I’ll be back next week.

Have a nice week folks, I will be back next Tuesday.

 

July 6, 2020 at 11:19 am 1 comment

Updated Guidance Issued on Hemp Banking

Given the SC decisions and pandemic news, you may have missed that earlier this week, the National Credit Union Administration (NCUA) and FinCEN issued updated guidance on regulatory expectations for financial institutions that provide banking services to hemp-related businesses.

For those of you who have followed the issue closely – and I know many of you out there have – the updates should not contain any surprises as you develop your Bank Secrecy Act framework (BSA) in states like New York, where hemp production is legal.

In December of 2018, Congress passed legislation removing hemp from the most restricted category of the Controlled Substances Act and making hemp production and sale legal in states where hemp production is legal. This is in contrast to hemp’s cousin, marijuana, which remains illegal in a matter of federal law, even as it has been legalized in states across the country. The federal government has issued temporary regulations and is now in the process of reviewing state plans to ensure compliance with federal law.

The FInCen guidance demonstrates how much easier it is to offer hemp baking services in states where hemp is legal. Most importantly, your credit union does not have to file a Suspicious Activity Report (SAR) simply because your member is involved in a hemp business, as it is obligated to do if it is taking the risk of providing banking services to marijuana related businesses in legal pot states.

But even with its legality, servicing hemp-related businesses requires increased due diligence depending on the size and complexity of the business with which you are dealing. For example, the only difference between marijuana and hemp is its level of THC (.03 versus .04). Does your credit union have the ability to spot those businesses which aren’t making this distinction and to file the appropriate SAR? And those pesky Beneficial Owner requirements can be much more difficult to comply with if you are dealing with one of the larger, more sophisticated companies engaging in the large-scale manufacturing of hemp.

Now you can go back to thinking about how you are going to deal with employees who travel to one of those states subject to a NYS quarantine.

 

 

 

July 2, 2020 at 9:51 am Leave a comment

Why the FOM Ruling Really Matters to CUs

The Supreme Court’s decision not to hear an appeal, upholding NCUA’s 2016 rule greatly expanding fields of membership for community credit unions, is not only important for the practical impact it has for credit unions looking to expand their fields of membership; it also has potentially greater significance for providing a judicial paradigm which could greatly enhance federal credit union activity for years to come. I am assuming that there will be no shortage of information about the field of membership possibilities, so humor me a little while I speculate about the potential significance of this decision. Simply put – the court’s logic gives rise to a more expansive reading of federal law as they pertain to credit unions and NCUA’s power to adjust these rules in the face of changing economic conditions.

Let’s face it, in recent years, the Federal Credit Union Act has become a huge roadblock strangling credit union growth. In 1934, when the US economy had a huge manufacturing base, fields of membership were as expansive as the employees working in factories. Manufacturing has all but disappeared, and shows no signs of returning. In 1998, Congress partially recognized this reality but limited credit unions to growing within well-defined local communities. Had the Court of Appeals not reversed the district court’s decision, invalidating much of NCUA’s regulation, most credit unions would have had little choice but to convert to state charters, at least in those states with charters that offered more growth opportunities. 

Just as there is a need for a strong and viable state charter, the federal charter needs to be equally competitive. If one charter atrophies it will, at least in the medium to long term, hasten the demise of the entire movement. 

A second big-picture reason why this decision potentially matters so much is that it directly addresses the argument that credit unions can’t be both large and true to the industry’s fundamentals. In reading up to the core of it’s ruling, the Court of Appeals for the D.C. Circuit throws this logic back at the industry’s critics. 

In upholding the regulation, the appellate court noted that “the definition allows for larger community credit unions; the decision is consistent with decades of history promoting the economic viability of credit unions in the face of banks and other competing financial institutions.” 

I don’t want to overstate my case. A decision by the Supreme Court not to grant an appeal has no precedential value, and this is just the opinion of one court. But for the first time in decades, credit unions can now start the hard work of using this language to defend future regulations and legal interpretations while also lobbying Congress and state legislatures to loosen antiquated and onerous field of membership restrictions. 

June 30, 2020 at 9:53 am 1 comment

It’s a Great Day to be a Credit Union

I just found out that the Supreme Court has declined to hear an appeal from the Court of Appeals for the D.C. Circuit, upholding NCUA’s interpretation of its fields of membership requirements. I will have much more to say about this tomorrow, but for now, suffice it to say that this is the most important ruling to ever come down in favor of credit unions, with the potential to have an impact well beyond the field of membership issues. If credit unions accomplish nothing else for the rest of the year, 2020 will still have been a major success. 

 

Don’t forget about ADA Compliance

 

It’s been awhile since I’ve given any thought to the issue of ADA website compliance. However, the other day, I saw a California State Court decision (Martinez v. San Diego) which reminded me that the issue is still alive and well. In its decision, the court ruled that a lawsuit alleging a violation of the ADA by a credit union without specific features for visually impaired members visiting their website could go forward. The case is a reminder that credit unions must remain vigilant to these types of compliance issues. 

 

Let’s Take a Trip Down Memory Lane

 

Under the Americans with Disabilities Act, public buildings must generally be made accessible to disabled individuals. The issue at the heart of all this litigation is over whether this also applies to online structures. As pointed out by this ruling, the courts have essentially come down in to separate camps on this issue. One group has decided that the ADA simply does not apply to websites. Another has ruled that the ADA does apply to websites (Second Circuit Court with jurisdiction over New York), and the third group has decided that the ADA applies to websites where there is a nexus between the site and the physical location. 

 

In this case, a California court has ruled that a credit union’s website is subject to the ADA because of the nexus between the physical location and the online services offered on the credit union’s website. Why is this important? Most of the cases in which credit unions have been involved have been dismissed because the person seeking to sue the credit union couldn’t become a member. Sooner or later, your credit union may be sued by someone who falls within your field of membership. If and when this happens, the legality of your website will be debated on the merits. Given the amount of time that credit unions have had to prepare for this kind of litigation, there is absolutely no reason to put your credit union at risk by failing to ensure your website is in compliance with the ADA. One of the many things that we have learned during the pandemic is that a website is an essential part of your branch operations. 

June 29, 2020 at 11:13 am Leave a comment

Travel Quarantine Presents New Challenges for Your CU

At 12:01 a.m. this morning Governor Cuomo joined the Governors of New Jersey and Connecticut in imposing a 14 day quarantine on persons entering the Tri-State area from states experiencing spikes in the COVID-19 virus.  According to press reports, the quarantine currently impacts persons traveling from Alabama, Arkansas, Arizona, Florida, North Carolina, South Carolina, Utah and Texas.  The initial list of states covered by the order is not static but instead applies to all states “…with a positive test rate higher than 10 per 100,000 residents, or higher than a 10% test positivity rate, over a seven day rolling average”.

Here are some issues for your credit union to take into consideration.

Most importantly, you should put your employees on notice that you need to be informed of their travel plans and updating your policies to enforce the quarantine.  There is a lot of disagreement over whether or not employers can be successfully sued by employees for contracting the illness.  What everyone can agree on is that the safest way for employers to protect themselves against potential claims is to follow state and federal guidance.  Besides, violations of this executive order can result in a fine of up to $10,000.

I had a quick chat with my friend and colleague Chris Pajak yesterday evening who pointed out some interesting complications this announcement raises regarding paid family leave laws.  It’s important to start asking the right questions.  For example, New York’s paid sick leave benefits don’t apply to employees subject to quarantine after traveling to a country which the CDC has designated as a COVID-19 hotspot.  No such limitation is imposed on persons who travel out-of-state.  Does this mean that an employee whose work can’t be performed from home can take a week’s vacation to Cape Hateras, NC—my favorite summer vacation spot—and then insist on being paid for the next two weeks?

I said it before and I’ll say it again, what makes the pandemic so challenging from a legal standpoint is the speed at which regulators, legislators, employees and employers are trying to react to an unprecedented situation for which there is by definition very little guidance.  This travel ban is the latest, but probably not the last twist as we grapple with the pandemic.

June 25, 2020 at 9:38 am Leave a comment

Regulators Release a “Must Read” Guidance for CUs

Agencies Issue Joint Examination Guidance

The NCUA yesterday joined with its state and federal counterparts to issue guidance describing examiner expectations during the pandemic.  Needless to say, this is required reading for someone at your credit union today.

What caught my attention most about the wide-ranging explanation of supervisory expectations was the emphasis it placed on institutions engaging in ongoing risk assessments related to the pandemic. For example, the examiners explain that they:

… will review the steps management has taken to assess and implement effective controls for new and modified operational processes. Examiners will assess actions management has taken to adapt fraud and cyber-security controls to manage heightened risks related to the adjusted operating environment. Examiners will also review how management has assessed institutions’ third parties’ controls and service delivery performance capabilities post crisis.”

I know how difficult it is for many of you scrambling around to meet the credit union’s needs on a day-to-day basis to find the time to look at the big picture, but at its most basic level this requirement demonstrates why it’s so important to take a deep breath, sit the team down and memorialize those new policies and procedures you have put in place so that examiners can see how your credit union responded to the pandemic.

AG Reaches $17M Settlement With Mortgage Servicers

New York’s AG announced that she has reached a $17 million settlement with Texas based mortgage loan servicer Caliber which she alleged had engaged in unfair and deceptive practices and violated New York Servicing Regulation Part 419 by, among other things, inadequately explaining to delinquent homeowners the consequences of interest only loan modifications and providing inadequate contact information.  The interesting thing about the settlement findings is that it was based entirely on violations of New York law.

New York Primary Results

Some much anticipated New York State Congressional primaries are too close to call, but it does look like we are on the verge of once again seeing some longtime incumbents losing out to a younger, more liberal, candidate.

 

June 24, 2020 at 8:41 am Leave a comment

CFPB Proposes Alternative to the GSE Patch

With a January 21st statutory deadline fast approaching, the CFPB yesterday put forward a set of regulations which could have a dramatic impact on the mortgage industry.

Dodd-Frank and its accompanying regulations provide mortgage lenders with enhanced legal protections in the event that they must foreclose on a property.  For a mortgage to be classified as a Qualified Mortgages (QM), it must, among other things, have a debt-to-income ratio no higher than 43%.  Alternatively, any mortgage eligible for sale to Fannie Mae or Freddie Mac also qualifies as a QM mortgage even though the GSE’s have GTI ratios exceeding 43%.

The drafters of Dodd-Frank put the GSE exception into statute so that policy makers would have enough time to gradually ween the mortgage industry off of its GSE dependency.  The Dodd-Frank GSE authorization expires in January 2021 and, according to the CFPB, there are still 957,000 loans which qualify as QM loans because they are eligible for sale in the secondary market.  Consequently, without the GSE option, home buying is going to be a lot more expensive for a lot of lower income Americans.

Yesterday the GSE unveiled its post January 2021 proposal.  Based on the summaries I have read, including a statement from the CFPB, the Bureau is proposing doing away with the 43% DTI ratio and replacing it with a price based approach similar to that which is already in use for other categories of loans.  Specifically, whether or not a mortgage qualifies as a QM would be determined by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction.

In a separate rulemaking, the CFPB is proposing extending the existing GSE authorization until April 2021.  In other words, after an election in which the future of the CFPB will be debated.  Needless to say, if you are looking for regulatory certainty in the mortgage market over the next year, you are in the wrong country.

June 23, 2020 at 9:28 am Leave a comment

How The Fed Intervention Is Hurting Credit Unions

My blog’s a little late this morning because I put aside what I was going to write about after I saw the amount of attention that this opinion piece from Bill Dudley, the former president of the New York Federal Reserve and now a professor at Princeton, is getting. In it he explains why the Feds unprecedented intervention in the economy, which he predicts will soon reach $10 trillion, is a manageable and necessary support, at least in the short term.

He is right. But this is little consolation if you run a credit union or a small community bank. Once again, the Fed is intervening in the economy in a way which helps large businesses and investment banks while doing little to support mainstream lending institutions. It’s time for this to change.

There are two ways to help an economy in trouble. The first and more traditional method is to stimulate economic activity by flooding it with cash. This is what Congress did by printing money and sending it out to consumers. This is analogous to using an economic defibrillator to jolt the economy back to life.

A second much less common approach which the Fed started aggressively using in the Great Recession is to intervene directly into government bond markets to keep interest rates artificially low. This is more analogous to putting the economy on a ventilator since the Fed is so closely intertwined with the economy that it has to cautiously sell off these bonds in a way which doesn’t harm the economy.

In dealing with COVID-19, the Fed has taken this approach to a whole new level. It has set-up mechanisms not only to buy government bonds but corporate bonds as well. This is in addition to setting up facilities to   make loans to businesses too big to qualify for the PPP.

This approach has worked. Despite shutting down the economy, corporations still have cash and the market is booming, in part because there is nowhere else to get any type of return on investments.

But here’s the catch. As Dudley points out, when the Fed engages in such a large amount of purchases, the resulting money has to go somewhere:

“When the Fed buys a financial asset from a private holder, the proceeds received by the seller typically flow back into the banking system. Even if the seller reinvests the proceeds into some financial asset rather than depositing it at a bank, the cash eventually ends up either as an increase in currency outstanding or an increase in bank deposits. Because most people don’t want to hold large amounts of cash, almost all of the money eventually finds its way back into the banking system.”

Don’t banks want to convert all this cheap money into cheap loans? Perhaps, but Dudley points out that in 2008 the Federal Reserve Board was given the right to adjust the interest rate it gives on Fed accounts held by financial institutions. This was done to ensure that all that cheap money didn’t fuel inflation.

All this comes at a very steep price to those of us who believe that for capitalism to work, it can’t be a “Heads the big guys win, Tails the little guys lose” system. Once again credit unions are being driven into Prompt Corrective Action because members need a place to put their cash and interest rates are being kept at artificially low levels.

For the second time in less than a decade policy makers are explaining why this is all necessary. It’s time to start calling the Feds intervention what it is: a justifiable bail-out of larger companies and the institutions that fund them. It’s time Congress consider providing direct funding for credit unions and community banks. After all, the industry should be allowed to fight on a level playing field.

June 22, 2020 at 10:52 am Leave a comment

Seven Things You Need To Know To Start Your CU Day

Today’s blog is tailor-made for those of you with ADHD.  There’s lot of information I want to get to you on a broad range of topics.

Governor Signs Mortgage Forbearance Bill – Governor Cuomo has signed into law legislation I have been telling you about regulating mortgage forbearances for homeowners impacted by COVID-19.  Here’s where it gets a little confusing.  You should read S.8243C in conjunction with PART C of A.10530 which amends S.8243C.  This is what New York State calls a Chapter Amendment.    I would certainly take a close look at these new requirements which are effective immediately.

Governor Declares Juneteenth A State Holiday—Governor Cuomo issued an EO recognizing Juneteenth as a holiday for state employees tomorrow.  June 19th marks the day in 1865 when Federal troops informed African American slaves in Texas that slavery had ended more than a year earlier following the end of the Civil War.

Meet The New Boss—On Monday the Trump Administration announced that it intends to nominate Kyle Hauptman, of Maine, to be a Member of the National Credit Union Administration Board.  He will replace current holdover board member J. Mark McWatters whose previous term expired August 2019.  If confirmed, Hauptman would serve through at least August 2025. Hauptman is currently an economic policy advisor to Senator Tom Cotton (R-Arkansas).

Don’t Forget The Money—Board Member McWatters used a gracious goodbye statement to the industry, to remind credit unions that they still have some money coming their way from the conserved credit unions as outlined on NCUAs website available here.

DFS Issues Guidance On Credit Reporting And Credit Reporting Agencies—As the sugar rush from the PPP loans and the stimulus checks begin to wear off, you can expect more and more issues to arise about your members credit.  Yesterday the New York State Department of Financial Services issued a guidance on credit reporting which is based on a set of principles the department negotiated with the CRAs.  It also will have some impact on what banks and credit unions report when acting as furnishers of credit information.

This Is One Wacky Economy; Retail Sales Surge—Any expert who tells you they know what to expect from the economy should bring you as much comfort as the weatherman confidently predicting what the weather will be like seven days from now.  Yesterday, retail sales bounced back with a vengeance.  Does this mean that a V-shaped recovery is once again possible? Or simply that people are anxious to get out of the house, anxious to spend some of that free money from the Federal Government knowing that the hard times are right around the corner?  The answers to these questions will of course have a profound impact on the financial health of credit unions large and small in the coming months.  Right now unfortunately, the economy is analogous to a 5,000 piece jigsaw puzzle with all the pieces spread across the table.

New York Primaries Worth Watching—With the state seemingly turning bluer by the day, and national pundits seeking to figure out how much staying power AOC has, here is a great piece of analysis from long time Albany hand Bruce N. Gyory handicapping the upcoming primaries in New York’s 16th Congressional District where longtime Congressman Eliot Engel is facing the proverbial spirited challenge from political unknown Jamaal Bowman and in the 15th Congressional District where the winner is all but assured of replacing retiring Congressman Jose E. Serrano.

 

June 18, 2020 at 10:04 am Leave a comment

Once Upon A Time At Your CU. Are you Ready To Respond To The Next Data Breach?  

One of these days you’re going to grab some coffee, turn on your computer and start your work day and, while dutifully reading this blog, get an email from your IT person informing you that your credit union has been hacked.  You don’t know exactly how much data has been exposed, but there’s a pretty good chance a third party gained access to your member’s personally identifiable information.

You spring into action by pulling out your credit union’s Data Breach Protocols, which will of course have just been updated a few months ago as part of the credit union’s on-going planning. The Data Breach Response Team is called into action and everyone knows exactly what to do.   Of course, you quickly want to nail down exactly what has happened.  So even before you contact your outside counsel, you reach out to a third party information security team that you know has experience dealing with data breaches.

Since contracts are always important and closely adhered to, your outside counsel quickly drafts a contract for the IT team and it quickly gets to work.  Within days the IT consultant reports back with a written document describing what happened and why, some of which doesn’t paint the credit union in the best light.  You contact your regulators and notify your members that a data breach has occurred and quicker than the coronavirus can spread through a bunch of drunk college kids on Spring Break, the first class-action lawsuit has been filed against your credit union.

The scenario I just described is similar to the one confronted by Capital One when it discovered it was hacked in 2019.  In re: Capital One Consumer Data Security Breach LitigationCapital One Ordered To Release Report Of Massive Data Heist OPINION PDF

My guess is that, while many of you have at least thought about the issues raised by the above hypothetical, you probably haven’t given much thought to the issue of attorney-client privilege in general or attorney work product in particular.  It’s time for that to change.  Capital One is now battling to keep a report produced by an outside IT team exempt from discovery from attorneys suing it over the data breach.  It has lost the first round in its battle which is an unfortunate development for anyone who works to protect financial institutions.

Attorney Work Product refers to work performed by attorneys or their agents in response to or in anticipation of litigation (Federal Rule of Evidence 502 and New York CPLR 3101).  This seemingly straightforward definition is not as easy to apply as it should be.  For instance, in Capital One’s case a third party IT report was done at the request of the bank’s outside counsel and its results were given first to the law firm.  Nevertheless, the court concluded that the report would have been produced with or without the threat of litigation.  It pointed out for example that the work being performed by the IT team was similar to work it was performing on behalf of the bank pursuant to a contract that was entered into before anyone knew of a data breach.  In addition, the report could be used to comply with regulatory requirements of which the bank had to comply regardless of the lawsuit.  The bank is appealing.

Although the scope of and deference given to attorney-client communications varies by state, the case underscores the importance of considering how best to keep attorney communications private in your data response plan.  A good data breach response has to allow for frank discussions and analysis.  This is precisely why the attorney-client privilege exists.  Mistakes are going to happen.  The consequences of these mistakes will be exacerbated if attorneys aren’t free to give the most straightforward advise they can.

June 17, 2020 at 11:18 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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