Posts filed under ‘General’

Are Fintech Lenders Less Biased?

To its supporters, technology has the ability to further egalitize the lending process by using unconventional data to assess the credit worthiness of underserved communities and removing human bias from lending decisions. To its critics, overly complex lending algorithms could further complicate the efforts of regulators to identify and clamp down on bias lending criteria. This debate is likely to have an increasingly large impact on credit unions, banks, and Fintechs as policy makers integrate 21st century technology into 20th century regulations. Recently released research underscores just how volatile this debate is destined to become.

The PPP program is a treasure trove for researchers of potential bias in lending decisions. Since the loans were guaranteed by the federal government, it is easier to evaluate what other factors led to businesses getting loans. Recently, a group of researchers at New York University concluded that: Fintech lenders were responsible for 53.6% of PPP loans to black owned businesses. According to the researchers “black owned businesses exhibit by far the most striking disparity among lender types when it comes to choosing Fintechs”.

In contrast, community banks with $2B or less in assets performed the worst when compared to all other financial institutions including CDFIs, credit unions and the largest banks.  In fact, the researchers conclude that larger banks demonstrated the least lender bias, underscoring their belief that automation contributed to more minority loans. Not surprisingly, this research has already drawn a heated response from community bankers who argue among other things that the research is flawed because it is based on assumptions about the race of borrowers.

Still, yours truly has been watching a lot of baseball recently and it seems to me that every game demonstrates that computer generated strike zones do a better job of calling balls and strikes than do umpires. As much as we like to extol the human element in decision making, common sense tells me that more automation not less can lead to an even fairer system for making lending judgements.

Chart depicting the proportion of PPP loans given to Black-Owned businesses  originated by financial institutions and Fintechs

October 19, 2021 at 10:40 am Leave a comment

What The Postal Service Could Learn From Google

Even as the world was struggling to survive several hours yesterday untethered to social media, the postal system was making a big splash with news of a small pilot program which could be the first step in reintroducing postal banking. While the post office was dabbling with banking, Google was quietly announcing that it was pulling the plug on its plan announced two years ago to work with banks and credit unions to provide google bank accounts. The two announcements have more in common than you might think. The announcements also contain important warnings for the credit union industry as it tries to navigate an uncertain future.

An article in the American Prospect reported that four postal branches in Washington D.C, Baltimore, Falls Church, Virginia, and the Bronx, NY were now allowing individuals to convert business or payroll checks of $500 or less onto a single-use gift card for a $5.95 purchase fee. The announcement was lauded by, among others, New York Senator Kirsten Gillibrand, a prominent supporter of postal banking.

It’s easy to dismiss the proposal. After all, it’s somewhat laughable to think that a business which cannot cost-effectively provide its core service to the American public, even though it has enjoyed a virtual monopoly for much of the country’s existence, will find its niche in cost effectively providing banking services.

This is where Google comes in. Your faithful blogger continues to believe that today’s Fintechs are tomorrow’s banks but in pulling the plug on its banking project Google discovered what many other Fintech wunderkinds have also discovered; providing cost-effective consumer financial services in a heavily regulated, highly competitive financial system is not easy. It takes a level of skill and knowledge that you don’t learn simply by attending business school or delivering the mail.

Just as Fintechs think they can easily handle the banking part of things, there are those, predominantly in the progressive wing of the Democratic party, who think that banking is as easy as setting up a branch and allowing individuals with no training as tellers to cost effectively provide banking services in a way which protects union jobs.

Common sense and history tells you that this is simply not the case. Postal banking is not a radical new concept but an idea that has been seriously debated since the 1800’s. In fact, between 1911 and 1966 Americans could open up postal banking accounts and at its height an estimated 10% of deposits were held in the postal system. But, as banking options became more widely available, and federal insurance stabilized the banking system, the system was put out of its misery by President Johnson in 1966. While I don’t think we have much to fear from postal banking, I do think that the industry has to recognize that proposals such as these are the result of frustration among some policy makers that the financial system has not done enough to help people of modest means. We must do a better job of telling our story and making sure our elected officials realize that the way to increase financial inclusion is not to get the government more involved in banking but to allow credit unions to provide more services to a larger group of people.

October 5, 2021 at 9:35 am Leave a comment

Just what is an “Item” anyway?

A former President got impeached after quibling over the definition of “is” and today CUS and banks are being sued over the definition of “item.”

That is one of the key questions confronting both credit unions and banks as they continue to make a handful of consumer plaintiff law firms wealthy because of inaccurate disclosures in their account agreements. On a practical level this means that you should review your account agreements to ensure that it actually defines what an item is. This is particularly true if your credit union is large enough to be targeted for class action litigation.

I’ve done blogs for several years now detailing how both credit unions and banks are being sued for inaccurately disclosing how account balances are determined for purposes of generating overdraft fees. For example, if your member has $50 in an account at the time she uses her debit card to pay for her Starbucks latte but 49 of those dollars are subject to pending transactions has your member been given adequate notice that an overdraft fee will be charged based on how the account balance is actually calculated?

A more recent permantation of this litigation has to do with the proper disclosure of NSF fees generated by repeated presentments for payments made by merchants using the NACHA network. Specifically, does your credit union charge a fee every time a merchant presents a transaction for payment and if so is this practice properly disclosed? In Richard v. Glens Falls National Bank, 2021 WL 810218, at *1 (N.D.N.Y., 2021,) the bank charged a separate fee every time a merchant represented an item for payment. The bank’s fee schedule disclosed that an NSF fee could be charged “per item” but did not define what an item was. As a result the account owner argued that the bank was only entitled to charge a single NSF fee irrespective of how many times a merchant presented an item for payment. 

The good news is that your credit union can avoid a similar fate by simply amending its account agreement. For example, the Navy federal credit union got a similar claim dismissed because its account agreement contained language defining what an item was and putting members on notice that they could be charged each time an item is presented for payment. Lambert v. Navy Federal Credit Union

Here is the punchline: your credit union should be having its account agreement periodically reviewed by an outside law firm, preferably one that specializes in defending against consumer class action lawsuits. Consider it an investment especially since I can guarantee you that your account agreement has been reviewed by attorneys looking to sue you over language which may comply with the latest regulations but does not reflect the latest case law. 

On that note, enjoy your day.

September 21, 2021 at 2:06 pm 1 comment

Sonic Case Demonstrates How Merchants Put Consumer Privacy At Risk

For those of you in Washington this week, a recent decision in the Sonic data breach litigation underscores why merchants need to comply with baseline data breach prevention standards. On September 7th a group of credit unions survived Sonic’s motion to dismiss claims that its negligence facilitated yet another massive data breach resulting in credit unions costs, such as the need to reissue cards, for which Sonic should be responsible (SONIC CORP. CUSTOMER DATA SECURITY BREACH LITIGATION).  And let’s not forget the thousands of consumers who were inconvenienced as a result of Sonic’s alleged negligence. 

Between April and October of 2017, hackers used malware installed at 762 Sonic restaurants to steal transaction payment card data. Franchises generally were allowed to use two different types of processing systems. The hacks occurred in franchises that use the PAYS system to process transactions. Sonic facilitates payments by setting up a VPN to facilitate remote access to the system. The VPN system was set up so poorly that it allowed hackers to access unencrypted payment card data. The list of defects reads like a “What Not-To-Do List” when it comes to protecting customer data:

  • They did not use multi factor identification to authorize access to the system.
  • The stolen data was not always subject to end-to-end encryption.
  • Sonic even facilitated the storing of unencrypted data on business servers.

If a New York State bank or credit union treated data this way, it would be in violation of several provisions of New York State’s cyber security regulations which mandate that sensitive data be encrypted when it is in transit and that it be adequately protected when it is being held on its server. Furthermore, a failure to use multi factor identification has already resulted in fines under the framework. Even if you do not have the good fortune of living in New York, the Gramm Leach Bliley Act and a host of regulations outlaws this type of conduct for financial institutions. 

In contrast, there is no corresponding regulatory framework for businesses like Sonic; the only way to hold Sonic and similar companies accountable is through lawsuits. The problem is that not all states give financial institutions the right to sue merchants for purely economic harm. In short, we continue to have a hodge-podge of regulatory enforcement which incentivizes merchants to under-invest in their cybersecurity infrastructure.

September 15, 2021 at 9:15 am Leave a comment

The Day After Tomorrow is Here, Now What?

Wednesday’s dramatic and tragic flash floods in the New York City Metropolitan area are the latest example that man-made climate change is here and will continue to impact the business climate in which credit unions operate. If I had told you a week ago that New York State had to start preparing for the consequences of hurricanes slamming into the Gulf Coast you would have told me to go look at a map. This morning businesses and policy makers would be nuts not too.

In 2018 the Union of Concerned Scientists issued a report in which it claimed that more than 300,000 of today’s coastal homes with a market value of about $117.5 billion were at risk of “chronic inundation by flooding” by the year 2045. They pointed out that this could impact the value of homes underwritten for 30 year mortgages.  After Wednesday night’s storm, I’m wondering if they underestimated the problem; perhaps we should also be concerned about the value of 15 year mortgages?

Even as we are hopefully done debating whether or not climate change is a real and growing problem, the tough part is deciding what to do about it. Contrary to popular belief, confronting climate change will require large disruptions to certain parts of the economy and a huge amount of investment. Simply put, dreams of a green economy won’t come fast enough for the coal miner in West Virginia and we need massive investments in our energy infrastructure in order to reconfigure our energy system.

So what does all this have to do with credit unions?  Most importantly, we need to engage with policymakers and regulators using certain key principles as our guide posts.  For example, even as no one questions the need to address climate change, there has to be a recognition that costs and benefits should be taken into account.  Secondly, as institutions dedicated to helping persons of modest means we are uniquely positioned to warn against proposals which disproportionately impact poorer individuals.  Thirdly, we should point out that this is a national problem for which we need national solutions.

What would be the tangible consequences of these principles?  We need to make sure that common sense distinctions are made between banks which provide lines of credit to energy companies and credit unions struggling to make cost effective loans to small businesses. This is not the time for one size fits all mandates which weigh down the economy while providing no real benefit.

Secondly, as an industry dedicated to helping persons of modest needs, we have to be willing to point out that improperly implemented climate change policies can have a disproportionately negative impact on the poor and underserved communities. For example, the wealthier you are the more you can afford paying higher premiums for flood insurance.

Finally, with the usual caveat that I speak for no one but myself when I write this blog, as an industry, credit unions should be in favor of dramatic infrastructure investments on a national scale which expedite infrastructure improvements needed in response to climate change while minimizing the need for additional mandates on small lenders. On that note, enjoy your weekend.

September 3, 2021 at 10:01 am 1 comment

Gone fishing

Your faithful blogger is on vacation for the remainder of the week, searching for some elusive sunshine. I’ll be back Monday, July 26. Enjoy your week.

July 20, 2021 at 2:31 pm Leave a comment

It’s a Scary Time for CUs, Cyber Attacks, and Insurance

Warren Zevon once called on his dad to bring him “lawyers, guns, and money.” Given the sharp increase in cyber-attacks, your average credit union CEO should be asking for lawyers, money, and better cyber insurance policies.

Recently, an article in The American Banker proclaimed that these are scary times for small banks and credit unions, some of which have recently been the target of ransomware attacks. Yours truly is highlighting this trend not simply because I want to scare you into action but because I believe that for many financial institutions the question is not if, but when you will find your credit union’s data being held by hackers who want money in return for allowing you to access your client’s personally identifiable information.

One of the most basic steps you can take to help protect yourself against ransomware and data theft attacks is to buy insurance. This is an issue that yours truly is also becoming increasingly obsessed about because there is a lack of clear guidelines as to precisely what a policy provides your credit union and even if your regulators are going to penalize you for using insurance proceeds to recover from ransomware payments.

My paranoia has been fueled by this recent GAO report describing an insurance industry that is scrambling to adjust to the rapidly evolving and increasingly expensive niche of cyber-attacks. For your credit unions that means that it is absolutely crucial that you get competent counsel to provide new guidance as to what is and is not covered under your policy. It also means that you should not assume that general language in your existing policy already provides you insurance protection. There are more and more cases in which this precise issue is being litigated. For example, I recently came across this case, West Bend Mutual Insurance Company v. Krishna Schaumburg Tan, Inc., in which an insurance company tried to deny coverage to a business that was sued after providing biometric data of customers to third parties.

In the medium to long term these issues will resolve themselves. Courts will scrutinize and effectively standardize basic terms. The problem is that this is little comfort to those of you confronting these issues right now. Time to call the lawyers and bring the money.

May 26, 2021 at 9:16 am Leave a comment

Meet Walmart, Your Friendly, Small Town Community Banker

Walmart signaled just how serious it is about expanding its offerings in the consumer banking sphere with the announcement that it lured away Omer Ismail to run its new FinTech joint venture.  On the off chance you don’t know who Omer Ismail is, he has been one of the key architects behind Goldman’s Marcus online consumer bank. 

Last month, Goldman announced that it was starting a joint venture with online FinTech Ribbit Capital.  As Bloomberg reported in breaking the news this morning, “Walmart’s move — depriving one of Wall Street’s elite firms of the talent atop its own foray into online banking — underscores the seriousness of the retailer’s intent to intertwine itself in the financial lives of its customers.” 

Stay tuned.

Surcharge Bans Continue to Fall

A federal court in Kansas last week became the latest court to strike down a state level ban on merchant surcharges for the use of credit cards.  This trend is hardly surprising following the Supreme Court’s ruling in Expressions Hair Design that a similar ban in New York State triggered First Amendment scrutiny. The case is CARDX, LLC, Plaintiff, v DEREK SCHMIDT, in his official capacity as Kansas Attorney Gen., Defendant., 20-2274-JWB, 2021 WL 736322, at *1 [D Kan Feb. 25, 2021]

Yours truly continues to be perplexed as to why so many consumer groups consider surcharging good policy.  The reality is that there after these laws are struck down, there is nothing that requires merchants to pass on the increased revenue to consumers paying cash.  This is a lesson that many New York consumers have already learned the hard way.

On that note, enjoy your day.  Who knew that 46 degrees could feel so balmy?  I, for one, am breaking out the sunscreen!

March 1, 2021 at 9:04 am Leave a comment

NYS Legislature Enacts COVID Hardship Exemption For Individuals Facing Foreclosure

You know that feeling you get a few days before Christmas when you’re afraid you should have gotten one extra present for that special someone.  You end up frantically checking out the last second deals and getting a present that feels good in the moment but ends up destined to be re-gifted.  If you work for the legislature, you can respond to this last second urge by passing a bill in the week between Christmas and New Year’s which provides foreclosure and credit relief for homeowners and tenants alike.  Let’s hope that this well intended measure doesn’t result in more confusion than would have a less hastily enacted piece of legislation. 

As you review Assembly Bill 11181, keep in mind that its purpose is not only to protect residential homeowners but also to protect small landlords and condo and co-op owners.  Under the bill, any individual who owns ten or fewer “dwelling units” can obtain a moratorium against any foreclosure actions until May 1, 2021.  Foreclosing parties are responsible for providing a copy of a hardship exception form to parties facing foreclosure.  Individuals seeking to freeze their legal actions will be responsible for submitting a signed copy of a new MORTGAGOR’S DECLARATION OF COVID-19-RELATED HARDSHIP.  If all goes according to plan, the form should be available on the office of Court Administration’s website this week.  It will be available in English and six other languages.  If your homeowner’s primary language is not one of these six languages, then it is the foreclosing party’s obligation to obtain the necessary paperwork.  This new requirement does not apply to vacant and abandoned property. 

Of course the state legislature wasn’t the only group working in the closing days of the year.  In tomorrow’s blog I’ll be talking about the operational impact those $600 stimulus checks are having on your credit union.

Although the moratorium has gotten much of the attention, another part of the bill may have an operational impact on your credit union regardless of whether or not it even offers mortgages.  Specifically, the law provides that

“…lending institutions shall not discriminate in the determination of whether credit should be extended to any owner of residential real property as defined in subdivision one of this section because, as provided for in this act, such owner has been granted a stay of mortgage foreclosure proceedings, tax foreclosure proceedings or of tax lien sales, or that an owner of residential real property as defined in subdivision one of this section is currently in arrears and has filed a hardship declaration with such lender.”

January 4, 2021 at 10:32 am Leave a comment

Happy Holidays. See you next year… thanks for reading!

December 23, 2020 at 11:13 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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