DFS Clarifies Zombie Property Exemption

Yesterday the Department of Financial Services finalized its Zombie Property regulations and clarified the exemption standard applicable to most credit unions.  This is a big help since it is now clear precisely what institutions are exempt.

The Governor also released a consumer Bill Of Rights for residents facing foreclosure.  It is yet another piece of paper to be provided to individuals facing foreclosure.

As all New Yorkers reading this blog should know, NY legislation set to take effect December 20th imposes obligations on lenders to maintain abandoned property upon which they have not yet foreclosed.  The good news is that the legislature exempted credit unions and banks that do a smaller volume of mortgage lending from these requirements. Unfortunately, the proposed exemption language was as clear as mud. Without clarification, institutions that the legislature intended to exempt from maintenance requirements would have found themselves having to comply with them. The DFS recognized this problem and made a helpful amendment.

As initially proposed to qualify for the exemption  you had to be a state or federally chartered credit union that:

…B. engages in all of the following activities during that calendar year: mortgage origination, mortgage ownership, mortgaging servicing, and mortgage maintenance; and

  1. It had less than three-tenths of one percent of the total loans in the state which the mortgagee either originated, owned, serviced, or maintained for the calendar year ending two years prior to the current calendar year.

The final regulation amends  subdivision B. It provides that to qualify for the exemption  a bank or credit union must :

  1. engage in mortgage origination and mortgage ownership during the calendar year; and
  2. It had less than three-tenths of one percent of the total loans in the state which the mortgagee either originated, owned, serviced, or maintained for the calendar year ending two years prior to the current calendar year.

Since even credit unions that sell most of their loans originate and own loans, the removal of the maintenance and service requirements will ensure that the exemption works for the institutions the legislature intended to exempt.

There is much more forthcoming on implementing the Zombie law so stay tuned.

December 8, 2016 at 9:11 am Leave a comment

Ben Carson Could Reshape Mortgage Lending Laws

bencarsonThe selection of Ben Carson as the Trump Administration’s nominee to be the Secretary of Housing and Urban Development (HUD) puts the former Johns Hopkins neurosurgeon turned conservative presidential candidate in a position to decisively and quickly reshape the fair lending landscape in a way that will make it easier for your credit union to deny mortgage loans without fearing a lawsuit.

HUD is responsible for enforcing the Fair Housing Act. As I’ve written in previous blogs, it interprets this law in its regulations as prohibiting lending practices that are intentionally discriminatory as well as those that have the effect of discriminating on the basis of someone’s protected status.

HUD has been steadfast in holding to this interpretation even as it has faced challenges questioning the propriety of its interpretation. For example, in 2013 it issued an updated interpretation of its analysis. At the time, it was assumed that the Supreme Court would be taking a look at how the FHA should be interpreted. HUD also refused to exempt lenders who make Qualified Mortgages that comply with CFPB’s regulations from possible enforcement actions if their Qualified Mortgages had a discriminatory effect on mortgage lending to minorities.

It’s always dangerous to speculate about what will happen in a Trump Administration and perhaps even foolhardy to speculate about the policy predilections of Dr. Carson, who has no formal background in this area, but I’m feeling lucky. I expect him to reexamine and narrow HUD’s interpretation of the Fair Housing Act. Conservatives believe that intent matters. Criminalizing lawful conduct because of its incidental impact is a recipe for regulatory overreach that deters lenders from making reasonable judgements about who can and can’t afford a home.

December 7, 2016 at 9:10 am Leave a comment

Why OCC’s Fintech Charter Is A Game Changer

Its the end of the world as we know it whether we realize it or not.

On Friday, The OCC announced that it had the power to grant bank charters to financial technology companies and was going to use it.   Specifically, it explained that fintechs could apply to operate “special purpose” banks.

It laid out the case for its legal authority but invited the public to comment on the issues involved as it moves forward.  Needless to say, the CU industry should weigh-in.

How big a deal is this? Time will tell but think of it this way: When Apple introduced Apple Pay it had to partner with banks and credit unions that were willing to use its technology to facilitate payment transactions.  Now, with the OCC moving forward with its plans, the Apples of the world can simply become  special purpose banks so long as they engage in at least one of three “core activities” receiving deposits, paying checks, or lending. 12 C.F.R. § 5.20.

It’s not just the big guys who are going to benefit. Credit unions now meet with vendors anxious to interest them in technology that can do everything from instantaneously underwrite loans to facilitating quicker payments to making toast for members.  These startups need your business to get to consumers.   Now they will have the option of competing against you rather than partnering with you.

As the Comptroller explained in his remarks “Many fintechs will choose to partner with existing banks or provide services to banks and other financial companies, but some will seek to become a bank. In those cases, it will be much better for the health of the federal banking system and everyone who relies on these institutions, if these companies enter the system through a clearly marked front gate, rather than in some back door, where risks may not be as thoughtfully assessed and managed.”

The OCC’s announcement is also  likely to set off  a mad scramble among state regulators. After all, why should states give the federal government a monopoly over an entirely new type of financial institution?

As for credit unions, the OCC’s move demonstrates yet again why they need more FOM flexibility.  When everyone is connected in a virtual community limiting CU’s  to physical boundaries makes no sense.

All of this will, of course,  further accelerate changes to a financial landscape that are already affecting  the way your credit union does business and against whom it is competing.  Good luck.

December 5, 2016 at 9:20 am Leave a comment

You Need To Read This

required-readingYesterday NCUA released an updated examiner’s guide on including, among other things, new guidance on member business loans and commercial lending regulations scheduled to take effect in January unless they are blocked by the courts.

I hate when people tell me what to read on my free time, but today I am going to be one of those people. If you do MBL/Commercial Loans or are considering them in the future, you should put some time aside to go over this material. Besides, the Giants game doesn’t start till 4:30 p.m., the Jets aren’t worth watching, and the Patriots don’t have a chance of winning anything beyond the AFC East now that their beloved “Gronk “ is out for the season.

Let’s take a trip down memory lane to March of this year: NCUA signed off on a radical redesign of MBL/commercial lending regulations. Specifically, it shifted from a regulatory framework heavy on specific requirements and potential waivers, and replaced it with a more general principles based approach to regulations. For example, whereas regulations currently require credit union MBL programs to be overseen by a person with at least two years of commercial lending experience, the new regulations require them to hire qualified lending personnel.

But this new approach should not be misconstrued as the equivalent of mom and dad leaving the keys to the car, telling the kids not to get into any trouble, and going away for the weekend. Regulations are replaced with requirements for detailed policies and procedures. In the preamble to the final rule, NCUA explains that it remains committed to “vigorous and prudential supervision of credit union commercial lending activities” and that “responsible risk management and due diligence remain crucial to safe and sound commercial lending. “

While I am very supportive of this new approach in concept, in practice, just as less specific regulations give credit unions greater flexibility, they also give examiners greater flexibility to manage aspects of programs with which they disagree or are uncomfortable. That is why the examination guide is so important; it provides the first glimpse of what the new examination parameters are going to be.

The guide also provides a helpful primer between the distinction of member business loans- which are counted against the aggregate MBL cap-and commercial loans, which are not.

Finally, remember that the final regulation also contains important mandate relief. Credit unions with less than $250 million in assets that fall below certain thresholds are not subject to more extensive board management and oversight responsibilities, or the requirement to develop extensive commercial lending policies.

 

December 2, 2016 at 9:25 am Leave a comment

NCUA ‘s Billion Dollar Legal Investment Was Worth The Price

gavelIn mid-October, NCUA announced that it had made over $1 billion  in contingency fee payments to compensate the law firms that it retained to recover losses incurred by the failed corporates as a result of their purchases of mortgage-backed securities.  The large sum of the payout, representing approximately 25% of the $4.3 billion in settlements that the agency has reached has understandably raised some eyebrows and provided ammunition to the agency’s critics. Credit Union gadfly and frequent reader of this blog  Keith Leggett posted  that  South Carolina Congressman Mick Mulvaney has asked  NCUA  to answer these three questions:

  • Why did the agency pursue these cases under contingency fee arrangements?
  • What was the original analysis of why this was the better approach? And,
  • Has there been a post-settlement analysis to see if this was actually the best approach, financially, given the outcome?

These are all very legitimate questions given the amount of money involved. But at the end of the day, let’s not demagogue NCUA’s actions. It has made a worthwhile investment that has already helped the credit union industry recoup billions of dollars.

Let’s look at the facts.

Most importantly, there was absolutely no guarantee that NCUA was going to win any money as a result of taking on the largest financial institutions in the world. The litigation was risky, both because there were novel legal issues involving statutes of limitations and the disclosure obligations of investment banks that bundle and sell complicated mortgage securities.  NCUA not only had to prove that the securities tumbled in value, but that the companies that sold these products knowingly failed to disclose material information.  Both of these were aggressive legal arguments. Without a contingency fee arrangement, NCUA would have had to choose between risking hundreds of millions of dollars of credit union money, or forgoing the litigation all together.  Had it chosen the later course, your credit union would most likely still  be paying special assessments.

You don’t bring a knife to a gun fight. Given the complexity of the litigation and the reputational and financial risk to the institutions that NCUA was suing, it was going to go up against the best lawyers.  It needed to do the same thing.  The best lawyers cost a lot of money.  A first year Associate at a top New York law firm – typically, a bright 25 year old right out of law school – is making a base salary in excess of $170,000 a year before her bonus.  In addition, top partners are now demanding in excess of $ 1,000 an hour.  Is this an excessive amount of money?  Perhaps, but this is the marketplace with which NCUA had to deal.  Look at the quality of the work NCUA got in return for its contingency fee arrangements:  both on the trial and appellate level, it won important decisions that put NCUA in the position to demand substantial settlements.

Finally, when people question the cost of this litigation, such concern should be weighed against its benefits, not only to the bottom line of  credit unions but to the public at large. NCUA’s litigation has an established precedent that will make it easier for financial institutions that engage in similar conduct in the future. Credit unions and the public got their money’s worth.

December 1, 2016 at 10:01 am Leave a comment

For CFPB’s Supporters, Wells Fargo is a Gift That Keeps On Giving

If I was one of those conspiracy theory nuts who dream up wild theories and spend late nights scouring the Internet for evidence vindicating my worst fears, I would believe that Wells Fargo is actually working with Massachusetts Senator Elizabeth Warren on a top secret plan to keep the CFPB alive.  The bank’s phantom account scandal was bad enough, but its continued mishandling of the consequences shows why so many well-meaning but misguided people feel that the Bureau in its current form must be protected at all costs and why it’s so important for credit unions to continually distinguish their conduct from that of the banking industry in both word and deed.

Exhibit A- On Monday, the CFPB issued a Supervisory guidance warning institutions against overly aggressive incentive based sales tactics. It warns that strict controls should be used at all financial institutions “where incentives concern products or services less likely to benefit consumers or that have a higher potential to lead to consumer harm, reward outcomes that do not necessarily align with consumer interests, or implicate a significant portion of employee compensation.”  One of the examples cited by the Bureau That Never Sleeps as an area of potential abuse is overdraft opt-In procedures. The Bureau noted that it took action against a financial institution that it alleged was deceiving consumers to opt-in to overdraft services.

In the old days, way back on November 7th, I would have told you that bulletin like this deserves close attention because, even though the CFPB has direct oversight over only the largest of credit unions, these types of warnings signaled that proposed regulations could be coming soon.  This assumption has been thrown into doubt by the Republican sweep.  But until further notice, the Bureau remains a, 1200 pound gorilla that is best not to be ignored. Besides, the guidance is consistent with a similar guidance issued by NYS’s DFS, which regulates state chartered credit unions.

Exhibit B,  With the Bureau pondering regulations that would prohibit financial institutions from including in their account agreements provisions forbidding members from joinning class action lawsuits and forcing them to arbitrate disputes, Reuters is reporting that Wells Fargo is seeking to dismiss a class action lawsuit stemming from the account opening scandal on the grounds that such lawsuits are banned  based in their account agreements.

Don’t get me wrong, if I represented the bank, I would be making the same exact argument, but on a policy level, Wells Fargo’s conduct provides the best argument I have seen for why categorical class action bans are a bad idea.  Never mind the fact that class actions benefit lawyers a heck of a lot more than consumers or that a  well-designed arbitration can provide a cost effective and swift alternative to the legal system.

On that note… enjoy your day!

November 30, 2016 at 8:01 am Leave a comment

Consummate Away! Gov. Signs Mortgage Consummation Bill(corrected)

gov

Sorry for the late blog, but I just found out that the Governor signed our  mortgage consummation bill(Chapter 491l. Effective immediately, the measure clarifies that, for purposes of RESPA and TILA, consummation occurs when a mortgage applicant signs both the mortgage and promissory note. This is most commonly done at closing.

This chapter provides welcomed certainty because the CFPB requires closing disclosures to be received by a member at least three days before consummation with certain exceptions. Case law suggested that consummation occurred when a financial institutional provides a member with a signed mortgage commitment.

As expected the Governor indicated that the Legislature will be amending the bill to clarify that it applies to electronic signatures

November 29, 2016 at 9:57 am Leave a comment

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Authored By:

Henry Meier, Esq., 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.

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