Posts filed under ‘Federal Legislation’

News Flash– Washington Working!

Nothing focuses the mind like fear, and it appears that as Democrats look over the horizon at an election contested against the backdrop of runaway inflation and an increasingly likely recession (the 70s are calling) and some Republicans wanting to campaign on more than conspiracy theories and hot-button social issues, DC is finding a way to break through some of the roadblocks that have all but paralyzed Congress in recent years.  Here’s some initial thoughts for credit unions on some of the latest developments. 

Yesterday, Senator Joe Manchin of West Virginia and New York’s Chuck Schumer announced that they had reached an agreement on a package of budget measures which would, among other things implement major corporate tax reform.  If this comes to fruition, this is almost as big an announcement as Ben Affleck and Jennifer Lopez getting married in Vegas after their long and sometimes tumultuous courtship.  Under the plan, for-profit corporations with one billion dollars or more in profits for three consecutive years will have to pay a minimum tax of 15%.

Don’t get me wrong, this has nothing to do with credit unions and if all goes according to the plan, it won’t.  But whenever Washington starts taking about major tax reform and deficit reduction, it’s time to sharpen our talking points lest because you can bet banking lobbyist are already suggesting how Congress can save even more money.  Afterall, longtime credit union lobbyists remember how Congress seriously considered doing away with the tax exemption as part of the 1986 tax reform measure.

Incidentally, the minimum corporate tax would also not apply to C-corporations which are a way for some banks to avoid paying corporate level taxes.  Instead, taxes are paid by individual shareholders.

Also yesterday, the House Financial Services Committee marked-up New York Congresswoman Maloney’s erstwhile proposal to limit overdraft fees.  According to the American Banker, the debate was a lively one with Republicans sharply critical of the proposal.  The debate comes at a time when overdraft practices are being scrutinized by New York’s Department of Financial Services and court ordered Congressional lines have placed the Congresswoman in the middle of a primary election which reminds me of one of those college parties which get out of control because too many people just assume they’re invited.

Last, but not least, explaining that it was “highly attentive” to inflation risks and “strongly committed” to taming the beast, the Fed announced that it was raising the Fed Fund rates by another 75 basis points marking its continued effort to close the barn door on inflation long after the horse has gotten away.  The wunderkinds of Wall Street responded to the news by sending the Dow Jones industrial average up more than 400 points.  While this is good news for my retirement fund, they might want to look back at history: the Fed has never been able to tame this level of inflation without triggering a recession, a recession that will take place as more and more smaller credit unions are merging out of existence. 

On that happy note, enjoy the rest of your day.

July 28, 2022 at 9:54 am Leave a comment

Why CUs Should Support NCUAs Oversight of Third-Party Providers

At a mark-up earlier this week, the House Financial Services Committee voted in favor of H.R. 7022, the “Strengthening Cybersecurity for the Financial Sector Act of 2022” sponsored by Illinois Congressman Bill Foster. With the reminder that the opinions expressed in this blog are mine and mine alone, I am here to respectfully tell the industry that it is time to stop opposing legislation that would do nothing more than give NCUA the same rights to oversee the practices of third-party service providers working with credit unions as other banking regulators already have.  This is one area where additional regulation would be a good thing; here’s why.

Under existing law, banking regulators have the authority to examine the activities of third-party service providers such as core processors.  As vendors become even more important in a financial ecosystem that has to react quicker and quicker to changing products and services, particularly in the digital sphere, the activity of vendors can have a direct, negative impact on individual credit unions and the industry as a whole.  Despite the importance of third-party providers, many credit unions, through no fault of their own, lack the size and leverage they need to adequately monitor vendor activities.  Only NCUA can provide the appropriate counterbalance. 

Nowhere is this disparity on greater display than when it comes to core processors.  Every week I hear stories about ridiculously long contract lengths, costs that increase with virtually any addition to a credit union’s products and services, and termination clauses that make it more difficult to break up with your core provider than your spouse.  This is a direct result of an industry that is so large and so concentrated that its lawyers can engage in the Don Corleone School of Negotiation by simply giving your average size credit union an offer it can’t refuse and implicitly threatening to litigate any suggested changes.  

Only NCUA has the power and authority to scrutinize these activities.  Furthermore, there are real and growing safety and soundness concerns.  For instance, data breaches are a threat to everyone, but credit unions lack the ability to mandate appropriate ongoing due diligence over many companies that deal with personally identifiable information.

Critics of the proposal argue that many third-party providers are CUSOs, many of which are owned in part by credit unions which are already subject to NCUAs examination.  But such oversight is not as comprehensive as it could or should be.  For instance, with the rise of platform lending, credit unions have increased access to loan participations but lack the ability to appropriately monitor these platforms for potential fair lending issues.  Besides, we are the Credit Union Industry, not the Credit Union Service Organization Industry. 

As credit unions prepared for Y2K, NCUA was temporarily given the authority it is now seeking.  The reality is that the threat posed by this lack of oversight is as real as the potential threat which regulators addressed leading up to the year 2000.  NCUA, the GAO, and the Congressman are right.

May 20, 2022 at 9:06 am Leave a comment

Why Overdraft Fees Are An Endangered Species

Good morning boys and girls, I want you all to grab a cup of coffee and gather around the virtual rug while I tell you a fascinating story about the history of overdraft protection programs and why a recent decision by the Court of Appeals for the Tenth Circuit is instructive for your credit union.

A long, long time ago, in an age before the internet and computers, banks and credit unions would decide on a case-by case basis whether to honor a member’s checks.  Let’s say Mrs. Jones didn’t have quite enough money to pay for the new vacuum she wrote out a check for. If they knew she was a good consistent member who deposited her paycheck every Friday, chances are they would cover the check. Everyone was happy, including the store owner who was dependent on checks to grow his business. 

Times changed.  Technology allowed financial institutions to automate overdraft decisions and financial institutions started charging fees for providing overdraft protection.  Financial institutions began to incorporate this practice into their account agreements and market them to their members. 

But marketing what used to be an ad-hock process into a financial product raised legal and regulatory concerns when that bank or credit union paid a check. For example, when that bank or credit union paid a check for Mrs. Jones’ granddaughter on the assumption that it would get the money back at a later date, wasn’t it extending credit, and if so, why wasn’t it providing more disclosures?   Never mind that some members absolutely loved this service.  For instance, Mrs. Jones’ granddaughter hardly knows what a checkbook is and couldn’t balance her account if her life depended on it.  After all, there are apps for this type of thing.

Responding to these concerns, in 2005, NCUA joined with bank regulators in issuing this guidance explaining the conditions under which financial institutions could provide overdraft protection services to their members and customers without running afoul of state usury laws or federal consumer protection laws, such as the Truth In Lending Act (TILA). The guidance established a common sense framework under which both federal and state credit unions were allowed to charge overdraft fees. The guidance also explained the conditions under which credit unions could offer overdraft lines of credit, but crucially, it explained that lines of credit triggered disclosure requirements under TILA. The OCC also authored an influential opinion letter for banks in 2007 in which it further explained that overdraft fees were part of a bank’s account maintenance activities for which fees could be charged, as opposed to debt collection activity subject to additional state and federal laws. 

Although overdraft fees remain controversial on a policy level, the fundamental premise of the above guidance remains good law.  Overdraft fees are not interest, so long as they are properly disclosed. In addition, members must affirmatively agree to overdraft protections when it comes to their debit cards. 

But just the other day, the Court of Appeals for the Tenth Circuit decided a case which took direct aim at this regulatory framework.  In Walker v. BOKF, National Association, 2022 WL 1052068 (C.A.10 (N.M.), 2022) involves an overdraft product under which the bank’s customers are charged an initial overdraft fee and an additional Extended Overdraft Fee of $6.50 per business day if the account remains overdrawn after five days.

The plaintiff in this case does not challenge the bank’s right to charge the original overdraft fee. He instead argues that the reoccurring charges for nonpayment amounts to interest. Interest which far exceeds the state interest rate cap of 8%. 

Stop yawning kids.  This argument takes direct aim at the core legal premise which allows financial institutions to charge overdraft fees. Remember how the bank used to honor Mrs. Jones’s checks even though there wasn’t enough money in her account? If the bank’s actions where actually classified as a loan, then virtually any fee would exceed NCUA’s interest rate cap not to mention state usury laws. The case in question was not challenging overdraft fees, but if the plaintiff in this case was successful, the next round of litigation would challenge the premise that overdraft protections are fees and not loans. The case is also crucial because it invites the courts to rule that bank regulators misinterpreted the law in 2005 and 2007 when they decided that overdraft fees should not be considered interest. Fortunately for us, the argument was rejected.

So what is the moral of the story? First, if you offer any products which charge both a fee and then recurring charges if the account remains overdrawn for a period of time, prepare yourself for a potential legal challenge.  Litigation like this does not happen in a vacuum. 

But here is an even scarier thought.  Right now the CFPB is considering taking action against so-called Junk Fees.  The distinction between interest rates and fees is a regulatory distinction developed long before the CFPB was conceived by an obscure Harvard law professor by the name of Elizabeth Warren. If the CFPB decides to aggressively challenge the existing regulatory framework, it most likely has the legal authority to do so. What one regulator can give, another can simply take away. Congress may have to be the ultimate arbiter of the overdraft debate.

On that happy note, yours truly is heading south in search of warm weather.  I will return a week from Monday.

April 14, 2022 at 9:32 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

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

And The Most Important Regulatory Action of The Year Is…

Not even a close call, people: The most important regulatory action so far this year is the Security and Exchange Commission’s $100 million settlement announced February 14 with crypto lender BlockFi, in which the SEC alleged that the company was illegally refusing to register under federal securities law. 

The hundred million dollars given to the SEC and 32 states is chump change; but the fact that the SEC was willing to successfully and aggressively pursue litigation designed to signal crypto lenders that they are in fact, subject to laws and regulations is a key moment in the evolution of the crypto lending industry [Law360 subscription required]. It is also an important first step to helping credit unions and banks compete against these non-banks on a more level playing field. Let me explain.

According to the SEC order, starting in 2019 BlockFi has offered everyday investors BlockFi Interest Accounts (BIA) accounts. Members receive different interest rates on these accounts based on the type of currency being deposited by the member. In return BlockFi uses this pool of crypto currencies to make loans. Members are promised quick and easy access to their crypto funds. 

To me this sounds an awful lot like a depository institution. Maybe someday we will see the Federal Reserve or the OCC move to regulate crypto businesses such as these, or maybe Congress will update federal banking law, but I’m not holding my breath.

In contrast to the timidity of others in Washington, since taking over at the SEC, Chairman Gensler has described crypto finance as the Wild West.  In announcing this settlement, he explained that:

“This is the first case of its kind with respect to crypto lending platforms. Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940.”

With the SEC’s action against BlockFi, it signaled that there really is a new sheriff in town. Under the settlement, BlockFi’s quasi deposit accounts will have to register as securities and average consumers will be provided greater notice that they are making investments as opposed to depositing their hard-earned funds in federally insured accounts.

History is repeating itself and let’s hope regulators strike an appropriate balance between fostering innovation and maintaining a safe and secure financial system. In the early 1970’s, non-bank financial firms introduced the widespread use of money market mutual funds. At the time regulation Q placed caps on the interest that banks could give to account holders. 

In 1977 Merrill Lynch pushed the envelope even further when it began offering cash management accounts which allowed members to use money market funds as functional bank accounts against which they could write checks. In the mirror image of the debate playing out today, the banking industry pleaded with federal regulators to regulate these accounts and the businesses that offered them as banks. They argued that companies offering NOW accounts were acting as banks without being subject to bank regulation. The issue wasn’t definitively settled until the Supreme Court struck down regulations issued by the Federal Reserve Board intended to regulate money markets. 

In hindsight, this was one of the watershed moments in the demise of the Glass-Steagall inspired banking era. (see Taming the Mega Banks: Why We Need a New Glass-Steagall Act, pages 151-153)

On that note, I’m off to prepare for my fantasy baseball draft.  Enjoy your weekend.

March 11, 2022 at 9:20 am Leave a comment

Is It Legal To Transport Cannabis Cash?

This is the question raised by ongoing litigation in Southern California as a company specializing in transporting cash generated by legal state cannabis businesses is suing the federal government over allegations that its trucks are being stopped and its cash is being seized under federal asset seizure laws.  This is another example of the type of issues your credit union should consider as it weighs the cost and benefits of providing banking services to marijuana businesses that operate legally in states like New York, even as federal law continues to make cannabis businesses illegal. 

Empyreal is a Pennsylvania Limited Liability company that provides armored car services in 28 states.  Its owner, Deirdre O’Gorman, is one of the leading consultants on cannabis banking in the credit union space.  According to court papers, “Empyreal contracts only with state-legal cannabis businesses that have established banking relationships with financial institutions with anti-money laundering law programs implemented pursuant to the 2014 FinCEN Guidance Regarding Marijuana-Related Businesses (“2014 FinCEN Guidance”) and applicable state-issued guidance.” 

Nevertheless, the company alleges that its trucks have been subject to traffic stops and seizures orchestrated by the Department of Justice, the FBI and the Drug Enforcement Administration, in conjunction with local law-enforcement officials, including the San Bernardino County Sheriff.  Similar problems have arisen in Kansas.  According to the complaint, these law-enforcement agencies are targeting armored vehicles owned by Empyreal, employing tactics commonly used to stop and search drug dealers. 

The company is seeking an injunction alleging that this conduct violates, among other things, the Fourth Amendment of the U.S. Constitution and the Rohrabacher-Farr Amendment, which forbids the Justice Department from spending any money on the prosecution of any legal cannabis activity. 

Let’s pull back the lens a little.  This legal dispute highlights that if your credit union decides it is going to provide banking services to cannabis businesses, provided they are in strict compliance with state level law and federal guidance, the possibility of facing federal litigation, while remote, cannot be completely discounted, particularly if the allegations in the Empyreal complaint are substantiated.  Furthermore, the Rohrabacher-Farr Amendment is not a substitute for passage of federal laws that recognize what the majority of states have already legalized.  Conversely, we are unlikely to see federal action on this issue any time soon, and as these businesses continue to take hold, the need and financial benefit from these services will remain strong.  I frankly don’t know what decision I would make if I were on a board.  But make sure when the decision is ultimately made that all the facts are on the table.

Speaking of federal action, on Friday, the House of Representatives passed the SAFE Act, for the sixth time, which would generally permit banking services to be provided in states that have legalized cannabis.  It was included as an amendment to the America COMPETES Act. 

Also on Friday, Senator Schumer, joined by New York Representatives Nydia Velazquez and Gerald Nadler, held a press conference in support of his legislation that would remove marijuana as a Schedule I drug under federal law.  While this would also solve the banking problem, there is unlikely to be a filibuster proof majority for the more sweeping proposal any time soon.

February 7, 2022 at 9:57 am Leave a comment

“First” In Credit Union History

Happy Friday from Buffalo, where yours truly should be especially pleased that he is experiencing unseasonably warm, snow-free weather as opposed to one of those freakish lake-effect snowstorms in which Buffalonians take such pride. But there is a lot to be ambivalent about as we take a look at the trends that are impacting credit unions today.

Right now, the economy is spinning in more directions than a five-year-old on a sugar high. As a result, now more than ever, we need economists with more than two hands to capture the impact that all this might have on the credit union industry. So you should all take the time to read the latest economic trends analysis from CUNA Mutual which is filled with plenty of ammunition for the optimist and pessimist alike. For instance, CUNA Mutual is reporting that for the first time in credit union history, share drafts make up a larger percentage of credit union total deposits than share certificates. On the one hand, the armchair economist in me says that this is good news since it decreases the cost of managing accounts, and with the direction of the economy still uncertain, we really don’t have to worry about people rushing to pull all that money out of their credit unions. In fact, the credit union cost of funds is expected to fall 30 basis points in 2021 to 0.4% from 0.7% in 2020. On the other hand, interest rate uncertainty will continue to plague long term planning for years to come, and do we really want an industry dedicated to thrift to be more dependent than ever on members who are not making long term commitments to the industry? 

BSA Examination Manual Updates

Those of you in charge of your credit union’s BSA program will certainly want to take a look at the latest updates to the FFIEC BSA examination manual.

The update that most intrigued me was a new general introduction dealing with customer due diligence which stipulates that:

Examiners are reminded that no specific customer type automatically presents a higher risk of ML/TF or other illicit financial activity. Further, banks that operate in compliance with applicable Bank Secrecy Act/anti-money laundering (BSA/AML) regulatory requirements and reasonably manage and mitigate risks related to the unique characteristics of customer relationships are neither prohibited nor discouraged from providing banking services to any specific class or type of customer.”

It sounds as if some examiners have been a little too aggressive in discouraging financial institutions from opening up certain types of accounts. This is welcome language in the event the federal government ever gets around to legalizing marijuana banking.

Speaking of the Federal Government…

Last night the Congress passed legislation funding Government operations until February. It’s pathetic that we have gotten to the point that this is big news, but so it goes.

On that note, enjoy your weekend. Sorry, Bills fans, but the Patriots are back, don’t expect to win on Monday night.

December 3, 2021 at 9:34 am 5 comments

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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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