FCU’s Can Access Federal Courts

Executives at larger credit unions have one more thing to be thankful for as they celebrate Thanksgiving on Thursday. The Court of Appeals for the Fourth Circuit reversed an earlier lower-court ruling which would have denied federal credit unions access to the federal courts in most circumstances. This may not sound like a big deal, but as credit unions grow larger and serve members in multiple states, the access to federal courts is crucial for these institutions going forward.

Federal law provides that a corporation  “shall be deemed a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.” 28 U.S.C. § 1332(c)(1) (emphasis added). 

Navy FCU was suing a company based in Florida, Delaware and New York to which it sold some of its loans for violating its contract by reselling the loans to another party. The defendant successfully argued that under 1332, a federally chartered credit union was not able to obtain jurisdiction or access to the federal courts. In the type of argument that thrills textualists on steroids, the district court interpreted the statute as requiring that a credit union must be both chartered by a state and have a principal place of business in order to be eligible to start a suit in federal court. Federal credit unions are chartered by the federal government, not states.

Fortunately for the home team, common sense prevailed. In reversing the lower court, the Fourth Circuit reached three conclusions that are fundamental to credit union operations. First, credit unions are corporations even though they are cooperatives. Second, the statute covers federally chartered credit unions which are either chartered by a state or have a principal place of business in a state. Third, as a result, Navy FCU with it’s C-suite of top executives located mainly in Virginia, qualified as a Virginia resident. This decision is not binding on other federal circuits. Still, it does represent persuasive authority if, and I believe when, federal credit unions face similar challenges in places like New York. 

After Further Review…

It took a mere three weeks to figure it out, but at long last, the electorate in New York has solidified Democratic control in the State Senate. Yesterday, Senate Majority Leader Stewart-Cousins and her top deputy Michael Gianaris announced that when all the votes were counted, Senate Democrats would hold at least 42 seats, but with other races still to be decided, this majority may grow. 42 is a magic number not just because it was worn by Jackie Robinson, but because it is also the threshold for a supermajority in this chamber, giving the Senate the ability to override a Governor’s budget proposal. The Assembly already has a supermajority. 

On that note, enjoy your Thanksgiving. I’ll be back next week.

November 24, 2020 at 10:01 am Leave a comment

Congress Moves Closer to Providing AML Relief

On Thursday, Congress moved closer to passing legislation which would relieve banks and credit unions of the most burdensome new Bank Secrecy Act requirement imposed on them in recent years. Negotiators have tentatively agreed to include the Corporate Transparency Act in the National Defense Authorization Act, which provides military funding for Fiscal Year 2021. It is considered must-pass legislation, although given the dysfunction in Washington, is there really any such thing anymore?

Enactment of the legislation would be a major victory for longtime Manhattan Congresswoman Carolyn Maloney, who has advocated for the passage of legislation like this for several years. In 2018, regulations took effect which required banks and credit unions to identify the beneficial owner of corporations and trusts. The intent of the regulation makes an awful lot of sense. One of the easiest ways for people to hide money is to create corporations that act as a front for their personal use. But the smartest way to get this information is to place disclosure requirements on the corporation. 

Under Representative Maloney’s bill, an applicant for a corporation or a limited liability company (LLC) would be required to file a report with FinCEN containing the identities of an entity’s beneficial owners. Under this legislation, as is required by existing FinCEN regulations, a beneficial owner is an individual who, directly or indirectly, controls a corporation or LLC; owns a certain percentage of such an entity; or generally receives “substantial economic benefits” from the company. We should know in a few weeks if this is going to become law. 

Drama at the NCUA

Maybe there was something in the water in our nation’s capital, but governing dysfunction has even infected the three-person NCUA Board. In case you missed it, J. Mark McWatters resigned on Thursday, ending a colorful six-year run in which he became the de-facto gadfly at the agency with his strict adherence to the plain text of NCUA’s regulation and governing law. You always got the feeling that he was not completely comfortable at NCUA. As early as 2016, he was in line to take another job at the Export-Import Bank of the United States. According to David Baumann, if McWatters did not resign, he was going to be fired by the White House, which it had the authority to do as McWatters’ term had already ended. If all goes according to plan, McWatters’ seat will soon be filled by Kyle Hauptman, but nothing seems to go smoothly in Washington these days.

November 23, 2020 at 9:30 am Leave a comment

NCUA Gives Credit Unions Greater Workout Flexibility

In a nod to reality at yesterday’s board meeting, the NCUA proposed amending its regulations to authorize credit unions to capitalize interest in connection with loan workouts and modifications. To help guide credit unions in using this new authority, the board is further amending Appendix B to Part 741 to define the capitalization of interest as “the addition of accrued but unpaid interest on the principal balance of a loan.” But assuming the regulation is finalized, please read it closely as NCUA is including several restrictions which will make it easy for your examiner to look over your shoulder when making these loans. As the board explains in the preamble:

The Board underscores that in proposing to remove this prohibition, it would maintain several requirements that apply to all loan workout policies in Appendix B. For example, the Appendix establishes the expectation that loan workouts will consider and balance the best interests of the FICU and the borrower, including consumer financial protection measures. Ensuring the best interest of the borrower prohibits predatory type lending practices such as including loan terms that result in negative amortization. In addition, a FICU’s policy must establish limits on the number of modifications allowed for an individual loan. Further, the policy must ensure that a FICU make loan workout decisions based on a borrower’s renewed willingness and ability to repay the loan.

Premium Increase on the Way

At yesterday’s board meeting, Todd Harper made it clear that it isn’t a question of if, but when, NCUA will be assessing its share insurance fund premium to credit unions. Stay tuned. 

And The Band Played On…

Pandemic-inspired lockdowns be damned- the homebuying industry continues to boom. According to the most recent survey released by the National Association of Realtors, existing home sales grew for a fifth consecutive month in October to a seasonally adjusted rate of 6.85 million, which is a 26.6% increase from this time last year. Furthermore, the median existing home price is now $313,000 which is 16% more than the comparable price in October 2019. The armchair economist in me can’t help but think that this is one of the starkest examples to date of why this country remains so divided. For those of us who can work remotely, low interest rates and rising home values provide a silver lining to the pandemic. The same cannot be said for the “essential” worker packing groceries for minimum wage at Price Chopper.

A Good Binge-Watch on Netflix

Not that you asked, but for those of you looking for a new show to binge, I would suggest giving The Queen’s Gambit a chance. You don’t have to like chess to like the show, and since you won’t have quite as much turkey to prepare this year, you’ll need something to do to kill the time. 

November 20, 2020 at 10:11 am Leave a comment

Rising Ransomware Attacks Trigger Key Compliance Issues

The increasing scope and cost of ransomware attacks means that credit unions should be updating both their BSA and OFAC policies, as well as their cybersecurity infrastructure. It also raises additional considerations as you decide how best to protect your members in the event that your credit union is attacked. 

On October 1st, OFAC and FinCen issued complimentary statements explaining how ransomware attacks trigger OFAC obligations. In a nutshell, your OFAC framework should assess the likelihood that a member could use your credit union to facilitate a ransomware payment. The accompanying FinCen guidance also underscores reporting requirements that are triggered by a financial institution’s involvement with a ransomware transaction. 

If you’re thinking that this increased ransomware scrutiny raises more questions than answers, you won’t get an argument from me. Increasingly sophisticated cyber criminals are using ransomware attacks to extort a wide range of institutions, from universities – which they threaten with exposing personal student information – to hospitals, who are threatened with losing access to vital medical records, to banks and credit unions. Whether or not to pay the ransom is an extremely tough call, with strong arguments on either side. Now, this guidance is suggesting that once your member has made this tough decision, your credit union should investigate whether or not the blackmailer is on an OFAC list and inform your member that they can’t use you to facilitate payment. How’s that for customer service?

And what happens if your credit union is the victim of a ransomware attack? I’m assuming that many of your credit unions have insurance coverage for precisely this type of problem. If you don’t you should analyze whether or not you should. As an excellent article in Law360 (subscription required) by Walter Andrews, Andrea DeField and William Sowers of Hunton Andrews Kurth LLP explains, the statements by OFAC raise the same type of issues for insurance companies deciding whether or not to reimburse you as the victim that your financial institution has when considering a member under ransomware attack. This means that you would be wise to discuss this issue with your insurance company so you have an idea of the financial exposure your credit union is facing should this happen to you.

November 19, 2020 at 9:32 am Leave a comment

Three Things to Ponder During Your Credit Union Day

Good morning, folks. Here are some things you need to know as you start your credit union day.

 Covid Compliance Could Be Focus of 2021 Exam Cycle

One of the challenges in dealing with compliance and legal issues for credit unions has always been getting information that’s as relevant to a smaller credit union, with its primary focus on regulatory compliance, as it is to larger credit unions, which not only face compliance burdens but the very real threat of class action lawsuits brought by an increasingly sophisticated group of plaintiff lawyers. These two emerging concerns are melding together. At its fair lending webinar yesterday, NCUA staff highlighted the areas it will focus on when it audits your credit union in 2021. 

The list includes policies and procedures related to loan modifications and credit reporting. It seems straightforward to me – this would include an analysis of your fair credit reporting policies to make sure that your credit union is properly complying with forbearance modifications. Remember that under Section 623 (a) (1) (F) of the Fair Credit Reporting Act, a furnisher must report a loan as current when it is subject to an accommodation caused by the pandemic. This does not apply when the credit obligation was delinquent before the accommodation was made. This is going to be a point of emphasis not only for NCUA, but for New York State as well. 

As luck would have it, an hour or so after the webinar, I came across news about this lawsuit in which a loan servicer in Pennsylvania is being sued over its alleged violations of these FCRA requirements. What intrigues me most about these cases going forward is not so much the regulatory violations, which will be easy enough to prove or disprove, but the amount of damages plaintiffs are rewarded. After all, even if a mistake was made, it is one that can be quickly corrected and would only be harmful to a consumer over a three month period. 

New Boss at MCU

I typically don’t use the blog to highlight personnel moves, but Municipal Credit Union is no ordinary case. MCU is the oldest credit union in the state. So, it’s good to see that it is gradually coming back after being placed under conservatorship by NCUA. Yesterday, NCUA announced the appointment of Kyle Markland as the permanent CEO at Municipal, who previously served as COO at Bethpage. With the credit union in conservatorship, it remains under the direct supervision of NCUA. If things go according to plan, a board will eventually be appointed.

Just How Bad Could it Get For Your Members?

The Century Foundation released a report this morning highlighting the economic strain that millions of Americans could face by the end of this year. The foundation put out an analysis indicating that 12 million workers face jobless benefit cutoffs on December 26, 2020. Specifically, the Pandemic Unemployment Assistance Program, which was designed for so-called gig workers (typically independent contractors) not eligible for unemployment insurance, an extended benefits program will come to an end by the new year. The better known Pandemic Unemployment Compensation Program, which provided the unemployed with an additional $600 weekly supplement, ended on July 31st. Strip away all these acronyms, and the bottom line is that an estimated 40 million Americans received a benefit from one of these programs. This is one of the reasons why the most important period for anticipating losses will be the first quarter of next year. If you want more background on the type of people who are struggling during the pandemic, you should take a look at this analysis by Liberty Street Economics, posted by the staff at the Federal Reserve Bank of New York.

By the way, the Century Foundation was founded as the Cooperative League in 1919 by none other than Edward Filene, who is of course the father of the credit union movement. Who knew?! 

Peace out people, enjoy your day.

November 18, 2020 at 9:58 am Leave a comment

Court to Hear Arguments on Key Mortgage Cases

New York’s Court of Appeals today will hear three cases that will have a direct impact on the length of time it takes to foreclose on mortgages in the state. Considering that New York’s foreclosure process is already among the longest in the nation, even if you don’t delve into the weeds on this subject, the issues raised are worth knowing about. 

These cases deal with the issue of standing, which in the foreclosure context refers to the foreclosing lender demonstrating why they have the legal right to even bring a lawsuit against the homeowner in the first place. In JP Morgan Chase, N.A. v. Caliguri, JP Morgan Chase moved to foreclose on a mortgage loan after the Caliguri’s fell into delinquency on their $1 million home in Suffolk County on Long Island. The bank had acquired the mortgage in 2008 from Washington Mutual Bank (remember them?). The bank had possession of the mortgage, the unpaid note, and evidence of default. Furthermore, it even served the homeowners with a summons and complaint, attaching to these documents a copy of the consolidated note bearing a blank endorsement from the original lender. You would think this would be enough to prove standing, but Caliguri is effectively arguing that a foreclosing plaintiff must prove that it had possession of the original mortgage note in order to bring suit. Otherwise, the bank would lack the standing to bring such an action against the homeowner. 

This may not seem like a big deal. But considering how often mortgages are bought and sold on the secondary market, keeping track of who possesses the original note is not as easy as it might seem. Furthermore, imposing this requirement would once again put form over function in New York when there is no dispute as to whether the mortgage has been properly negotiated. 

In US Bank v. Nelson, the Court of Appeals will weigh in on when and how a defendant raises a lack of standing in a foreclosure action. As a general rule, affirmative defenses to civil actions require that the defendant raise defenses, including a lack of standing, at the first opportunity. Should they fail to raise such a defense at this time, this defense would be considered waived. In Nelson, the court will decide whether a defendant has adequately raised standing as a defense. This is admittedly extremely esoteric stuff, but it is nuances such as these which result in foreclosures being dragged out, in some cases, for more than a decade. Last but not least, the Court of Appeals will hear Deutsche Bank National Trust Company v. Morgan Stanley Mortgage Capital Holdings LLC. Do you ever wonder why your vendors always allow you to sue them for gross negligence? Do you ever wonder what remedies you really have in the event someone breaches a representation and warranty they have made to you? Probably not, but I do. And trust me when I tell you that this last case is important precisely because it addresses those issues. As a matter of fact, I’m going to be designating a blog specifically to this case in the coming days. Stay tuned and don’t let your anticipation keep you from getting a good night sleep.

November 17, 2020 at 9:59 am Leave a comment

The Credit Union Movement and Veterans

Veteran’s Day got me thinking about the bond between credit unions and the military. A recent survey demonstrates how that bond is alive and well, and, if you look at the history of our movement, all credit unions owe a debt of gratitude to service members. 

The survey to which I am referring underscores that credit unions are still living up to their reputation for helping members of the military. Specifically, of the 20 top lenders which provide government VA loans, Navy Federal offers the best rates. Based on analysis of HMDA data, of the VA lenders examined in 2019, 10 had a rate spread that was above the average prime offer rate. In fact, there was more than a 1.25% spread between the lowest annual percentage rate offered by Navy FCU and the highest rate offered by New Day Financial. 

You would think from the comments of some of our Congress members that the CFPB had stopped taking enforcement actions. In fact, one of its most recent settlements involved Low VA Rates, LLC. The settlement demonstrates that the substantial rate spread reflects more than the complexity of offering VA loans. Guess what? The rates weren’t quite as low as advertised. In fact, the Bureau accused the company of engaging in classic bait and switch tactics, in which it advertised low rates on VA backed mortgage products that it did not make available or in which it placed conditions which were not clearly advertised. More generally, the movement is inexorably linked to the armed forces. It is not a coincidence that so many credit unions, such as AmeriCU in Rome, NY, were founded on military bases. Once again, we owe a debt of gratitude to the Greatest Generation. The federal credit union charter was less than a decade old when the Japanese bombed Pearl Harbor. As the NCUA commented in its 1948 report, federal credit unions were encouraged to give “sympathetic consideration to borrowers who entered the military during the war.” Not all of these loans worked out well. In 1944, for example, there were 20,000 military loans “with unpaid balances totaling $1.6 million, which was nearly 5 percent of the total amount of loans outstanding.” But by 1948, almost all of these loans were repaid, and the NCUA explained that “the experience of Federal credit unions with military loans is highly gratifying, and a new chapter in the history of credit union service has been written.”

November 16, 2020 at 10:13 am Leave a comment

For Medallion Loans Things Just Get Worse and Worse

Yesterday, New York City Comptroller Scott Stringer endorsed a plan by Taxi Workers Alliance proposal to help stabilize the prices of taxi medallions in New York City.  Under the proposal:

 “…lenders [would] write down outstanding loans to a maximum of $125,000, allowing medallion owners to repay loans on terms they can afford with current earnings. Under this agreement, the City would act as a backstop for medallion loans held by individual owners. After reviewing the proposal, the Comptroller’s Office has concluded that it offers a comprehensive risk management approach that could reduce future liability and costs for taxpayers.”

Unfortunately, this proposal is being put forward at a time when the prospects for the medallion industry in New York City continue to dim even more.

Similar frameworks have been proposed in the past only to be overtaken by economic reality.  Most notably, in February NCUA was criticized for agreeing to sell the medallion loans it was servicing to Marblegate Asset Management LLC, even as a task force which included representatives of the credit union industry was putting the finishing touches on its own plan to stabilize medallion prices.  But had NCUA not sold these loans, the financial impact on the industry could have been catastrophic.  Remember, this controversy was taking place before anyone knew that a pandemic was about to shut down The City.

To get a sense of just how badly the pandemic further crippled the taxi industry, a blog reader recently sent me a press release from Medallion Financial Corp.  Medallion Financial Corp is a publicly traded lender which is involved with a broad range of loans.  In its third quarter financial report it announced that it has impaired all of its medallions loans and established loan loss reserves at the collateral value, net of liquidation costs, which for the New York City market declined from $119,500 as of June 30, 2020 to $90,300 as of September 30, 2020.  Furthermore, it also stressed that the situation remains highly uncertain.

November 13, 2020 at 12:36 pm Leave a comment

State Enacts New Restrictions on State Charter Inactivity Fees

Governor Cuomo has approved legislation requiring state chartered credit unions to provide additional notices to account holders prior to imposing inactivity fees. S.4188 (Kennedy) / A.9140 (Abinanti) takes effect in 90 days.

Under the bill, financial institutions will have to provide 30 days written notice before fees can be imposed, and the notice will have to include full contact information, including a phone number, for the account holder to use in reaching a representative from the financial institution. 

Although this is a legal determination that you should confirm with counsel, the bill does not apply to federally chartered institutions. First, the new law only applies to financial institutions subject to this chapter. This generally limits its jurisdiction to state licensed and chartered financial institutions, but there are some exceptions. Secondly, even if the state was to attempt to apply this provision to federally chartered credit unions, NCUA has repeatedly and clearly opined that inactivity fees are preempted as applied to federal credit unions. The bottom line is that the state has imposed another meddlesome mandate which makes the state charter less attractive, even though there are relatively few state chartered institutions left to regulate.

Here We Go Again?

New York State appears to be edging closer to reinstituting lockdowns. Reacting to a dramatic and uncontrolled spike in COVID-19 cases, the Governor yesterday released new restrictions on when restaurants, gyms and bars have to close by, as well as limits on the number of people permitted to meet at once. Look on the bright side: you know there are people you’d rather not spend Thanksgiving with, and this year you have the perfect excuse to disinvite them. This is a great solution for avoiding the inevitable political debate which will accomplish nothing besides ruining the day. 

New York Adviser Named to Biden Transition Team 

Even as Donald Trump refuses to concede that he lost the election, President-elect Joe Biden is moving ahead with his transition team. The ever-informative Washington Credit Union Daily gave me a heads up this morning that Leandra English has been named to the Biden Administration’s CFPB Review team, which will help set priorities for the Bureau under the new President. Nationally, English is best known as the Deputy Director under Richard Cordray, who argued that she could not be replaced as the Bureau’s acting director following Cordray’s departure. Locally, English has served as an adviser to New York State’s Department of Financial Services. If the past is prologue, this means the rest of the country should quickly expect a heavy emphasis on servicers offering forbearance options for individuals facing economic hardship as a result of the pandemic. 

November 12, 2020 at 9:17 am 2 comments

BOA Gets Approval for Low Interest Small Loans

Good morning, folks. Your intrepid blogger is so committed to providing you the information to start your credit union day that he has managed to post this blog even after inexplicably losing power to his house. I wonder if, in the age of COVID-19, I can write off a generator as a business expense. 

In any event, here are some things to ponder this morning. 

You don’t have to be Nostradamus to realize it’s time to start planning for reduced non-interest income in the coming years. With a highly partisan Senate unlikely to go along with big legislative changes like bankruptcy reform, all eyes will be on the CFPB and who Joe Biden picks to take the helm as the next benign dictator of Consumer Protection. For months, there has been speculation in the bloggersphere that one of the first areas we could see regulatory action in involves overdraft fees. Apparently, bankers are reading the room as well – yesterday, the CEO of PNC Bank called for an end to “gotcha fees.” What a coincidence that he made the statement less than a week after President-elect Biden declared victory. 

Responding to calls for payday loan alternatives, the CFPB has signed off on a small dollar loan program. Starting in January, eligible borrowers will be able to obtain loans of $100-$500 dollars with only a $5 fee and a 36% APR that can be repaid over a 90-day period. While the product is clearly consumer-friendly, it will only be available to persons who have had Bank of America accounts for at least a year prior. As I’ve heard from many credit unions, the persons most in need of emergency small dollar loans often do not have existing banking relationships. 

On that note, enjoy your day. I’m headed to the office.

November 10, 2020 at 10:07 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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