Posts filed under ‘Compliance’

3 Things You Need to Know

 

The Next Love Canal?

While the water problems in Flint, Michigan have understandably garnered the national spotlight, the potential that toxic dumping has been taking place in Hoosick Falls, New York is beginning to impact not only the community but lenders.

On Friday, the Albany Business Review reported that Trustco Bank and The Bank of Bennington have temporarily suspended mortgages in the village.  The announcement underscores that environmental problems inevitably have a banking component.  Obviously, problems like this make it almost impossible for homeowners in affected communities to sell their properties.  Less obvious is the fact that lenders could retroactively be made to buy back mortgages on property that is found to be contaminated.

I went back through my archives and as I explained in this blog about the potential risks of fracking, Fannie and Freddie have set up a system where lenders can be forced to buy back mortgage loans years after they were sold to the secondary market.  Let’s hope for the best in the case of Hoosick Falls.

CUSO Registration Takes Effect

For years now, our good friends at the NCUA have expressed concern that they don’t have adequate oversight over CUSOs.  Starting today, CUSOs, irrespective of whether they are owned by state or federal credit unions, must be registered with the NCUA.  As part of this new requirement, all CUSOs must now provide information directly to the agency.  I know this has been a real hot button issue for some credit unions, but the final regulation is much less onerous than what was initially proposed and, the more I look into this issue, the more I agree with NCUA.  It makes sense to increase its ability to assess the impact of CUSOs on the industry as a whole.

The Most Important Election

The election that will have the most direct and immediate impact on your credit union is not the one for President this November.  Governor Cuomo announced Saturday that a special election will be held on April 19 to fill the Senate and Assembly seats of Senator Dean Skelos, Republican and Assemblyman Sheldon Silver, Democrat.  Right now, the Republicans hold a one seat majority in the Senate chamber, but a victory by Assemblyman Todd Kaminsky would mean that the continuing control of Republicans is dependent on the continued support of the Independent Democratic Caucus.

 

February 1, 2016 at 7:46 am Leave a comment

3 Quick Hits for Your Friday Morning

Yesterday, the NCUA held a board meeting but the most interesting news to come out of the agency was its joint announcement with the Treasury Department that they would be streamlining the process for credit unions to become Certified Depository Financial Institutions (CDFI). The agencies hope to double the number of credit unions with that designation by the end of 2016. According to the Treasury, there are currently 296 certified CDFIs, the majority of which are already designated as low-income credit unions.

CDFIs are institutions that have as a primary mission promoting community development. Low-income credit unions are already eligible for many of the benefits that come with a CDFI designation, but CDFIs are eligible for additional technical and financial support from the Treasury Department. To me, it seems like a great idea. But I’ve been surprised by the number of credit unions reluctant to be designated low-income and I will be curious to see if history repeats itself when it comes to CDFI certification.

Credit Unions Get Opportunity to Comment On Overhead Transfer Rate

Score one for NASCUS. The Association led the charge to open up NCUA’s process for determining the Overhead Transfer Rate to greater public scrutiny. Yesterday, NCUA followed through on a promise and announced that it would take public comments on how the agency’s Overhead Transfer Rate and federal credit unions operating fee are calculated. Now it’s time for the industry to put up or shut up on this issue. NCUA has always been skeptical that industry feedback on this issue would be of much value. If the industry doesn’t respond to this opening with thoughtful analysis, their skepticism will be vindicated.

NCUA Outlines Supervisory Priorities for 2016

NCUA released a letter to federally insured credit unions (that includes you state charters) outlining its supervisory priorities for the coming year. On the top of its list was cyber security assessment. All credit unions are encouraged to use the Cyber Security Assessment Tool released by the FFIEC last June. Here’s a blog I did on this issue last year.

Other priorities include credit union incident response procedures for data breaches regarding member information and BSA compliance with a special emphasis on the risk posed by Money Service Businesses. The complete list is available here and is worth a read.

There are even more issues I could talk about today, but there is other work to be done and there’s a little more than 48 hours to go before the Patriots and Tom Brady send Peyton Manning into retirement with a humiliating defeat. On that note, have a great day.

 

 

January 22, 2016 at 8:49 am Leave a comment

Technology Outpaces FOM Requirements

The most intriguing change NCUA is proposing to its Chartering and Field of Membership Manual that it officially issued  on December 10th is one that would, for the first time, acknowledge that technology is transforming banking.  This  change alone makes NCUA’s  proposed changes intended  to give federal credit unions greater flexibility in expanding their membership worthy of the full- throated support of the entire industry.   At the same time, the proposal’s limitations underscore that the truly radical changes that need to be made to credit union membership requirements can only come by way of Congress.

Currently, when a multiple common bond credit union seeks to add a select group of members it must demonstrate that the group to be served is within “reasonable proximity” to the credit union’s “service area,” which includes reasonable proximity to a credit union branch, shared branch, a mobile branch that visits the same location on a weekly basis or a credit union owned electronic facility.  In other words. If a  potential member can’t walk or drive to a physical location that member doesn’t have access to a credit union’s services.

This is nonsense. NCUA wants to end this antiquated view of the world at least for multiple common bond credit unions.  It is proposing that groups be considered to have reasonable access to a service facility so long as they have online access to a transactional website.

Just how important is this change? It’s a step in the right direction, albeit a baby step towards giving federal credit unions the flexibility they need to compete in a world in which technology is making the traditional brick-and-mortar model of banking obsolete and fundamentally changing the concept of what should be considered a community.

For instance,  this morning’s New York Times reports that the growth of so-called financial technology companies has the biggest banks in the world scrambling to develop  online, smartphone-driven banking platforms.  It explains that “some banking habits are changing across the population. In 2010, 40 percent of Americans with bank accounts visited a physical branch once a week, while only 9 percent made a mobile transaction weekly, according to survey research by Javelin Strategy and Research. By 2014, the percentage reporting weekly visits to bank branches fell to 28 percent, while the weekly mobile banking share tripled, to 27 percent.”

Meanwhile credit unions are constrained by reasonable proximity tests.  Of course the regulation is a good first step but it doesn’t go far enough, fast enough.  The change that needs to be made is one that replaces the requirements that community credit unions operate in “well-defined local communities” with one requiring credit unions to operate in well- defined  communities.  After all, Merriam Webster defines a community not only as “ a group of people who live in the same area (such as a city, town, or neighborhood)” but also as  “ a group of people who have the same interests, religion, race, etc.“   The problem is that by mandating that communities be “local,” Congress constrained growth to communities in the same proximity

Still NCUA’s proposal is an important one and you should take the time to express your support.  You have until February 8th to do so.

January 19, 2016 at 9:18 am Leave a comment

Credit Unions Dodge Home Loan Bank Bullet

It might not be sexy, but credit unions scored an important regulatory victory earlier this week when the Federal Housing Finance Agency (FHFA) decided not to impose additional requirements on financial institutions that are members of the Federal Home Loan Bank system even as it went ahead with tighter regulation of the insurance industry. I know that sounds about as exciting as watching public access television, so let me explain.

The Federal Home Loan Bank system is made up of 12 regionally based banks funded by membership investment. It has been around since 1932.  It is one of those Depression-era creations of the federal government intended to, in the words of the Supreme Court , put “ long term funds in the hands of local institutions in order to alleviate the pressing need of homeowners for low cost” mortgages (See Laurens Fed. Sav. & Loan Ass’n v. S. Carolina Tax Comm’n, 365 U.S. 517, 521-22, (1961).  As of 2014, 19% of credit unions were bank members.

Institutions applying for membership have to have 10% of their assets in mortgage loans at the time they apply. (An exemption from this requirement for institutions with less than $1 billion in assets doesn’t apply to credit unions).  The proposal under consideration by the FHFA would have required that this and other asset requirements be assessed on an ongoing basis.  This would have been particularly troubling, because many credit unions sell their mortgages to Fannie and Freddie.  It also was another example of regulatory overkill.  Remember this proposed regulation came out just as the NCUA was unveiling proposed risk weightings for larger credit unions subject to risk based capital requirements.

Fortunately, commonsense prevailed. In announcing the final regulations, the FHFA decided that “While members’ ongoing commitment to housing finance is important to ensuring fidelity to the Bank Act, FHFA believes that the statutory requirement for members to continue their commitment to housing finance can be addressed, for the time being, by monitoring the levels of residential mortgage assets they hold.“

Credit unions almost got caught in the crossfire of a much bigger battle involving the insurance industry that you may continue to hear about. Insurance companies are allowed to be bank members because many of them invest in mortgages.  According to the agency, captive insurance companies are being created by Real Estate Investment Trusts primarily so that they can qualify for FHLB membership. Subsequently, the insurance companies transfer FHLB advances to their parent REITs.  The final regulation still makes captives ineligible for membership but existing captive members will have five years to pack their bags.

Folks, regulatory advocacy might not be exciting.  Whenever my kids ask me what I do for a living, their eyes glaze over.  But the FHFA’s final rule is the latest example of how it really does make a difference.

I will be back on Tuesday. Have a great long weekend.

https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/Membership%20Final%20Rule%20to%20Fed%20Reg.pdf

January 15, 2016 at 9:18 am Leave a comment

Court Denies Pot Credit Union Access To Banking System

Concluding that existing federal guidance does nothing more than encourage  financial institutions to “look the other way” when it comes to complying with federal laws that make the possession and sale of marijuana illegal. a federal judge on Tuesday   dismissed a credit union’s attempt to force the federal Reserve Bank of Kansas to allow it to open up a Master Account.(THE FOURTH CORNER CREDIT UNION, a Colorado state-chartered credit union, Plaintiff, v. FEDERAL RESERVE BANK OF KANSAS CITY, Defendant., No. 15-CV-01633-RBJ, 2016 WL 54129, at *1 (D. Colo. Jan. 5, 2016)

The ruling, if upheld on appeal, raises serious questions about the legality of federal guidance allowing credit unions and banks to provide banking services  in states such as New York where marijuana possession is legal in at least some circumstances.  Any credit union or bank that provides services for Marijuana Related Businesses should be analyzing this decision today and discussing if it impacts their business practices.

In 2012 the Mile High state lived up to its moniker when it voted to amend its Constitution and enact legislation legalizing the sale and possession of marijuana.  Marijuana was then,  and remains today,  a controlled substance which is illegal to possess and sell  as a matter of federal law.  Consequently financial institutions were reluctant to provide banking services for marijuana businesses even after the state legalized it.

Frustrated by this lack of financial access, representatives from legal pot states reached out to the federal authorities.  As I explained   in more detail in previous blogs (see below),  the Justice Department’s Cole memorandum outlined the conditions under which businesses would not be prosecuted for aiding marijuana businesses and a guidance issued by FinCEN outlined how financial   institutions could both comply with BSA requirements, and service pot businesses. Nevertheless financial institutions still remained reluctant to service pot businesses. Out of frustration,  Colorado  authorized the creation of the Fourth Corner Credit Union to provide banking services for these businesses.

Remember that even state chartered credit unions need NCUA’s permission before they can provide federal share insurance to their members. In addition all credit unions and banks need access to a federal reserve bank Master Account to facilitate electronic fund transfers. Things got really hazy when NCUA refused to  authorize share insurance for the credit union and the Federal Reserve  Bank of Kansas refused to grant it a Master Account . Without this access the credit union cannot operate in any meaningful way.

It sued  in federal court.  It argued the Federal Reserve Bank  was abusing its discretion by rejecting the credit union’s access to the Federal Reserve System.  It stressed that it was ready, willing and able to comply with the Cole memorandum, FinCEN’s mandates and state law.  It wanted the court to issue an order that it be given a Master Account. The Federal Reserve Bank moved to dismiss the lawsuit and on Tuesday Judge R. Brooke Jackson firmly sided with the Federal Reserve.

He ruled in blunt and concise language that by ruling for the credit union he  would be forcing the Federal Reserve to “facilitate criminal activity” As for the argument that the Cole Memorandum and FinCEN  Guidance authorized pot businesses he concluded that they did no such thing.

“[T}the Cole memorandum emphatically reiterates that the manufacture and distribution of marijuana violates the Controlled Substances Act, and that the Department of Justice is committed to enforcement of that Act. It directs federal prosecutors to apply certain priorities in making enforcement decisions, but it does not change the law. The FinCEN guidance acknowledges that financial transactions involving MRBs generally involve funds derived from illegal activity, and that banks must report such transactions as ‘suspicious activity.’ It then, hypocritically in my view, simplifies the reporting requirements.”

Whether you agree or disagree with this decision it underscores that  this issue has festered long enough.   Either Congress  must act to legalize state drug laws  or the next president should withdraw the Cole Memorandum and FinCen Guidance .  We are a Nation of Laws not a Nation of Laws that prosecutors  and regulators  choose to enforce

Here are some previous blogs on this increasingly important subject.

https://newyorksstateofmind.wordpress.com/2015/10/23/legal-haze-thickens-for-pot-businesses/

. https://newyorksstateofmind.wordpress.com/2015/08/03/mile-high-confusion-has-national-implications/

 

January 7, 2016 at 9:31 am 1 comment

CFPB Clarifies TRID Liability

 

Well, I’m back for another fun-filled year trying to help you stay up-to-date on the issues that could most affect your credit union.  If, like your faithful blogger, you have spent a good chunk of the last week and a half engaged in pursuits that have little if anything to do with banking, here is a quick look at an important development you may have missed.

On December 29, the CFPB offered its opinion regarding the increased liability mortgage lenders face as a result of the “Know Before You Owe” mortgage disclosure rule that took effect in October in response to a letter from the Mortgage Bankers’ Association.  In a nutshell, the Bureau does not believe that lenders face greater liability.  This is certainly one to keep in the file.  Dodd-Frank mandated that homeowner disclosures required by the Truth in Lending Act and RESPA be combined into a single regulatory framework.  Since RESPA and TILA have historically imposed different penalties for compliance failures, lenders have been justifiably concerned about how much liability they face when they make a mistake implementing this new regulation.

Among the key points from the Bureau are “as a general matter” legal liability will be based on the accuracy of final closing disclosures and not on initial loan estimates.    According to the Bureau, this means that “a corrected closing disclosure could, in many cases” forestall private liability.

In response to concerns that the regulation has made it more difficult to sell mortgages in the secondary market, the Bureau stresses that if investors are rejecting loans based on formatting “and other minor errors,” they are doing so for reasons unrelated to potential liability.

While the Bureau’s clarifications are welcome, the issues raised by concerned lenders, including credit unions, will ultimately be resolved by the Courts.  In other words, while the CFPB’s interpretation of Dodd-Frank may provide persuasive authority, it is far from the final word on the issue.

On that note, welcome back.

 

January 4, 2016 at 8:20 am 1 comment

On Mammoth Bills And Giant Defeats

A little before three o’clock yesterday I was so disgusted by my Giants-who were trailing 35-7- that I turned off the game secure in the knowledge that their hopes of making the playoffs were over. I was so desperate to wash football from my head that I  searched for the Cybersecurity Information Sharing Act (CISA) which was tucked away in the good old-fashioned mammoth budget bill signed by the President late last week.  CUNA and NAFCU both supported the bill,  which makes it easier for credit unions and businesses to share information with each other and the federal government about cyber threats without violating federal law or getting sued. http://docs.house.gov/billsthisweek/20151214/CPRT-114-HPRT-RU00-SAHR2029-AMNT1final.pdf

Since 9\11,   large corporations and banks have been complaining that existing laws make it difficult for companies and the government to share cyber threat information.  The major thrust of the act is to facilitate the sharing of cyber threat intelligence  by allowing   companies to enter into agreements to monitor each other’s information technology systems without running afoul of federal law or getting sued . For example, the law authorizes “two or more private  entities to exchange or provide a cyber threat indicator or defensive measure, or assistance relating to the prevention, investigation, or mitigation of a cybersecurity threat.” In addition the law stipulates that  “No cause of action shall lie or be maintained in any court against any private entity, and such action shall be promptly dismissed, for the sharing or receipt of a cyber threat indicator or defensive measure.”

The next step is for the government to issue proposed guidance and regulations laying out in greater detail what information can be shared and under what circumstances. Given the criticism of the bill from privacy advocates who have described it as the next Patriot Act.  expect an intensive rule making process. The bill is a step in the right direction for those of us who feel that the country needs a more robust and coordinated cyber defense system.

But much more still needs to be done.  Most importantly, it does nothing to address other cyber issues of more pressing concern to many credit unions.  For example it  imposes no cyber security protocols on merchants.  Instead,  the government is tasked with  accessing cyber security  implementation challenges faced by small businesses as part of a broader effort to disseminate cyber security “best practices.”

When I was done reviewing the bill I went  to  a family get together where I started complaining about the Giants getting blown out.  My Father-In-Law looked at me like I was nuts.  In ends up that I missed the  greatest comeback in Giants’ history which is fine with me because they ended up losing anyway when the Panthers kicked a game winning field goal as time expired.

December 21, 2015 at 9:25 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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