Posts filed under ‘Compliance’

The ABC’s of MBL

Those of you who do MBL loans or who are thinking about doing MBL loans should take a look at this recent FAQ released by the NCUA in its Quarterly Report.

As readers of this blog know, on January 1st NCUA instituted a radical new approach to MBL regulation under which credit unions are given greater flexibility in shaping their MBL programs while examiners still retain the responsibility for making sure that credit union programs are designed and implemented in a safe and sound way. This approach is certainly worth trying, but it is a work in progress that requires credit unions not only to embrace their increased flexibility but their increased responsibility and examiners to distinguish between an inappropriate MBL program and a creative one.

As such, this FAQ is an important guidance which should be read in conjunction with NCUA’s Examination Guide. Most importantly, the guidance reiterates that there are baseline elements that examiners are expecting to see in an MBL program. For example, credit unions are not just expected to have relevant policies and procedures commensurate with the sophistication of their MBL programs but also personnel qualified to manage these programs.

I continue to get questions about whether NCUA expects credit unions to continue to get personal guarantees when making commercial loans. So I was happy to see NCUA explain that “in those cases where there are strong mitigating factors” a credit union is not required to get a personal guarantee, but should detail in writing why it decided that a guarantee was not necessary.

Curmudgeons like myself have always been concerned that, just as credit unions now have greater flexibility in administering their MBL programs; examiners also have greater flexibility in curtailing credit union practices on safety and soundness grounds. As a result clear and consistently applied guidance is absolutely crucial if this bold experiment is going to succeed. The FAQ explains that the primary sources for credit unions implementing MBL programs are the proposed and final rules and their preambles, as well as the updated commercial and MBL section of the examiners guide.

The NCUA also explains what steps credit unions should feel free to take when they disagree with an examiners assessment pertaining to their MBL program. I have been around credit unions long enough to know that some of you read that last sentence and snickered out loud (SOL), but seriously, for this new approach to regulatory oversight to work credit unions can’t be afraid to engage in a dialogue with their examiners about their MBL practices.

SC Decides Important Debt Collector Case

Yesterday, the Supreme Court unanimously upheld a narrow interpretation of the Fair Debt Collection Practices Act (FDCPA). The court ruled that Santander Bank was not subject to the FDCPA after it purchased delinquent car loans.

Incidentally, for you legal geeks and grammarians the decision was the first written by Neil Gorsuch and included a discussion of the past participle.

June 13, 2017 at 10:24 am Leave a comment

Are You Really Ready For Remote Deposit Capture?

One of my compliance pet peeves has been the rush to embrace remote deposit capture without a clear framework for apportioning liability. “Check 21” authorized “substitute checks” which are truncated electronic images of paper checks that are treated as real checks. The idea was to speed up settlements between banks.   At the time no one envisioned a world in which your average consumer would have the ability to create electronic images with a smartphone. As a result, what happens if a credit union receives a deposit of an original paper check that was returned unpaid because the check was previously deposited using a remote deposit capture service and paid?

So I was pleasantly surprised that the Federal Reserve finally approved regulations slated to take effect in July 2018 which updated regulation CC for the new century. There is a lot of important stuff in here so in the coming weeks I will be periodically highlighting some key changes as well as an additional proposal the Fed is seeking comment on. Remember this impacts your credit union irrespective of its size.

A new section 229.34 addresses this precise issue and I’m quoting extensively from the accompanying commentary:

“Depositary Bank A offers its customers a remote deposit capture service that permits customers to take pictures of the front and back of their checks and send the image to the bank for deposit. Depositary Bank A accepts an image of the check from its customer and sends an electronic check for collection to Paying Bank. Paying Bank, in turn, pays the check. Depositary Bank A receives settlement for the check. The same customer who sent Depositary Bank A the electronic image of the check then deposits the original check in Depositary Bank B. There is no restrictive endorsement on the check. Depositary Bank B sends the original check (or a substitute check or electronic check) for collection and makes funds from the deposited check available to its customer. The customer withdraws the funds. Paying Bank returns the check to Depositary Bank B indicating that the check already had been paid. Depositary Bank B may be unable to charge back funds from its customer’s account. Depositary Bank B may make an indemnity claim against Depositary Bank A for the amount of the funds Depositary Bank B is unable to recover from its customer.”

Does all this mean that you are at the mercy of your member? Not entirely. The commentary goes onto explain that if the original check deposited in Bank B contained a restrictive endorsement “for mobile deposit at Depositary Bank A only” and the customer’s account number at Depositary Bank A. Depositary Bank B may not make an indemnity claim against Depositary Bank A because Depositary Bank B accepted the original check bearing a restrictive endorsement inconsistent with the means of deposit.

What all this means on a practical level is that you may want to limit access to remote deposit capture to your more seasoned members. Remote Deposit Capture is the future but it’s also ripe for abuse. The new regulations make clear that the credit union offering the service is ultimately vouching for its member’s trustworthiness.

 

June 8, 2017 at 9:28 am 1 comment

Reports of CFPB’s Demise have been greatly exaggerated

Last Thursday, Congressional efforts to kill regulations set by the CFPB extending certain protections currently given to debit cards to pre-paid card holders quietly died; the regulations take affect April 2018. Even if you don’t offer pre-paid cards this speaks volumes about the regulatory environment in which we will find ourselves for years to come.

First, a slight digression since I really enjoy this subject. In 1996 Congress passed and Hillary Clinton’s husband signed into law the Congressional Review Act (5 U.S.C. § 801-808). Under this legislation final regulations must be submitted to congress and it has 60 days – excluding certain breaks- to pass a resolution blocking them from taking effect. Since regulators have way too much power, this statue sounds great, but its bark is much worse than its bite. After all, in order for a regulation to be blocked both houses of congress would have to vote to repeal it, and there is always the possibility of a veto.

With Congress and the presidency in Republican hands, the act has become a potent weapon with which to undue many regulations promulgated in the final days of the Obama administration. Since Donald Trump took office in January (yes it has only been 4 months) Reuter’s reports that congress has used the Congressional Review Act to kill 14 pending regulations.

This brings me back to the CFPB’s prepaid card regulation. In early February, Senator Perdue of Georgia introduced a joint resolution to block the regulation. He complained in a press release that “If the CFPB wants to continue to impose rules and regulations that impact every American’s financial well-being, it must answer to the American people.” In the same press release Senator Cotton of Arkansas called the rule “a disaster for consumers attempting to access prepaid cards,” In short, the regulation seemed like precisely the type of CFPB mandate that the free market, anti-regulation congress would quickly make go away. But on Thursday the deadline for repealing this bill came and went.

Consumer groups are right to point to this failure as a strong indication that the CFPB, or at least the regulations it has promulgated to date, are alive and well. After all, if congress doesn’t have the appetite to repeal an esoteric regulation dealing with a specific segment of the consumer finance market, then hopes of forging a bi-partisan consensus on changes to the CFPB seem doomed.

I have a sneaking suspicion we are seeing a reemergence of the same pattern that has made it so difficult for Republicans to “Repeal and Replace” Obamacare. Republicans were unified in their opposition to Obamacare until they had to explain to their constituents that they would lose coverage under the Republican alternative. Now Republicans might be growing skittish over taking on the CFPB if that means repealing consumer protection regulations that consumers like.

Don’t get me wrong. The pre-paid card rule has its defects. And, with or without changes to the CFPB’s structure, we will eventually have a CFPB director appointed by President Trump. Unfortunately however, needed regulatory changes may not be as a dramatic or come as quickly as we would like to see.

May 17, 2017 at 10:19 am Leave a comment

Your Compliance Is Only As Good As Your IT

Yesterday over 20 state regulators and the CFPB took action against Mega-Servicer Ocwen for its continuing inability to address sloppy servicing practices.

Ocwen fueled its amazing growth (as of December it serviced approximately 1,393,766 loans with an aggregate unpaid principal balance of approximately $209 billion) by specializing in sub-prime loans.

Since the vast majority of credit unions are out to help their members, as opposed to squeezing every last penny out of them, there is a natural tendency to view news reports such as this one as simply one more example of “Lenders Gone Wild”.

That being said, Ocwen’s legal troubles hold lessons that all lenders would be wise to pay attention to. Most importantly, your compliance regime is only as good as your IT department. Let me explain.

Front and center in the CFPB’s complaint is the servicer’s alleged inability to properly use its major platform, REALServicing and its sub-systems, to manage its servicing responsibilities. The CFPB contends that Ocwen’s employees failed to put accurate borrower information into the system, but “Even when the information in REALServicing has been accurate, REALServicing has generated inaccurate information about borrowers’ loans due to system deficiencies. Because of these system deficiencies, Ocwen has had to rely upon manual processes and workarounds that have themselves resulted in errors in borrowers’ loan information. “

Ocwen’s problems are not new, it entered into a consent decree in 2013 including one with the DFS. A particular concern has been Ocwan’s inability to properly reconcile escrow accounts. In fact, according to a Cease and Desist order filed by North Carolina, the company informed regulators in January that it would cost $ 1.5 billion dollars to make borrows whole. Not surprisingly, the CFPB contends that Ocwen is wrongly relying on a “deficient servicing platform” that has exacerbated its use of inaccurate loan information.

Here are some questions for you to ponder this weekend. Does your credit union have the ability to spot mistakes in your core operating systems? Does your compliance team have enough coordination with your IT people to ensure that new regulations are being properly translated into computer code? Do you exercise adequate oversight over your third party vendors? For instance, how quickly can you get out of contracts? Is there someone in your credit union charged with auditing your key vendor contracts and software providers on an ongoing basis? As a a new colleague of mine likes to say “garbage in … garbage out.”

April 21, 2017 at 9:45 am Leave a comment

Why SC Ruling Will Make Your Debt More Attractive

Expect “debt collectors” to have more interest in buying your delinquent loans as opposed to simply contracting for a percentage of collection recoveries if, as expected, the Supreme Court rules in favor of Santander Consumer USA, Inc.

Oral arguments were heard on the case yesterday, in an important collections case, and we can expect a ruling sometime in June. You can also expect states like New York to take a renewed interest in strengthening state level restriction on debt collection practices.

The FDCPA was passed by congress to deter abusive debt collection practices. It was intended to crack down on third-party collectors which is why it does not apply to banks and credit unions which are collecting on their own loans. The question is who exactly is a debt collector under 15 U.S.C.A. § 1692a (West). Under the statute, a debt collector is any person….”who regularly collects or attempts to collect, directly or indirectly debts owed or due or asserted to be owed or due another.” Santander purchased billions in car loans and set about collecting on those that were delinquent. Borrowers alleged that their aggressive collection practices violated the FDCPA, but when they tried to sue Santander for violations it successfully argued before the Court Of Appeals for the Fourth Circuit. Their argument was that since it was collecting on debt it owned, the statute didn’t apply to its activities.

According to press reports, justices weren’t buying the argument of the borrowers yesterday, who argued that Santander was taking advantage of a loop hole that is inconsistent with congress’s intent when it passed the FDCPA.

No matter how the Federal Law is interpreted, New York is one of several states that has a state level DCPA modeled after the federal law. In a brief submitted to the Supreme Court, New York joined several such states in arguing that existing state level prohibitions aren’t adequate. The brief noted for example, that New York’s debt collection statute (NY General Business Law § 600 et. seq.) has traditionally been interpreted in reference to the federal law and that it does not permit consumers to bring a lawsuit.

Stay tuned – this provides another classic example of how a change in direction in the federal level is often met with push back on the state level.

April 19, 2017 at 9:43 am 1 comment

Two Things I Wanted You to Know before I Travel to Grandma’s House

I just went through my email folder containing ideas for future blog content and there are two things I would like to share with you before heading off to God’s country (i.e., Long Island to visit my family).

First, I have been remiss in failing to inform my faithful readers that the New York State Department of Financial Services recently approved a Wild Card application that will allow state chartered credit unions to limit the oath taking requirements to board members. Let me explain.

Section 468 of the New York State Banking Law requires each “director, officer and member of a committee” to own a credit union share and to take an oath of office when appointed. In recent years this requirement has become increasingly burdensome to state chartered credit unions; it has been interpreted as applying not only to board directors but also to individuals such as lending officers.

The approval of the Wild Card power, under which state chartered credit unions have no greater oath obligations than their federal counterparts, is important not only because it helps state charters operationally, but because it is another example of how Superintendent Vullo is backing up her public commitment to helping makes the state charter option as attractive as possible. Remember, all credit unions in New York State, irrespective of their charter type, have an interest in a strong dual-chartering system.

The second thing I would like you to know was that NCUA recently released a supervisory letter to examiners updating the risk factors that should be considered when evaluating credit union compliance programs. The update reinforces a guidance issued by NCUA 15 years ago when it began to implement a risk focus examination process designed to eliminate the need for annual examinations of well performing credit unions. With the NCUA once again expanding its examination timeline it makes sense to revisit the criteria once again.

On that note, I will be back on Tuesday – enjoy the weekend

 

April 13, 2017 at 8:58 am Leave a comment

Will CFPB’s Pre-Paid Card Rule Increase Consumer Fraud?

As it stands right now, reports of the demise of the CFPB have been greatly exaggerated. It is still diligently going about its business of protecting consumers from themselves even as it continues to insist that its primary goal is to simply insure that consumers are receiving adequate financial information about the products they are purchasing.

Take for instance the CFPB‘s final rule extending Regulation E protections to those prepaid reloadable cards that are becoming an increasingly common way for individuals to transact basic banking services without going thru the hassle or expense of opening an account. The basic idea of the Regulation is that consumers who registered their accounts with the institution that issued the pre-paid cards would receive Regulation E style protections in return for financial institutions being able to perform customer identification checks on these new members. The final rule was to kick in on October 1st.

One area of particular concern has to do with extent to which Regulation E’s liability protection framework should be extended to the holders of pre-paid account cards. Under existing law a consumer who provides notice of an unauthorized use of a debit card within two business days of learning of the theft, or loss of the card can only be held liable of the lesser of $50.00 or the amount of the unauthorized transfer. If notice is received after two business days, the consumer’s liability is capped at no greater than $500.

In the final rule the CFPB decided to extend its one sided liability protections even to consumers who have not yet registered their accounts or for whom CIP protocols have not yet been completed. This approach has not sat well with critics of the CFPB. For example, an article in this morning’s American Banker noted concerns that the new rule has “opened the door to potential fraud by unregistered pre-paid card users” it quotes Ben Jackson, the director of prepaid advisory services at Mercator Advisory Group. Jackson suggests, “The problem only exists once the rule to provide this protection goes into effect, and suddenly unregistered cards might become hugely popular as fraudsters start buying them.” The scenario envisioned by the rule’s critics involves fraudsters buying big ticketed items with unregistered pre-paid cards and then claiming that they were unauthorized. Remember the burden is on the financial institution not the consumer to prove the purchase wasn’t authorized.

The CFPB addressed these concerns by stipulating that consumers don’t have to be provisionally credited for unauthorized payment until a CIP review is completed , but given how difficult it is to prove that a transaction was authorized this a little comfort to pre-paid card issuers.

Given the expended use of reloadable pre-paid cards and electronic devices there is a good chance that this regulation will impact your operations. Even if you don’t issue prepaid card accounts now , you will sometime in the near future . For instance, the definition finalized by the CFPB includes accounts that are issued on a pre-paid basis or capable of being reloaded with funds whose primary function is to conduct transactions with multiple unaffiliated merchants for goods or services, or at ATM’s, including person to person transfers.

 

March 24, 2017 at 9:58 am 1 comment

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Authored By:

Henry Meier, Esq., 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.

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