Posts filed under ‘Compliance’
That seems to be the attitude of many millennials based on the number of surveys that consistently report that those born between 1982 to 2000 are at best indifferent and at worst skeptical when it comes to financial institutions.
For example, according to recent research conducted by Goldman-Sachs, 33% of millennials don’t think they will need a bank in the near future. In addition, 50% of the surveyed millennials are counting on tech startups to overhaul banks. Interestingly, this group is not only skeptical of banking, but profoundly impacted by the Great Recession. According to this survey, less than half of them have a credit card.
This is consistent with what I’ve described in previous blogs: a generation that will make its banking relationship decisions in a vastly different way than any previous generation. In addition, this is a generation that is more than willing to scrap traditional banking models. After all, Facebook announced recently that it is debuting an App to allow its users to make account to account transfers. Can you imagine the previous generation so willing to transfer cash without breaking out the checkbook or walking down to the bank.
I came across this survey as I was taking one more look at a proposal by the CFPB to make reloadable general purpose prepaid cards subject to Regulation E. I just can’t make up my mind when it comes to the proper role of regulation and the prepaid card. On the one hand, as an advocate for credit unions, it makes sense that as prepaid cards provide consumers with almost all the same benefits they get from a traditional banking accounts and debit cards that these accounts be subject to the same regulatory requirements such as disclosures and overdraft protections. On the other hand, the growth in prepaid cards reflects, in part, a generational shift away from traditional banking. Like them or not, the availability of these cards in stores such as Walmart have provided access to financial products for a group of people who may have otherwise chosen to forego or at least delay entering traditional banking relationships.
My concern is that by making prepaid cards more like traditional accounts from a regulatory perspective, we run the risk of squelching innovation. Rather than imposing traditional account regulations on prepaid cards, let’s assume that in the aggregate your average consumer opting for the prepaid card knows what he or she is doing, and is willing to take the risk in return for a different kind of consumer product. After all, from a generational standpoint, millennials have seen what traditional banking can do to their parents. Who can blame them if they are not all that impressed.
NCUA Sues HSBC
HSBC became the latest investment bank to be sued by NCUA over its alleged failure to properly scrutinize mortgage-backed securities purchased by bankrupt corporates. This time, NCUA is headed to Manhattan Federal Court.
HSBC was a trustee for 37 trusts that issued residential mortgage-backed securities. As with almost all its other cases, NCUA is arguing that HSBC breached its fiduciary obligation to properly assess the quality of the mortgages it used to create these securities. As alleged in the complaint, “an overwhelming number of events alerted defendants to the fact that the trusts suffered from enormous problems, yet it did nothing.” Money recovered in these and other lawsuits after legal payouts will be used to reduce credit union costs related to losses to the Share Insurance Fund.
Typically, your faithful blogger likes to prepare posts first thing in the morning to provide you with the most up-to-the-minute information that is going to impact your credit union day. Today, I’m cheating. As you read this post, there is a good chance that I am still sleeping, having binged on a late night college hoop extravaganza. Later today, I will be playing poker with 25 fellow hooky players. I must be rested and sharp for such a day’s work.
Why am I telling you this? I just watched an Internet broadcast of yesterday’s NCUA board meeting and I couldn’t resist giving you my take on some very good news. In fact, I am as pleased as I would be if I got dealt a Straight Flush on the River.
In the latest example of how an infusion of new blood has given the agency enthusiasm for real mandate relief, the NCUA has decided to go forward with plans to eliminate the Fixed-Assets Cap. This cap currently limits federal credit union expenses for buildings, furniture, equipment – including computer hardware and software, and real property to 5% of a credit union’s shares and retained earnings unless they get a waiver. The really good news is that NCUA is proposing to far exceed its initial proposal made in July of 2014 and not only eliminate the cap, but do so without a requirement that credit unions submit a fixed asset management program (FAM).
When NCUA initially proposed eliminating the fixed asset cap, it coupled this proposed reform with a requirement that credit unions submit a highly detailed plan and mandating procedures to insure a board’s involvement in the project. Credit unions and associations, including NYCUA, argued that while they supported elimination of the cap in concept the FAM was so onerous that the proposed “reform” was of little value. Yesterday, the agency proposed doing away with both the cap and the proposed FAM. Instead, guidance will be issued to give credit unions and regulators a sense of when a credit union is taking on too much risk.
This means that NCUA should and will have the authority to question building plans, but that credit unions should be able to execute expansion dreams so long as they can justify them. In yesterday’s board meeting, NCUA’s Larry Fazio quoted the Gospel of Luke – I’m not kidding – for the following proposition:
“Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying, ‘This fellow began to build and was not able to finish.’(14:28-30).
Regardless of what your religious beliefs are, with or without a formal cap, NCUA always has had and always will have the authority to question building plans on safety and soundness grounds. NCUA may not be requiring credit unions to develop a detailed FAM, but credit unions should be able to demonstrate that they have thoroughly analyzed the cost and benefits of their project by, for example, doing cost projections. They also should be able to show that the board was actively involved in the building decision. Neither of these conditions are unreasonable and I would much rather credit unions be prepared to demonstrate how their projects reflect their unique needs instead of being required to comply with inflexible regulations.
The Board also decided to go forward with an amendment establishing a standard occupancy requirement. Under existing regulations, an FCU must partially occupy the buildings acquired for future expansion within three years and unimproved property within six years. NCUA is going forward with plans to require credit unions to partially occupy property within 5 years of its acquisition whether or not it is improved. NCUA is going to put these new changes out for a 30-day comment period.
On that note, enjoy the basketball and remember people who chase straights and flushes arrive on planes and leave on buses.
As readers of this blog know, last week the Supreme Court unanimously reversed a lower court decision and upheld the U.S. Department of Labor’s authority to issue an opinion letter classifying mortgage loan officers as non-exempt employees for purposes of the Fair Labor Standard Act (Perez v. Mortgage Bankers Ass’n, No. 13-1041, 2015 WL 998535, at *4 (U.S. Mar. 9, 2015). What kind of impact will this have on your credit union? I can’t answer that for you, but the question you should be asking is: What are my employees’ primary duties? If an employee’s job is to act as a mortgage loan officer, then the decision may change the way he is classified and compensated. In contrast, if your supervisors originate the occasional mortgage, but spend most of their day supervising staff, then the decision won’t impact your operations. The key point is that labels don’t matter: it’s what the employee actually does that you and your HR person have to look at in the aftermath of this ruling.
First-with apologies for those of you for whom this is real basic stuff-federal law divides us up into two basic categories of workers: exempt and nonexempt. Nonexempt employees are entitled to overtime whereas exempt employees are not. The distinctions made sense in 1938 when it was obvious who the blue collar factory worker was and who was the white collar boss, but in the information age, the distinction isn’t as easy to figure out. Regulations recognize five categories of exempt employees including professional, administrative, executive, outside sales, and computer-related professions. In 2010, the Obama Administration’s DOL reversed an earlier DOL opinion letter. It ruled that mortgage loan officers were not administrative employees and had to be given overtime. Last week’s decision upheld the DOL’s right to issue this ruling.
The distinction can be tricky for credit unions, particularly smaller ones. For example, since many branch managers wear multiple hats-they not only manage staff but they sign off on most of the mortgage loan originations-does this decision mean that they are now automatically non-exempt employees? No, it comes down to what an employee’s “primary duties” are. Nothing in the Court’s decision changes this erstwhile test. As explained on the DOL’s website, the primary duty “means the principal, main, major or most important duty that the employee performs.”
Remember, the label you give a job doesn’t mean all that much. For example, our small branch manager who helps out with an occasional mortgage loan is considered a Mortgage Loan Originator under other federal regulations; after all she sometimes offers, arranges, or assists a member in obtaining or applying for a mortgage at the credit union. ( 12 CFR 1026.36.) But, while the CFPB doesn’t care what an originator’s primary duty is, the DOL sure does
They may-at least in relation to mortgage loans involving bankrupt borrowers.
Let’s recall that in passing Dodd Frank and promulgating its regulations Congress and the CFPB wanted to minimize potential dual track foreclosures whereby a bank agrees to modify a mortgage loan on a Friday only to foreclose on the same house the following Monday. As a result, the 2013 Mortgage servicing rules mandated that mortgage servicers make a “good faith efforts to establish live contact with a delinquent borrower not later than the 36th day of the borrower’s delinquency and, promptly after establishing live contact, inform such borrower about the availability of loss mitigation options if appropriate.” In addition servicers are required to provide to a delinquent borrower a written notice alerting a delinquent borrower to loss mitigation opportunities not later than 45 days of a borrowers delinquency (12 CFR 1024.39)
But what happens if the delinquent borrower has declared bankruptcy? What happens if the mortgage is owed by co-borrowers only one of whom has declared bankruptcy? These are the type of arcane riddles that keep compliance folks tossing and turning at night. They are very legitimate questions because trying to collect a debt subject to an automatic stay is illegal.
Fortunately, the Bureau That Never Sleeps shared these concerns, or so I thought. When it finalized the mortgage servicing rules in 2013 it clarified that the “Live Contact “ provisions don’t apply if the borrower has declared bankruptcy. It went onto explain that the “live contact” provisions also don’t apply if either co-borrower on a delinquent loan is delinquent. As the Bureau explains in a commentary to this provision “The exemption in § 1024.39(d)(1) applies if any of the borrowers is in bankruptcy. For example, if a husband and wife jointly own a home, and the husband files for bankruptcy, the servicer is exempt from complying with § 1024.39 as to both the husband and the wife.”
This makes perfect sense. After all can you imagine trying to make live contact with a non-bankrupt spouse while trying to avoid running afoul of the bankruptcy code with the other? Would you train your servicers to hang up if it sounds like anyone but the spouse who has not declared bankruptcy answers the phone?
Unfortunately our good friends at the Bureau can’t keep well enough alone. In December they issued a series of proposed amendments to the servicing rules. Some of these changes make sense but the Bureau is considering narrowing the live contact exemption. Specifically it is proposing that the exemption from the live contact requirements applies to only those non-bankrupt borrowers who are jointly liable on a mortgage loan with a debtor in a Chapter 12 or Chapter 13 bankruptcy case. In other words, if the Bureau goes forward with this proposal you would have to make a good faith effort to make live contact with a non- bankrupt co-borrower whose co-borrower declared chapter 7 bankruptcy.
The Bureau is responding to consumer groups who point out that there is currently no prohibition in the bankruptcy code against contacting a non-delinquent co-borrower. Fair enough. But this means that under existing law servicers get to use their own judgment in deciding when the benefits of such contact are worth the risks. How serious a problem is the CFPB trying to address anyway? Is there an epidemic of houses being lost because a co-borrower filed for Chapter 7 bankruptcy and the other co-borrower didn’t know? This is a great example of crafting a regulation that is great in the abstract just so long as no one has to try to implement it.
As for the early intervention notices the Bureau is proposing to mandate that servicers, with certain exceptions, be required to provide the written early intervention notice required by § 1024.39(b) to a delinquent borrower who is in bankruptcy or has discharged personal liability for the mortgage loan. The comment period ends Monday and I will keep you posted on what the CFPB decides to do.
Have a good weekend.
Its great having the Clinton’s back in the spotlight.
Their penchant for going right up to the line of propriety and wallowing in the gray area of the law (e.g. how do you define “is” anyway?) provides so many entertaining blog worthy teaching moments that I’m sure Hillary’s relentless drive for the Presidency will be of great benefit to blogger and reader alike.
In case you missed it, earlier this week the former First Lady held a press conference to dispel any notions that she was knowingly doing something inappropriate when she had a personal server installed at her private residence so she could store her State Department email on her personal account. (Can you imagine Putin responding to an email from Secretaryofstatechick at yahoo.com?)
Anyway, shame on those of you who thought that she was trying to pull a fast one. The prestigious law school graduate, and former high-powered lawyer with the most experience in and around government of any presidential candidate since John Quincy Adams didn’t realize that it might be wrong to put government email on her personal server and decide for herself what emails should be saved, destroyed and parceled out.
In fairness to the Lady Who Would be Queen, the question of how much email to retain and for how long is one that vexes businesses of all shapes and sizes including credit unions every day. Compliance people hate it because there are few bright line rules about how long email should be retained. Instead one of the best guides to use in crafting your credit union’s email retention procedures are the factors considered by the courts overseeing lawsuits. Why? Because unless you plan on never getting sued by a former employee or ending up in a contract dispute with a vendor the courts are going to expect you to be able to provide basic information that the party suing you needs to prove its case. The more reasonably you maintain your email today the more slack a court may be willing to cut you tomorrow when determining whether you or the disgruntled plaintiff should bear the cost of discovery. There are also specific recordkeeping requirements for specific regulations but basing your record retention exclusively on these requirements doesn’t do enough to provide your credit union with an appropriate record retention framework.
As a general rule a party being sued bares the cost of complying with discovery requests-as those of you who have ever tried to get an attorney to reimburse your credit union for the cost of complying with an information subpoena are well aware. However with the explosion of electronic storage courts have become sensitive to the fact that, depending on a corporation’s size, electronic record retention and retrieval of email and other documents can become prohibitive. Furthermore, it isn’t reasonable to impose the same retention requirements on a $50 million credit union and Bank of America. As a result in weighing discovery requests and apportioning retrieval costs federal courts and, increasingly, New York’s state’s courts have examined the following criteria:
“1. [t]he extent to which the request is specifically tailored to discover relevant information;
“2. [t]he availability of such information from other sources;
“3. [t]he total cost of production, compared to the amount in controversy;
“4. [t]he total cost of production, compared to the resources available to each party;
“5. [t]he relative ability of each party to control costs and its incentive to do so;
“6. [t]he importance of the issues at stake in the litigation; and
“7. [t]he relative benefits to the parties of obtaining the information”
U.S. Bank Nat. Ass’n v. GreenPoint Mortgage Funding, Inc., 94 A.D.3d 58, 63-64, 939 N.Y.S.2d 395 (2012)
I underlined 4 5 and 6 because, as you update your email retention or broader record retention policy a key point to keep in mind is that the courts expect you to have a reasonable policy reflecting the characteristics of your credit union. In this day and age you won’t avoid the cost of retrieving email because your policy is to save money by not archiving email on any of your servers for more than one day. Conversely it’s perfectly acceptable to delete email where the cost of storing it becomes prohibitive and the likelihood that the information will ever need to be retrieved is slight.
One more thing to really make things more entertaining. Hillary’s mistake also underscores the reality that, in the age of the smartphone, drawing a neat line between an employee’s “work” and “personal email” is all but impossible. It is likely to be the source of many a contentious legal battle. Your policy should put employees on notice that “their” email may not be “theirs” if they are using a company smartphone or using their smartphone to conduct personal business
I wanted to scare you a little with this blog. Your record retention policy is one of the most important policies your credit union can have and deciding how to manage all that email is a crucial component of that policy. This is not an area where you should cut and paste another credit union’s policy and go onto more important work. Instead you should involve your IT staff, your HR person your compliance officer and yes even a lawyer in devising a record retention policy that reflect your credit union’s unique attributes.
Here are three things you should know if you want to be one of the cool kids at the water cooler this morning.
Yesterday, the Supreme Court issued one of the handful of decisions each year that directly impact your credit union’s operations. Most importantly, if you have employees whose job is to assist prospective borrowers in applying for various mortgage offerings, the Supreme Court upheld a Department of Labor interpretation mandating that such persons be treated as non-exempt employees. This means, for example, that originators are entitled to overtime for the time they work over forty hours.
If you don’t do mortgages, I have some bad news and some good news for you. The bad news is that the Court gave agencies like the NCUA the green light to continue and arguably expand their practice of issuing guidance “reinterpreting” existing regulations. The case decided by the Court yesterday (Perez, Secretary of Labor, et al v. The Mortgage Bankers Association, et al) involved the validly of a legal interpretation issued by the Department of Labor in which it opined that mortgage originators should be treated as non- exempt employees. The mortgage bankers argued that the DOL’s interpretation amounted to a new rule and could only be imposed following a formal rule making process. The Court overturned lower court precedent and concluded in a unanimous decision that a formal rulemaking notice and comment period is only required when an agency amends – i.e. changes the wording – a regulation. It can issue all the interpretations it wants and the only remedy for the regulated is to argue that an interpretation is “arbitrary and capricious.” Don’t be surprised if you see amending the Administrative Procedures Act become a major component of Republican regulatory reform efforts.
The good news? You also have three Justices begging for future challenges to the APA. In the short run, the agencies won a major victory yesterday with the Court giving them expanded powers to interpret their own regulations. But, in the long run, the Court will probably give less deference to agencies drafting their own regulations. In the meantime, your credit union faces the potential of more regulatory oversight. Oh Boy!
Regulatory Relief On The Way?
There was some good news on the regulatory front yesterday. Chairwoman Matz dubbed 2015 “the year of regulatory relief.” (I think she stole that from the Chinese calendar) while outlining an impressive-sounding list of reform proposals. The list Includes expanded use of supplemental capital, authorization for large credit unions to securitize mortgage loans and greater Field of Membership flexibility.
All of this sounds promising, but let’s not get too excited until we see the detail. Let’s not forget that NCUA has already proposed changes to FOM requirements that make it more, not less, difficult for credit unions to expand their associational based memberships. In addition, even with yesterday’s Supreme Court ruling, it’s far from clear how much the use of supplemental capital can be expanded without amendments to the law.
Schneiderman Secures Credit Rating Agency Reform
NY AG Eric Schneiderman continued to raise his profile on consumer protection issues yesterday when he announced what is being described as a national settlement with the three major credit rating agencies: Experian, Equifax, and Transunion. Under the agreement, the CRA’s will, among other things, agree to enhanced dispute resolution procedures and delay the recording of medical debt for 180 days. One passage of the press release really got my attention: the settlement “prohibits the CRAs from including debts from lenders who have been identified by the Attorney General as operating in violation of New York lending laws on New York consumers’ credit reports.”
Although the settlement involves the reporting agencies, furnishers of credit information such as credit unions aren’t completely off the hook: “The Attorney General’s agreement requires the three CRAs to create a National Credit Reporting Working Group (“Working Group”) that will develop a set of best practices and policies to enhance the CRAs’ furnisher monitoring and data accuracy.” Stay tuned.
This morning’s top headline in the WSJ is sure to get some attention: It breathlessly announces that Apple Pay “Is beset by low-Tech Fraudsters” It goes onto report news that I have seen floating around the blogosphere for the last few days, mainly that fraudsters are able to use old-fashioned low tech techniques,like using stolen credit cards, to sign-up for Apple Pay and make illegal credit card purchases.
In truth this news should surprise no one. What bemused me about the headline is that if your credit union has signed up to make Apple Pay available for your members-and if you haven’t you should give it serious consideration-remember that it is your credit union that it on the hook for “Apple’s” fraudster problem.
For all the frenzy surrounding it, Apple Pay is nothing more than a way of allowing consumers to make purchases without having to go through the hassle of taking their plastic out of their wallets. If your wallet is like mine this is a big deal. Credit unions and banks are signing up because they are correctly assuming that Apple has the ability to make mobile purchases as common as a song download. But this is by no means a win-win. Apple is taking a slice out of every transaction and your credit union not Apple is on the hook for the type of fraud that the Journal is writing about. If your contract with Apple is anything like the information that I have seen it makes it quite clear that the company is doing nothing more or less than providing a payments platform. It has no way of knowing whether or not a consumer is an authorized user. That is the issuer’s job.
Also contrary to the impression you may get from reading the headlines there haven’t been any reports yet of hackers breaking into Apple’s system and manipulating it to approve fraudulent purchases. If and when this does happen than Apple should have to shoulder some of the liability but until that happens it’s your credit union that is on the hook for that fraudulent transaction to the same extent it is on the hook today for any other unauthorized credit or debit transaction.
Electronic wallet platforms actually highlight the need for basic fraud prevention. Instead of simply allowing your members to sign-up by taking a picture of their card as I did the other day with a card issuing bank, you could require a member to call a number to activate the account or type in additional information. In addition Apple Pay makes stolen financial information that much more valuable. The simpler it is for crooks to use stolen credit cards the more cost-effective it may be for your credit union to issue new cards in response to major breaches.
And remember as a faithful reader of this blog likes to point out Apple is not the only electronic wallet in town. Credit unions have developed CU Wallet. Perhaps as people get user to using their phones for payments they will be more receptive to using different platforms that don’t cut into your bottom line.
Here is a link to a related story
High noon for credit card Surcharges
Do laws that ban merchants from imposing surcharges on credit card transactions while authorizing merchants to offer cash discounts for the same transactions violate the First Amendment? That was the question being mulled over by the Court Of Appeals for the Second Circuit yesterday in Expressions Hair Design v. Schneiderman, The case involves an appeal of an earlier ruling that struck down as unconstitutional New York’s General Business Law Section 518 which bans credit card surcharges. The Association filed an amicus brief in support of the law. Also yesterday our friends at CUNA submitted a brief in a similar lawsuit challenging a Florida surcharge ban on similar grounds (Dana’s Railroad Supply v. Bondi)