individuals on the basis of sexual orientation and gender identity. The announcement, which is an outgrowth of Executive Order 139.88, means that we will soon start seeing high profile enforcement actions based on alleged sexual orientation discrimination.

In one of the most important cases from its last term, the Supreme Court ruled that Title VII of the Civil Rights Act, which prohibits discrimination in employment on the basis sex, also applied to individuals discriminated against on the basis of their sexual oritentation or gender identity. In the memo released on Friday, HUD’s Office of Fair Housing and Equal Opportunity announced that the ruling extends to discrimination under the Fair Housing Act, which of course bars discrimination on the basis of race or sex. Effective immediately, HUD will “accept for filing and investigate all complaints of sex discrimination, including on the basis of gender identity or sexual oritentation.” The new announcement is intended to signal that this prohibition is going to be aggressively interpreted and enforced by HUD.

On a practical level, lenders in New York should already have policies which prohibit gender-based discrimination as a matter of state law. But now that HUD has issued this ruling, credit unions that lend in New York and in states which don’t already ban this type of discrimination should review their existing policies.

February 16, 2021 at 9:40 am Leave a comment

Preparing for the COVID-19 Endemic

“Vaccination drives hold out the promise of curbing Covid-19, but governments and businesses are increasingly accepting what epidemiologists have long warned: The pathogen will circulate for years, or even decades, leaving society to coexist with Covid-19 much as it does with other endemic diseases like flu, measles, and HIV.”

So said the Wall Street Journal earlier this week. This reality several important legal issues for your credit union to manage as it transitions from pandemic to endemic operations. For instance, one of the key questions with which you should all be grappling, if you haven’t done so already, is whether or not to mandate that your employees receive the vaccine. As I explained in this blog, the EEOC has provided guidance for those institutions which choose to make the vaccine mandatory. Keep in mind that this is a very fluid area of the law. For example, one case that will provide some guidance to New York State businesses on the interplay between the Americans With Disabilities Act (ADA) and vaccine requirements is Norman v. NYU Langone Health System. The district court ruled in September that an employee’s allergy did not qualify them for an exemption from a mandatory vaccination under the ADA. But this case is being appealed, giving the court the opportunity to explain its thinking on this important area of the law just as businesses look to determine their new policies. 

Another important source of information is this guidance issued by OSHA within days of the Biden Administration taking over. It suggests that employers should make COVID-19 vaccinations available to eligible employees, as well as to provide information and training on the benefits and safety of vaccinations. Against this backdrop, you should all consider updating your policies to – at the very least – encourage your employees get voluntarily vaccinated. A voluntary policy avoids many of the legal complications involved with a vaccine mandate while still effectively stressing the importance of workplace safety. In the meantime, the Association has stressed to both the Department of Financial Services and the Governor’s office the importance of making frontline financial workers eligible for the vaccine as soon as possible. 

Another issue for your credit union to consider as it learns to live with COVID is to recognize that even after vaccination becomes widespread, many of the new conditions you put in place are here to stay. As the Wall Street Journal pointed out, there are already burgeoning industries based on that assumption. In the future, rapid testing – not only for COVID-19, but for the flu – will probably become par for the course.  What this means is that one should not assume that the conditions you have put in place today like increased social distancing and an emphasis on healthier buildings will disappear with the pandemic. 

On that note, enjoy your long weekend. Yours truly has no idea what he will do with all the free time he has now that the football season has come to an end.

February 12, 2021 at 9:30 am Leave a comment

SBA Provides Workaround For Platform Glitches

If you are among the financial institutions that are providing PPP loans, I have some good news for you. Although the rollout of the program following its reauthorization by Congress in December has gone relatively well, it has not been without its glitches. Incidentally, I belong in the group of people who believe the SBA has done a good job administering a program doling out billions of dollars within weeks of Congressional approval. 

Under the procedural notice, lenders will be allowed to certify that a loan meets SBA requirements notwithstanding the fact that it has been flagged for rejection by the SBA platform. The updated guidance provides a list of error codes to which this flexibility will apply, such as a potential match to the OFAC sanction list, or a tax ID mismatch. The guidance explains that when a lender resolves a compliance error through this lender certification process, the lender must submit all information and documentation supporting the certification to the SBA when the lender submits a forgiveness decision or guarantee purchase request. As a result, keep in mind that the certification override is an option – not a requirement – for lenders. The guidance also points out that not all platform red flags can be resolved through this process, and provides a list of examples of the type of documentation which lenders could provide to the SBA to resolve these issues as quickly as possible. 

While we are on the subject of the PPP, today’s American Banker is reporting that more than $93 billion of the roughly $101 billion worth of loans approved by the SBA since January 12th have involved second-draw loans. I was talking to an accountant friend the other day, and as he noted, either you are comfortable relying on the government, or you simply don’t trust it enough to take it in the first place. 

Setting the Record Straight When it Comes to FOM Proposal

When I started blogging oh-so-many years ago, I quickly decided to ignore the white noise of banker attacks as much as possible. After all, there’s only so much you can say on the same topic, and when it comes to dealing with the inevitable attacks, the industry has to be able to walk and chew gum at the same time. But, I’m more than a little amused this morning by the banking industry’s reaction to a common-sense proposal by the NCUA. 

Under existing regulations, only multiple common-bond credit unions that qualify as investors in a shared branching network, such as New York’s USNet, can use the branches in that network to satisfy physical facility requirements. Mere participants in such a network cannot. This distinction is of course arbitrary, since any credit union which contracts to participate in a shared branching network is making a legal commitment to helping other participating credit unions and their members, regardless of their status as an investor in the network. In fact, the existing regulation simply makes it more difficult for smaller credit unions to fully realize the benefits of shared branching. In other words, this is the latest example of how banker opposition hurts consumers by minimizing the potential financial options that could be made available to them. I strongly suspect that the banker’s hyperbole is motivated by a desire to signal their concern to steps that NCUA may take to further expand field of membership flexibility in the aftermath of the decision by DC’s court of appeals to uphold NCUA’s field of membership improvements. 

Sounds like it’s time to get the lawyers and money ready to go. Personally, I can’t wait.

February 11, 2021 at 9:46 am Leave a comment

For New York, Things Are Worse Than They Appear

Yesterday, the Federal Housing Finance Agency highlighted just how long the pandemic has lasted by announcing that mortgages backed by Fannie Mae and Freddie Mac may be eligible for an additional forbearance extension of three months. Although the agency cautioned that other conditions may apply, the extension will generally apply to borrowers who are on a COVID-19 forbearance plan as of February 28th, 2021. By extending forbearance plans through May, GSE forbearance policies are now more consistent with New York State’s forbearance requirements for non-GSE loans held by your credit union. Remember that in early January, the State Legislature passed legislation granting forbearance extensions to individuals claiming to have been negatively impacted as a direct result of COVID-19. 

The announcement underscores that on a national level, the economic conditions under which credit unions will operate remain unclear, even as the vaccination rollout picks up speed. This uncertainty is particularly true for credit unions in New York. The state has been among the hardest hit by the pandemic – for example, New York currently has an unemployment rate of 8.2%, the fifth highest in the country. In addition, New York has some of the highest numbers of delinquent mortgages in the country, with New York City standing out among other metropolitan areas for its reported number of mortgages past due. 

Of course, these statistics are as predictable as they are depressing. In October 2020, the Empire Center reported that New York’s second quarter GDP dropped 36.3%, marking the biggest decline on record in New York state history. To put it in perspective, New York’s drop was almost five percent higher than the national average for the same period. 

On that inspiring note, enjoy your credit union day. 

February 10, 2021 at 9:22 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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