Groundbreaking legislation. Political intrigue. Indecipherable regulations. If you get chills of excitement just thinking about these topics, this is the blog for you! Henry Meier is taking on the latest laws, regulations and political issues that impact New York credit unions, so read often and join the conversation!
If you look at your mortgage notes, chances are they include an acceleration clause stating that in the event a mortgage payment is overdue, a borrower is in default and the entire mortgage becomes payable. These so-called acceleration clauses still exist, even though the courts continue to chip away at their efficacy.
(Another clause you might see is one stipulating that an unauthorized transfer of residential property also accelerates payment of the mortgage. Interpreted literally, a child who receives mortgaged property upon the death of his parents would immediately have to pay the entire mortgage. Federal law has, however, long since invalidated these clauses as applied to successors in interest. 12 U.S.C.A. § 1701j-3)
The latest example of this trend is a case recently decided in Queens (B & H Caleb 14 LLC v. Mabry). The facts in the case are fairly straightforward. Karen C. Mabry took out a mortgage to buy property in Queens from Greenpoint Mortgage. Under the terms of the mortgage, all payments had to be made by the first of each month. The mortgage notes stated that in the event payment is late by at least ten days, a late fee of 5% of the total monthly payment due could be charged. It further stipulated that the failure to make this payment constituted a default for which the entire remaining mortgage could become payable. Karen Mabry did not send her April 1 payment until April 8 and it was not received by the Bank’s attorney until April 14. The amount she sent did not include a late fee of $118.
B & H, which assumed the mortgage from Greenpoint, brought a lawsuit seeking to accelerate the entire mortgage and foreclose on the property. Interestingly, the Court noted that there is little case law in New York analyzing the validity of mortgage acceleration clauses. In 1991, the Third Department, which has jurisdiction over much of Eastern New York, stated that the law is clear that when a mortgagor defaults on loan payments, even if only for a day, the mortgagee may accelerate the loan, require that the loan balance be rendered, or commence foreclosure proceedings.
Conversely, the Court cited with approval cases in which a “mortgagee’s opportunistic bad-faith in accepting payment of a check and subsequently seeking to foreclose on the property was considered unconscionable conduct.”
As a result, the Court concluded that in the event Ms. Mabry could show that her late payment was the result of an inadvertent mistake that she intended to cure as soon as she realized what she had done, she could prevent foreclosure notwithstanding the plain language of the mortgage. The case underscores just how radically foreclosure law has evolved in the last decade.
As I mentioned in a previous blog, a veteran attorney once told me that the only question in foreclosure cases used to be whether or not a homeowner had made his payment on time. As this case demonstrates, the law is now a lot more complicated.
Have a nice weekend folks, I’m taking tomorrow off.
A recent GAO report points out that a “key challenge” of the Dodd-Frank Act mortgage regulations is to balance the goals of increasing borrower protections while not decreasing access to credit. How are regulators doing so far?
A report released by the Commerce Department yesterday demonstrates just how much homeownership rates have tumbled over the last decade. The national home ownership rate stood at 64.4 in the fourth quarter of 1992 and reached its zenith of 68.4% in the first quarter of 2007. According to the numbers released yesterday, the homeownership rate now stands at 63.4%. The decline is even more dramatic for minorities. In the third quarter of 2006, the homeownership rate for African-Americans was 48% and 49.7% for Hispanics. Today those rates stand at 43% for African= Americans and 45.4% for Hispanics.
Do these declines reflect inevitable retrenchment following a housing bubble, as I would suggest, bad public policy, or racial bias in lending? This is going to be the most important and hotly debated public policy question over the next decade (surpassed in importance to the American public only by whether or not Tom Brady received a just punishment for his deflated balls?). How it is answered will impact your credit unions’ operations for years to come.
For example, with the Supreme Court upholding the use of disparate impact analysis, I guarantee you that judges will one day have to decide if the CFPB’s QM rules have a disparate impact on minorities. Given how aggressively the CFPB is utilizing disparate impact analysis, it’s even possible that the CFPB may one day make mortgage amendments based on its own findings about the impact QM rules are having on homeownership for minorities.
Let’s say you believe that all borrowers are being victimized by bad policy, irrespective of race. Is the key to increase legal protections provided to lenders so that the cost of lengthy loss mitigation regimes and foreclosures don’t get backed into home purchase prices? Maybe we need a more vibrant secondary market? If so, should we scrap Fannie and Freddie and have a single entity bundle mortgage loans or should the government get out of the secondary market all together?
All of these are legitimate questions and, even in Washington, facts matter. Fortunately, we are in the beginning of the QM experiment and policymakers can develop statistical models to help answer them.
This is why the GAO report released the other day should serve as a wakeup call to industry stakeholders, Congressmen and regulators regardless of what side you take in the housing debate. The GAO concluded that it is still too soon to determine what impact Dodd-Frank was having on the housing market but that regulators, including the CFPB, still have not adequately prepared for effective “retrospective reviews” of Dodd-Frank’s impact. It recommends that all the relevant federal agencies, including the CFPB, finalize plans to conduct such reviews.
To me this seems like a commonsense suggestion.
As for that other burning issue of the day, I too am outraged by the NFL’s decision to uphold its four-game ban against Tom Brady for his role in deflating footballs used in a playoff game against the Colts last season. There’s something distinctly un-American when multi-millionaires can’t break rules with impunity and destroy incriminating evidence. If the NFL’s approach to law enforcement was implemented in the banking world, where would investment banking be today?
Like a bad horror movie where the Villain seemingly reaches from beyond the grave-I’m thinking Glen Close in Fatal Attraction-the antitrust litigation between merchants and Visa and Master Card could be coming back to life. Merchants have filed a motion in federal district court in New York seeking to vacate the $7 billion settlement that was reached between merchants and the card payment networks in 2012 that was supposed to put an end to litigation claiming that interchange fees violated the law.
A motion by the merchants alleges that Gary Friedman, an attorney who represented merchants in a suit against American Express at the same time the Visa/ MasterCard litigation was taking place, passed on confidential information without authorization to an attorney and friend who was representing Visa and MasterCard. The motion contends that by “illegally” passing on this information Friedman was “helping the enemy.” In doing so merchants claim they were denied adequate representation, they argue that the attorney’s conduct amounts to a conflict of interest that necessitates vacating the settlement. They are also seeking to keep him from collecting the $32 million he earned representing them. Attorneys representing Visa and MasterCard have until August 18th to respond to the motion.
This allegation is serious. Clients are entitled to the undivided loyalty of their attorney and if that right is denied them it can lead to lawsuits being reopened.
This litigation has been dragging on since 2005. In addition to the record settlement, Visa and MasterCard agreed to changes to their merchant agreements, For example merchant contracts no longer prohibit merchants charging more for credit card transactions. According to court records the lawsuit has resulted in a mere 400 depositions and the production of 80 million documents.
Is The CFPB unconstitutional?
Since we are talking about lawsuits I feel like mentioning one of my favorites. In 2012 State National Bank of Texas challenged the constitutionality of the Dodd Frank Act. With the backing of several State AGs it argued, among other things, that (1) Dodd-Frank gave the CFPB powers that only Congress could exercise and (2) that it was unconstitutional to vest all of the Bureau’s powers in a single director.
The suit has always been a longshot and no one was all that surprised when it was dismissed in August of 2013 on the grounds that the bank lacked standing to sue the CFPB. Last week the Court of Appeals for DC caught more than a few court watchers by surprise; The Court held that the bank could bring its lawsuit because it was regulated by the CFPB and impacted by its regulations. State Nat. Bank of Big Spring v. Lew, No. 13-5247, 2015 WL 4489885 (D.C. Cir. July 24, 2015).
As an unabashed constitutional dinosaur when it comes to the ever-expanding powers of regulators, I have a real soft spot for this lawsuit even if it is the longest of long shots. I’m not saying that the CFPB is going away but what I am saying is that, since the 1930’s-like I said I’m a dinosaur-Congress has gotten too used to delegating too much power to agencies. These agencies are ostensibly constrained by Congress, but as Dodd Frank demonstrates, so much legislation is so broadly written there are few actual constraints on regulators. By letting this case go forward the courts can begin reexamining what limits, if any, the constitution places on Congress to delegate de facto legislative power to unelected regulators.
On Thursday, the NCUA finalized regulations eliminating the 5% aggregate limit on fixed assets for federal credit unions. It also established a single time period of six years from the date of a property’s purchase for an FCU to at least partially occupy the premises. These changes would have been important enough on their own, but there is even more going on here than meets the eye.
When NCUA first proposed doing away with its fixed asset rules for FCUs, it proposed replacing them with a requirement that credit unions implement a fixed asset management program (FAM). Commenters , including the Association, welcomed NCUA’s willingness to do away with the nettlesome fixed asset cap but expressed concern that the FAM requirement would end up being almost as burdensome to credit unions as the existing regulation.
In an example of the impact that comment letters can have, particularly when a three-member board is divided, NCUA eventually agreed to not only do away with the fixed asset cap but to eliminate the FAM requirement. This might sound like incredibly dry stuff, but it is yet another indication that NCUA is fundamentally re-examining its regulatory approach away from prescription towards greater flexibility in complying with safety and soundness mandates. The preamble states that the amendments reflect the Board’s recognition that it should give credit unions relief from a prescriptive limit on fixed assets but it stressed that investments in fixed assets “are, and will continue to be, subject to supervisory review.”
NCUA will attempt to achieve a balance between oversight and flexibility by issuing more guidance. Are we simply replacing one set of prescriptive rules with another that gives examiners more flexibility to decide what constitutes safety and soundness? This is the part of the preamble that I find so important. .
In response to these concerns, NCUA explains that the purpose of supervisory guidance and other interpretive rules is to advise the public of the Agency’s construction of statutes and rules that it administers” It further explains that “supervisory guidance regarding FCU ownership of fixed assets is not intended to supplant FCU’s business decisions or to impose rigid and prescriptive requirements on FCUs on the management of their investment in fixed assets.”
The rationale in the preamble is similar to NCUA’s rationale for radically altering the MBL regulations. It may take some getting used to for those of you who have grown used to complying with very specific mandates. As for those of you who are looking forward to increased flexibility, be prepared for thorough discussions with your examiner explaining why an approach taken by your credit union satisfies safety and soundness concerns.
It is an experiment well worth trying. Its success will depend not only on examiners but on the willingness and ability of credit unions to create individualized compliance programs Here is the final regulation.
NY’s Criminal Exacta
With Saratoga opening this past Friday maybe it’s only fitting that federal prosecutors secured an exacta last week First, Deputy Senate Majority Leader Tom Libous of Binghamton was convicted of lying to federal investigators about his efforts to obtain work for his son from lobbying firms. On Friday, State Senator John Sampson of Brooklyn, who once held the position of the Senate’s top Democrat, was convicted of Obstruction of justice charges. Both Senators automatically lose their seats.
With Republicans holding a one seat majority in the State Senate-Not including the Independent Democratic Conference- and the Governor apparently committed to pushing hard for democrats to win the Libous seat when a special election is called, the political class is looking forward to the first major election since John Flanagan was named Majority leader following the indictment of Dean Skelos on corruption charges earlier this year. Cuomo was quick to praise Barbara Fiala, the former Department of Motor Vehicles commissioner who has announced that she will be seeking the Democrat nomination.
I just got done watching your congressional testimony about NCUA’s budget operations. Between you and me, you shot yourself in the foot with what Congressman Mick Mulvaney called your “crazy talk” defense of NCUA’s refusal to re-institute budget hearings. Listen, I love people who stick to their guns. In the dictionary there is a picture of me next to “Beater of Dead Horses.” But there is a point at which you have to admit you’re wrong, or at least concede that continuing a fight isn’t worth it and move on. We are well past that point when it comes to a request for a single budget hearing on NCUA’s budget proposals. Declare victory, admit defeat and schedule one today.
First let me explain that I am a fan of the work you have done at NCUA. You’ve implemented substantial mandate relief, restructured the corporate system and have more aggressively pursued compensation for the banker malfeasance than any other agency in Government. You have a good story to tell, so why not just reinstitute a budget hearing and get into telling it?
Do you realize you just told Congressmen, people who appropriate money for a living, that budget hearings are a waste of time? That was bad enough but you also opined that any credit union CEO in favor of them is being manipulated by the Trades and not representing the best interests of their members.
Do you really believe that credit unions aren’t representing the interests of members when it comes to advocating for budget cuts? I was a little surprised by this comment but not quite as surprised as Congressman Mulvaney, who asked you a second round of questions to clarify this “crazy talk.”
You didn’t back down one bit. In fact, you suggested that credit union members should want NCUA to have a larger budget because it helps protect their money. So let me get this straight: the more money NCUA is allowed to spend without any oversight the more efficient it will become? I get it: that must be why so many third world dictatorships with bloated bureaucracies, well-fed dictators and starving populations spend their tax dollars so prudently.
I know you have been around credit union CEOs and members longer than I have, but they strike me as a fairly frugal lot: you don’t go into banking to spend money you go into it to save. Can’t you at least see how it just might bother people as a matter of principle that the agency they fund is consistently raising its budget even as they scrimp and save on theirs? After all, this is an industry where every basis point matters. Can’t you see how spending over a million dollars so that NCUA can have its very own Cone of Silence might raise a few eyebrows? Unlike the Treasury, the NCUA is not exactly a linchpin of the world economy.
Congressman Mulvaney had a good question for you. Since NCUA doesn’t get its funding from Congress, and you don’t want to get industry input on NCUA’s budget, then whom exactly should you be accountable to when spending other people’s money? I would love to determine my salary and have the Association pay the bill, but somehow I don’t think my boss would go for that.
I’ll let you in on a secret if you promise not to tell anyone. If I was to list the 10 biggest issues facing credit unions, NCUA’s budget process would be number 15 on the list. I also think it makes sense to increase spending on financial oversight after the country has a meltdown caused, in part, by a lack of financial oversight. But, this is precisely why you should hold a budget hearing and remove this silly distraction.
Look at what happened today: you came across as slightly arrogant and somewhat indifferent to the concerns of Congressmen, many of whom said they love credit unions. Listen, there is a lot of important stuff to be done. I’m afraid that this budget issue is going to take on a lot more importance than it deserves. Do me a favor and schedule one budget hearing. It might not be all that informative, but it won’t be a waste of time if only because it would demonstrate that you know the people who are taxed to pay NCUA’s bills deserve the opportunity to discuss NCUA’s budget in a public forum.
You repeatedly told Congress that you learn a lot more about credit unions than you would listening to hand-picked lackeys of the Trades drone on about NCUA’s budget for a few hours every year. I know you love to get out and meet people, but small talk over stale cheese and mediocre wine at credit union get-togethers just isn’t the same as a formal on-the-record discussion. My guess is you can find the time to do both.
I noticed how you managed to make additional budget cuts at yesterday’s Board meeting hours before your Congressional appearance. I’m sure this is just a coincidence. After all, public oversight really doesn’t lead to better budgets, right?
Some Good News on Housing
As housing goes, so goes the economy. So the announcement by the National Association of Realtors that existing home sales increased in June at their fastest pace in over eight years is some of the best economic news I’ve seen lately. It is likely to give comfort to Fed members uneasy about whether or not to start raising short term interest rates this year. According to the NAR, sales of existing homes increased 3.2 percent to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May. Sales are now at their highest pace since February 2007 (5.79 million).
One statistic that I’ve been keeping an eye on is the number of first time home buyers. Their noticeable absence from the market has been one of the key indicators that the post-recession economy we are living in still feels like a recession to many Americans. The NAR report revealed mix results on this front. The percent share of first-time buyers fell to 30 percent in June from 32 percent in May, but remained at or above 30 percent for the fourth consecutive month. A year ago, first-time buyers represented 28 percent of all buyers.
What remains to be seen is how much of the increase in housing activity reflects growing consumer confidence and how much reflects buyers rushing to buy before the Fed ends this period of historically low interest and mortgage rates.
Here is the NAR Press release.
Live from DC. . .It’s the Debbie Matz Show!
NCUA Chairman Debbie Matz appears before a House Financial Services Subcommittee today at 2:00 PM to answer questions about NCUA’s budget and operations. In addition to questions about NCUA’s budget process-or lack thereof-CUNA anticipates that we might also get some information about the pending Risk Based Capital Reform. You can watch it live over the Internet or probably download it tonight if you are having trouble sleeping. Here is a link to the hearing.
You’ve Come A Long Way Baby(?)
Nothing to do with credit unions but there is a provocative article in the New York Times reporting on the changing attitudes that young professional women are taking as they enter the workforce toward achieving a work/life balance. According to the column “The youngest generation of women in the work force — the millennials, age 18 to early 30s — is defining career success differently and less linearly than previous generations of women. A variety of survey data shows that educated, working young women are more likely than those before them to expect their career and family priorities to shift over time.”
It seems to me that those businesses that are mindful of this attitudinal shift by, for example, embracing workplace flexibility and going the extra mile to keep young parents from slipping down the corporate ladder even as they dedicate more time to their families, might be able to attract and keep employees who they otherwise couldn’t afford.