Posts filed under ‘Compliance’

Just When Does The Equal Credit Opportunity Act Apply?

The CFPB waded even further into a legal dispute which has direct implications for your day-to-day compliance obligations, by issuing an advisory opinion concluding that the Equal Credit Opportunity Act and its implementing Regulation B applies even after an applicant has been granted credit.  If the CFPB is right, you are all going to be sending out more notices. 

As I know most readers of this blog know, taken as a whole, the ECOA and Regulation B prohibit lending policies and practices which have the purpose or effect of discriminating against individuals on the basis of race, sex and other characteristics.  This is why an individual denied credit is entitled to a written explanation of the reasons for the denial.  Everything I just said is settled law.  In recent years, however, there has been an increase in litigation across the country seeking to sue lenders for actions taken after a loan has been approved. 

For example, in Tewinkle v. Capital One, N.A., 2019 WL 8918731 (W.D.N.Y., 2019), a Western New York resident, sued Capital One after it discontinued his line of credit.  Although he received notice of the closure as specified in his account agreement, he did not receive an explanation as to why the line was shut down.  Many financial institutions have taken similar steps in recent years, particularly following the Great Recession and Mortgage Meltdown.  The district court sided with the bank.  Similar cases are now being appealed.

Enter the CFPB.  In its advisory opinion, the Bureau stated the Tewinkle court as well as others that have reached similar conclusions have got it all wrong.  The Bureau argues as a matter of statutory history and (implicitly) the deference due to regulators interpreting ambiguous statutes that consumers like Mr. Tewinkle should receive full disclosures under Regulation B.  To be fair, other courts have agreed with the Bureau’s analysis, which means this is going to be a hotly debated issue in the federal courts, that could ultimately be decided by the Supremes.

This is an area where it is extremely important that people understand precisely what is being debated.  With or without the ECOA, lenders cannot discriminate against individuals at any point in the lending process.  For example, if a lending institution reduced credit just to African-American consumers, this would be a blatant violation of both state and federal law. 

In addition, as pointed out in Tewinkle the ECOA would have applied in this case had our disgruntled homeowner Tewinkle sought reconsideration or applied for renewal of the line of credit.  At this point, he would have been seeking new credit and been entitled to an explanation if he did not receive it;  but that is not what happened in this case. Capital One followed the terms of its account agreement in closing down a line of credit, something it and other lenders should be allowed to do in a fair, efficient manner. 

Stay tuned. This is a debate which is far from over. By the way, I hope to see some of you at tonight’s Southern Tier Chapter event at McGirk’s Irish Pub in Binghamton.

May 11, 2022 at 9:45 am Leave a comment

Required Reading for the Compliance Geek

Yours truly is always a little ambivalent when someone gives me a reading suggestion; on the one hand, I love a good recommendation, on the other, there’s an implicit pressure that comes with the suggestion lest you have to sheepishly explain why you haven’t gotten to the book the next time you run into the recommender.  
So, with apologies to those of you who already have a list of compliance material piling up in your virtual in-box, there are two recent publications that all good compliance people should take the time to peruse. 

Most importantly, the CFPB released its Quarterly Compendium Of Supervisory Highlights which it uses to put financial institutions on notice as to its areas of regulatory emphasis in the coming months.  The Spring issue includes many topics with which I have seen credit unions grapple in the past, including mandatory re-evaluation of increased credit card interest rates under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) and continued concerns about the reporting practices of financial institutions under the Fair Credit Reporting Act.  But the issue that the CFPB decided to highlight that I think credit unions would be well advised to look at most closely has to do with GAP car insurance and the refund of excess payments.  This has already been the subject of lawsuits and if the issue is highlighted by the CFPB you can bet it’s one that class action lawyers will continue to scrutinize.   

A second document you should review is one of my personal favorites.  A new Consumer Compliance Outlook report has been issued by the Philadelphia Federal Reserve.  This issue provides you with a comprehensive overview of CDFIs and how to become one.  I know this is an area that many a credit union has been examining and, as usual, the report is concise and useful. 

On that surprisingly upbeat note, enjoy your day.  For the five of you who care about hockey out there in the blogosphere, I am predicting a Tampa Bay-Calgary Stanley Cup but was unfortunately not able to get this certified as acceptable collateral, as my hockey predictions are even worse than those for other sports. 

May 3, 2022 at 9:02 am Leave a comment

New York State Issues Important Guidance on Virtual Currency and BSA Requirements

New York’s Department of Financial Services issued guidance yesterday emphasizing the unique BSA concerns raised by virtual currency.  While this guidance only applies to entities subject to the Department’s virtual currency license requirements as well as certain trust companies, categories which do not include credit unions, I would suggest anyone responsible for integrating virtual currency oversight into your credit unions compliance framework would be well advised to analyze New York State’s missive. 

In today’s blog, yours truly is not going to summarize the guidance but instead provide some context as to the considerations that regulators and financial institutions should take into account as they begin to dip their virtual toes into the virtual currency space.  In doing so I want to illustrate why I think the DFS guidance is important. 

What virtual currencies such as Bitcoin and Ether have in common is that they allow individuals to transfer these currencies between computers so long as the sender and receiver have set-up virtual wallets.  The key to this arrangement is Distributed-Ledger-Technology (DLT). 

With apologies to the technologically savvy out there, every time a request is made to send or receive “currency” from, or to, a wallet and the transaction is confirmed as valid, a notation is added to a computer program called a block-chain.  This technology is the key to the whole process since it provides a virtual ledger confirming the transfer of debits and credits. 

This means that without the use of a financial institution, any two individuals, using fictitious names, can transfer money.  Needless to say, since the emergence of the Bitcoin, there have been concerns raised about the utility of this technology to facilitate money laundering and other illicit activities (since we’re on the subject of money laundering, my wife and I have started binge watching Ozarks, which is the best show I’ve seen since I binged Breaking Bad, but I digress). 

These concerns have been partially vindicated since ransomware attacks typically include a demand for payment in Bitcoin.  But that may be changing.  Law enforcement is beginning to understand DLT.  For example, the ransomware attack on the Colonial Pipeline understandably got a lot of attention last year, but as significant as the attack itself, is the fact that the FBI was able to track down at least some of the culprits and retrieve much of the ransomed funds. 

Now, I’m not suggesting that credit unions or vendors need to be as savvy as the FBI in order to ensure compliance with BSA and AML requirements, but in the old days it was thought that the only way of deterring illicit activity was to make it as difficult as possible to convert Bitcoin and its prodigies into cold hard cash.  The DFS guidance emphasizes that even now there are basic steps that financial institutions can take as they begin to consider how to integrate virtual currency offerings into their lines of products or working with third party vendors as already permitted by the NCUA.  Besides, as virtual currencies become more widely accepted, there will be less and less need to convert them into fiat currency, but that’s a blog for another day.

April 29, 2022 at 10:20 am Leave a comment

Getting Ready For The Legislature’s Stretch Run

Yours truly is back from his Carolina vacation and has caught up with enough e-mail to finally post again.  While there is a lot I want to get off my chest – there is only so much my wife wants to hear about the banking industry during an eight-hour car ride – I think I will start with a description of some of the key legislative and regulatory issues that will be impacting New York state credit unions in the coming weeks. 

Not only is this an election year, but it is an election year following the redrawing of the election map, meaning that the legislature will want to get out of town as quickly as possible, especially with primaries scheduled for June. 

One of the most important issues we are dealing with is a bill that would retroactively impose strict new requirements on lenders foreclosing on property (S5473D Sanders).  As many of our members have already explained to their representatives during our state GAC, as currently drafted, the retroactive application of this bill and the ambiguity regarding the right of lenders and borrowers to negotiate modifications without running out of time to foreclose on property will actually make it more difficult to work with delinquent borrowers.

We are also continuing to advocate for changes to a proposed data portability and privacy bill which does not currently exempt financial institutions (S6701A Thomas / A680B Rosenthal) as well as continuing to express a strong opposition to state level anti-trust legislation (S933A Gianaris) which could negatively impact the ability of credit unions to help provide communities banking services, particularly in underserved areas. 

All this is taking place as New York’s highest court hears an appeal of a case challenging the legality of New York’s redrawn Congressional map which could allow Democrats to pick up four additional seats as they struggle to keep their majority.  Expect a decision to come down shortly.

As for the federal level, there is an interesting article in today’s WSJ reporting that privacy legislation may finally be getting traction in Congress.  This is potentially good news, provided the legislation does not impose additional requirements on credit unions and the legislation preempts state law.  But I still remain skeptical that Congress will be able to get legislation done this year.  Hopefully, I am wrong.

On the regulatory front, we are still waiting to see what will come out of the CFPB’s initiative against so-called “junk fees”.  The president of the American Bankers Association has already taken to publicly accusing the Bureau of going rouge.  My bet is that we are going to be hearing a lot about overdraft fees in the coming months. 

Last, but not least, let’s hope that the NCUA is going to be following up on its reach-out to credit unions by providing additional guidance as credit unions begin to explore the banking issues raised by distributed-ledger technologies and cyber currencies.  On May 11th yours truly will be discussing the state of regulation in this area and how it is going to impact your credit union as part of the Southern Tier’s Spring Chapter Event in Binghamton.  I noticed it’s at an Irish pub, so let’s share a half-and-half as we ruminate on how technology is once again upending the way banking is done.

Full disclosure, my wife and kids won’t be attending.  They already heard enough about how the NCUA needs to move more quickly and provide additional guidance in this area.  It was one of my favorite topics as we drove around North Carolina.

April 27, 2022 at 9:57 am Leave a comment

Human Trafficking and the FCRA

Last week the CFPB proposed regulations implementing a federal law which amends the Fair Credit Reporting Act (FCRA) to help victims of human trafficking recover from their abuse by helping them gain access to credit.  As currently proposed, the regulation does not impose any new obligations on credit unions but I would certainly make sure that anyone in your credit union who accesses credit reports, or furnishes information to Credit Reporting Agencies (CRAs) is aware of these pending changes.

Section 6102 of the National Defense Authorization Act amended the FCRA by adding a new section 605C which generally prohibits CRAs from including information in credit reports resulting from “any adverse item of information about a consumer that resulted from a severe form of trafficking in persons or sex trafficking if the consumer has provided trafficking documentation to the consumer reporting agency.” Credit unions are furnishers of information contained in credit reports and users of this information, under the FCRA, but are not credit reporting agencies.

CRAs are going to be responsible for collecting the appropriate documentation and ensuring that they update an individual’s credit report.  The obligations of CRAs will be triggered by the receipt of “…a determination that a consumer is a victim of trafficking made by a Federal, State, or Tribal governmental entity or a court of competent jurisdiction or documents filed in a court of competent jurisdiction indicating that a consumer is a victim of trafficking; and government documentation demonstrating that an individual has been victimized by trafficking.” 

Once an individual’s identity has been established, the CRAs will be responsible for using this, or additional, information provided by the victim to remove adverse information from a credit report.  As currently drafted, precisely how this responsibility is going to be performed should be further clarified, but again, a credit union is not responsible for performing this obligation.

One aspect of the regulation that could involve your credit union, involves the receipt of a notification that a credit report contains information affected by human trafficking.  Specifically, the Bureau is seeking comment on whether a CRA should be required to notify a furnisher about the consumer’s submission to prevent a CRA from furnishing a consumer report containing any adverse item of information about a consumer that resulted from trafficking.

Presumably, this would include a mandate that furnishers update their policies and procedures to ensure that they cease providing the impacted information to the CRAs.  We will have to wait and see what is in the final regulations.

April 12, 2022 at 9:53 am Leave a comment

Can Your Member’s Immigration Status Be Considered When They Apply for a Loan?

A married couple comes into your credit union to apply for a car loan.  The spouses, in their late 20s, have excellent credit but one of them is not a permanent U.S. resident.  Instead, one spouse is allowed to live and work legally in the U.S. under the Deferred Action for Childhood Arrivals (DACA) program, a program begun under the Obama Administration, under which children who came to this country illegally are allowed to remain indefinitely and obtain the documentation they need including obtaining valid Social Security numbers.  The credit union informs the couple that the citizen spouse must apply individually.  Since the DACA spouse is not a permanent resident of the U.S., she is not qualified to apply for a car loan under the credit union’s policy.

These facts are very similar to those in a lawsuit recently filed against Alliant Credit Union in federal district court in California alleging that the credit union engaged in illegal discrimination under federal law.  The case is by no means unique to this credit union.  There are currently several cases pending in the Ninth Circuit, which covers the West Coast, in which the rights of lenders must be squared with federal law, which generally bans discrimination, including Ruben Juarez, et al. v. Social Finance, Inc., et al.; Perez v. Wells Fargo Bank, N.A.; Garcia v. Harborstone Credit Union just to name a few.  These cases demonstrate that all credit unions should understand their policies related to loans to members whose immigration status may be in doubt. 

From a compliance standpoint, the credit union would seem to be on solid legal ground.  While Regulation B prohibits lenders from inquiring about a borrower’s race, creed or national origin, the same Regulation provides an exception for inquiries about an applicant’s immigration status.  Specifically, it provides that:  “[a] creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.” [12 CFR § 202.5(e)]

However, this authority is not unlimited.  For example, should lenders be allowed to make a distinction between unsecured loans for which they may not be able to locate an individual force to leave the country and a secured loan for which the credit union will have adequate collateral?  And, is it possible that Regulation B should be struck down as illegal since it is arguably inconsistent with the federal Civil Rights Act, which bans discrimination on the basis of alienage?  These are all open questions that underscore that your policy considerations in this area should go well beyond the plain language of the Regulation. 

This is also an example of how our increasingly divided political discourse is framing our compliance considerations.  The DACA regulation was one of the most fiercely legally contested government acts during the Trump Administration and then, effectively, reinstated by Executive Action when President Biden took office.  In the absence of legislation, it is up to businesses and the courts to grapple with policy issues that used to be dealt with by Legislators. 

From a Compliance standpoint however, DACA is extremely helpful in ensuring that persons covered under the program will have adequate documentation to comply with a lender’s obligations to know their members under Regulation B.

April 6, 2022 at 9:15 am Leave a comment

Does New York’s Commercial Lending Law Apply To Your Credit Union?

Greetings folks, today I am the bearer of good news. 

Lately, it seems to me that a New York State law passed in 2020 has gotten a lot of attention; at least I’ve gotten a concerned phone call and have seen some recent analysis (Law360 subscription required) of this important new requirement.  I’m here to reassure you that it does not apply to either state or federal credit unions in New York. 

Take a look at State Financial Services Law starting at section 801. The article creates a comprehensive framework for the disclosure of commercial loans of $2.5M or less made by non-bank entities.  The law is called the New York Financial Services Law (the “Commercial Finance Disclosure Law” or “CDFL”).  Under this new framework, these commercial lenders will have to provide disclosures similar to those mandated by the Truth in Lending Act.  The law technically took effect in January but DFS issued this guidance explaining that the statute will be enforced once the accompanying regulations take effect later this year.  It’s enough to make anyone in charge of commercial lending break into a hives for fear that they’ve missed the boat on getting ready for these new requirements.

But breathe easy.  Section 802 of the law makes it clear that this article does not apply to financial institutions, a term that includes both state and federally chartered credit unions and banks.  Still, yours truly will be keeping a close eye on developments in this area of the law.  In recent years, consumer groups have expressed concern that existing federal law does not do enough to protect small businesses, particularly those that are women and minority owned.  New York’s law is based on a similar measure already in effect in the great state of California.    In short, I would look at this framework and ask yourself how difficult it would be for your credit union to meet similar requirements. 

On that concise note, I wish you all a happy and warm Tuesday… peace out!

March 29, 2022 at 9:09 am Leave a comment

What Compliance Folks Should Know About Interest Rates

As readers of this blog know, the Fed recently announced that it is raising the interest rate target on the federal funds rate by ¼ to ½ and that it expects to raise the rate even higher in the coming months.  But announcing that it is going to raise interest rates and actually accomplishing this goal is an increasingly complicated endeavor behind which lies some important changes in the incentives given to banks and credit unions with regard to holding on to reserves. 

The Fed now uses a radically different approach to implementing monetary policy.  In a nutshell, for those of you who still think that the Federal Reserve sets interest rates primarily by manipulating reserve requirements, it’s time to throw out those old textbooks.   

Regulation D establishes minimum reserve requirements for depository institutions, including banks and credit unions.  The goal of the Federal Reserve is to strike an appropriate balance between ensuring adequate reserves and encouraging financial institutions to make loans.  Up until 2006, the Federal Reserve did this in part by not offering interest on funds held in Federal Reserve accounts; since there was no interest paid to depository institutions that deposited their funds in a Federal Reserve Bank, there was no incentive for those institutions to keep any more money than necessary to meet reserve requirements in these accounts. 

The system worked fine when things were going well, but what about when there was a sudden shock to the financial system?  For example, as noted in this blog from 2012, in the weeks after 9/11, the Federal Reserve struggled to stabilize interest rates.

To address these concerns, in 2006 Congress amended the law to permit the Federal Reserve to pay interest on its accounts.  Originally, this authority was going to be phased in over a five year period, but in 2008, Congress sped up the timeline in response to the Great Recession.   

How do you nudge-up interest rates while encouraging institutions to keep reserves?  Under a so called “floor approach” to monetary policy, the Federal Reserve provides interest on reserves held at its banks at a rate slightly lower than its target funds rate.  Obviously, in most circumstances, a lending institution is not going to lend out money at a lower rate than it could get from depositing its money in a Federal Reserve account, at least not if it doesn’t have a huge amount of excess reserves that it wants to get rid of. 

This new approach to monetary policy has not gotten enough attention.  It is one of the key reason’s the Federal Reserve has been able to act more aggressively in response to the increasingly common shocks to the system, such as the COVID shutdown and the Great Recession.  All this is made possible because of subtle changes to law and regulation.  For instance, just last June, the Federal Reserve finalized regulations simplifying the calculation of interest on all Federal Reserve accounts.  We can debate whether or not it is ultimately healthy for the fed to play this big a role in the economy another time.  For today’s blog, it is enough to point out that subtle changes in policy and regulations over the last two decades have brought about fundamental changes in the way the financial system is protected. 

For those of you interested in finding out more, there is a great series of posts by the Liberty Street Economics blog available through this link which I relied on heavily for today’s post:

March 28, 2022 at 10:58 am Leave a comment

Why Member Expulsion Legislation Is a Big Win

Greetings Folks, with a special shout out to those of you who attended our State GAC.  It was nice to be roaming the halls of the Capitol once again! 

Speaking of GAC meetings, it’s been around three weeks now since CUNA held its annual GAC meeting and I wanted to talk about recently passed federal legislation, which credit unions lobbied for, to make it easier to expel abusive members.  It is called the Credit Union Governance Modernization Act of 2022.  I get the sense that the industry as a whole doesn’t appreciate how important the legislation is for federal credit unions. 

As I am sure most readers of this blog know, under 12 USC 1764, members can only be expelled from a federal credit union by a majority vote of the Board of Directors for non-participation.  Otherwise, for a member to be expelled from a federal CU, there must be a 2/3 vote of members present at a special meeting.  In some ways, this statute is a quaint anachronism since it reflects the importance that the founders of the credit union movement placed on membership.  The problem is that the statute makes it extremely difficult and impractical to get rid of members for abusive or fraudulent conduct.  As one of New York’s credit unions pointed out at a virtual meeting in DC, it is easier for airlines to ban someone from flying than it is for credit unions to ban an individual who is abusive toward staff. 

The good news is that legislation included in the recently passed consolidated budget act will change this situation when it takes full effect in approximately 18 months.  Among other things, a federal credit union’s board will now be allowed to expel a member with a 2/3 vote for, for example, substantial or repeated violation of the membership agreement, significantly disruptive or abusive behavior, and a conviction of fraud or illegal activity.  Members may request a hearing before the board and even petition for reinstatement.  But the key point is that once this law takes effect, you will be able to swiftly get rid of bad actors.

NCUA has 18 months to promulgate regulations further defining the statute’s terms.  In the meantime, remember that even in the absence of the statutory change, provided your credit union has a policy in place, it can severely restrict a member’s activities.  For example, I know of at least one FCU that mandates that disruptive members conduct all their banking by mail. 

On that note, enjoy your day!

March 23, 2022 at 9:05 am 2 comments

How Sensitive Is Your Credit Union to Market Risk?

Yesterday the NCUA released a letter to credit unions providing more detail on what they can expect once the NCUA starts assessing “Sensitivity to Market Risk” as a separate category of examiner evaluations. To put it another way, starting in April, NCUA’s CAMEL is getting an “S”. This change applies to both federal and state chartered credit unions.

The material provided by the NCUA is intended to further clarify what impact, if any, this new change will have on your credit union operations.

 The good news is that, in an accompanying Q&A, the Board explains that “Implementing the “S” component will not create a burden or significant disruption to credit unions, examiners, or the examination process.” After all, NCUA has always evaluated a credit unions sensitivity to market place risks, it just never felt the need to join the other financial regulators in breaking it out as a separate category. In addition, at the same time it is breaking out market sensitivity, it is narrowing the parameters of its CAMEL Liquidity analysis.  This is a potentially positive development.  On paper this makes sense since Liquidity, which measures how much money a credit union has on hand to meet its member’s obligations, is different than measuring how sensitive a credit union’s products and investments are to sudden changes in the marketplace.

One potentially troubling aspect of this expanded framework is that the regulation does not formally define Market Risk, leaving open the possibility that Market Risk will be in the eye of the examiner. Consequently, you would be well advised to keep a copy of this letter in your files if only to explain to future examiners that:

The new Sensitivity to Market Risk component rating reflects the exposure of a credit union’s current and prospective earnings and economic capital arising from changes in market prices and interest rates. The Liquidity Risk component rating reflects a credit union’s ability to monitor and manage liquidity risk and the adequacy of liquidity levels.”

One final note. To its credit, NCUA has historically made a distinction between the level of interest rate risk posed by the balance sheets of the smallest credit unions and those over $50M in assets. This distinction is likely to remain. As explained in the Q&A:

Credit unions with relatively noncomplex balance sheet composition and activities and whose senior managers are actively involved in the daily operations may be able to rely on fairly basic and less formal risk management systems. If the risk exposure is low to moderate, procedures for managing and controlling market risks are adequate, and risk profiles are communicated clearly and well understood by all relevant parties, then basic processes may be sufficient to receive a favorable rating for the “S” component.”

So why is yours truly somewhat ambivalent about these changes?  Until now, NCUA has not felt the need to evaluate marketplace sensitivity as a separate category, even though it has been in place for banks since 1997.  NCUA concluded at the time that credit union balance sheets were not as sophisticated as other types of banking institutions.  In the intervening years, some credit unions have grown in sophistication and for the largest credit unions this change makes sense, but my concern is that this new category will result in increased confusion for both examiners and the vast majority of credit unions which have functioned just fine under the existing CAMEL system.  Very few credit unions fail because of marketplace upheaval.  If the system isn’t broke, why fix it?

March 9, 2022 at 9:37 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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