Posts filed under ‘Legal Watch’
To its credit, for almost a decade now NCUA has been emphasizing the need for due diligence when entering into third party relationships. Unfortunately, based on what I have seen, the quality of credit union oversight varies widely with too many credit unions continuing to place too little emphasis on a properly drafted contract which commits vendors to upholding privacy standards and establishes a framework whereby your credit union monitors vendor performance.
So, I’m not surprised with the results of a survey released last week by New York’s Department of Financial Services. The Department surveyed 40 financial institutions about their vendor management activities. Its findings are likely to result in proposed state regulations outlining vendor relationship requirements. It concluded that:
- Nearly 1 in 3 (approximately 30 percent) of the banks surveyed do not require their third-party vendors to notify them in the event of an information security breach or other cyber security breach.
- Fewer than half of the banks surveyed conduct any on-site assessments of their third-party vendors.
- Approximately 1 in 5 banks surveyed do not require third-party vendors to represent that they have established minimum information security requirements. Additionally, only one-third of the banks require those information security requirements to be extended to subcontractors of the third-party vendors.
- Nearly half of the banks do not require a warranty of the integrity of the third-party vendor’s data or products (e.g., that the data and products are free of viruses).
As I see it, one of the biggest problems is that businesses think of the contract as one of those last second details to be addressed after a vendor has been selected. It doesn’t have to be this way. For your larger vendor contracts you should ask your finalists to provide you with copies of their base contracts. You have leverage you should use if you find that one vendor has better terms than another. Furthermore, if one vendor is more committed than another to insuring data security then you can and should take this into account when making your final decision. Finally, you are being penny wise and pound foolish if you don’t pay for an attorney who has experience with vendor contracts and who is aware of pertinent regulatory requirements. By the way, the Association is willing and able to provide these services.
Is the Fed Getting Cold Feet?
The recent spate of lack luster economic news may keep the Fed from raising interest rates when it meets in June, according to an interesting WSJ article today. If this reporting is correct, a consensus is emerging that with inflation still below its 2% target range and employment still lagging, it makes sense to wait until later in the year before deciding to pull the trigger on the first rate increase since the Fed placed short term interest rates near 0 in December 2008.
Two quick thoughts, this is another great example of the Groundhog Day economy we have been stuck in for some time now. Economists confidently predict every Fall that the economy is finally on solid footing only to back away from the predictions following tepid economic growth in the first quarter. For what it’s worth, this blogger still believes the Fed will raise rates ever so slightly in June, if only to shift the debate away from when interest rates will rise to how high they should go. Low interest rates have artificially inflated equities for several years now by making the market the only place to get an adequate return.
On that note, have a nice weekend.
FICO), Lexis –Nexis Risk solutions and Equifax yesterday described the details of a pilot program currently underway to examine the creditworthiness of those who aren’t eligible for credit because there is no way of scoring them under traditional models. According to the press release the pilot program allows 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit. (http://www.fico.com/en/fico-lexisnexis-risk-solutions-and-equifax-joining-to-generate-trusted-alternative-data-scores-for-millions-more-americans-04-02-2015).
There is more here than meets the eye. For one thing I didn’t realize just how many Americans are completely off the credit scoring radar. These “unscorables” don’t engage with the banking system and therefore can’t be scored . Yesterday’s press release put that number at 15 million but this may be on the low side. No matter what numbers you rely on, what everyone agrees on is that a disproportionately large segment of this group is composed of poorer minorities who are flocking to prepaid cards.
In order to assess the credit worthiness of these unbanked persons of modest means additional data has to be mined. The pilot program announced yesterday uses information such as cable and utility bill payments. These are potential members who have so far chosen to opt out of the financial system all together. Does the industry have an obligation to aggressively court these members? I say yes. Alternative scoring models can help.
So why am I a little squeamish? I’ve talked about how “Big Data” has the ability to both revolutionize lending and create a host of legal challenges that simply weren’t anticipated when fair lending laws were passed, For example, let’s say that this pilot scoring system proves to be a reliable indicator of creditworthiness. How many years will lenders have to start using this new model without being accused of violating lending laws? After all, FICO has now demonstrated that traditional scoring systems have the effect of reducing credit to poorer often minority. credit worthy applicants and that an alternative system can be used.
Then there are the broader policy implications. Is extending credit to people who have so far chosen to live without it or who can’t afford it under traditional measures really a good thing? In 2007, on the eve of the Great Recession, America had a personal savings rate of 1.7%. Today it has skyrocketed to 5.5%which still puts us well behind most developed nations. In addition, your average 401K barely has enough in it to pay a retiree’s bus fare for his ride to his job at Walmart.
The financial industry will be devising more and more creative and accurate ways of reviewing credit worthiness for years to come. Used wisely and monitored by regulators within the appropriate legal framework, much good can come of this innovation. Conversely, right now the technology is racing too far ahead of the policy. Just because an alcoholic can pay for his drink doesn’t mean he should be having one. As a nation we are too dependent on credit and enabling the poorest among us to take on debt doesn’t seem to be the best way of encouraging thrift.
On that note, your faithful blogger is off next week to take the family on a visit to the nation’s capital and Southern Pines, North Carolina, to go to my niece’s wedding and finds some warm weather. Enjoy the holiday.
Whether or not you work in a unionized workplace, the National Labor Relations Board has used an expansive view of federal law to insert itself into , and implicitly attempt to micromanage, the American workplace in a way that is directly impacting your credit union operations.
Those of you who think I’m exaggerating and\or those of you whose job it is to manage employees would be well advised to review the NLRB’s recent guidance outlining language that can and can’t be in workplace handbooks(http://www.nlrb.gov/reports-guidance/general-counsel-memos Report of the General Counsel Concerning Employer Rules). On the one hand the memorandum is an attempt to provide a concise compendium of handbook dos and don’ts based on its prior rulings; on the other hand it reads like an “April Fools” joke. Unfortunately it isn’t.
First, the NLRB correctly reminds us that handbook language violates federal law when “employees would reasonably construe the rule’s language to prohibit” concerted activity be it in a unionized or non-unionized workplace. The problem is that the mythical employee the NLRB is protecting apparently has a law degree, is utterly devoid of commonsense, behaves like an out-of-control teenager who has just been told she has to be home by 11:00PM and works for the NLRB. No other workplace could function in the workplace as pictured by the Board
In the-“ You can’t make this stuff up category” the NLRB explains that a workplace policy “that prohibits employees from engaging in. “disrespectful,” “negative,” “inappropriate,” or “rude” conduct towards the employer or management, absent sufficient clarification or context, will usually be found unlawful… Moreover, employee criticism of an employer will not lose the Act’s protection simply because the criticism is false or defamatory.”
Apparently the NLRB doesn’t think your average employee has a rudimentary grasp of the English language or can be expected to have the etiquette of a kindergartener.
But wait there’s more. Did you know that a policy banning “Disrespectful conduct or insubordination, including, but not limited to, refusing to follow orders from a supervisor or a designated representative.” Or another prohibiting “Chronic resistance to proper work-related orders or discipline, even though not overt insubordination will result in discipline.” Is illegal?
I want to give the NLRB the benefit of the doubt. Maybe it is so committed to protecting the Norma Rae’s of the world chafing under employer misconduct that it wants to give complaints about management malfeasance the widest possible protection. The problem is that its prohibitions also prohibit language intended to regulate employee to employee civility. For example it found the following policy to also violate the FLSA.
“Material that is fraudulent, harassing, embarrassing, sexually explicit, profane, obscene, intimidating, defamatory, or otherwise unlawful or inappropriate may not be sent by e-mail. …”We found the above rule unlawful because several of its terms are ambiguous as to their application to [concerted] activity—”embarrassing,” “defamatory,” and” otherwise . . . inappropriate.” We further concluded that, viewed in context with such language, employees would reasonably construe even the term “intimidating” as covering Section 7 conduct”
Finally even where the NLRB tries to be reasonable the distinctions it draws between lawful and unlawful conduct is so paper-thin that a properly designed handbook needs more qualifiers than a Viagra Ad. For example the following language is unlawful “ Do not discuss “customer or employee information” outside of work, including “phone numbers [and] addresses.” But this policy is legal “Misuse or unauthorized disclosure of confidential information not otherwise available to persons or firms outside [Employer] is cause for disciplinary action, including termination.”
Today my blog is like a mall food court – there is a little something for everyone just so long as you aren’t expecting a great meal.
Senate Minority Leader Chuck?
This is huge news that might be even bigger for New York. It’s just been reported that current Senate Minority Leader Harry Reid, D-NV, will not seek reelection. Power abhors a vacuum and you can bet that Senators are already talking about who will replace Reid as the Chamber’s top Democrat. One of the most likely candidates is New York’s own Chuck Schumer. He has developed a reputation as one of the Senate’s top tacticians and his past chairmanship of the Democrat’s Senate Campaign Committee means that he has fostered the type of long term relationships that are awfully important in leadership fights.
Smartphones Are Smarter Than You Think
Just how important is the smartphone to your growth plans? Whether you want it to be or not, it is absolutely crucial because more and more of your members are using their smartphones to access services. Yesterday, the Fed released its fourth annual survey of mobile phone use. According to the Fed, as of December 2014, 39 percent of adults with mobile phones and bank accounts reported using mobile banking – an increase from 33 percent a year earlier. Furthermore, although people continue to use their phones for the more basic transactions – such as checking account balances – they are getting more adventurous. I was surprised that 51 percent of mobile banking users reported depositing a check using their mobile phones, up from 38 percent a year earlier.
Viewing the mobile phone as just another access device is tantamount to describing the Model T as just another vehicle. It magnifies the power of the web by cost effectively giving everyone the means to transact business with anyone else anywhere in the world at the touch of a button. For those of you who want to delve more deeply into the issue, here is a link to a great recent article in the Economist magazine. Here is my favorite quote:
“Smartphones are more than a convenient route online, rather as cars are more than engines on wheels and clocks are not merely a means to count the hours. Much as the car and the clock did in their time, so today the smartphone is poised to enrich lives, reshape entire industries and transform societies—and in ways that Snapchatting teenagers cannot begin to imagine.”
The Great Bank Robbery
I’ve always been ambivalent about the Tea Party movement. On the one hand, it started as a visceral reaction to the banking crisis. People saw the average middle class family losing their homes in the name of capitalism while the very institutions that tanked the economy got a taxpayer bailout. On the other hand, their misdirected rage has been harnessed by a clever group of anti-government extremists masquerading as Republicans, but that’s a blog for another day.
This morning’s WSJ has an extensive article about how “regional banks” are once again lending money to factories. What caught my eye and stirred my ire in the article were quotes from small business owners about how difficult it was to get the loans three or four years ago when they would have been most useful.
Let’s not let bygones be bygones. Every time a legislator questions why credit unions need authority to make member business loans or worries that the big bad credit union movement is somehow undermining community banking, let’s remind them that the same institutions he or she wants to protect are those that took Government handouts and did nothing to help the American consumer in return. Sometimes the truth hurts.
About That Pregnant Employee. . .
Here’s one for your HR people. A couple of days ago the Supreme Court decided one of the most interesting HR cases of the year: Young v. United Parcel Service. I thought the case involved a fairly straightforward question – asking whether a pregnant part-time employee was discriminated against after the company refused her request that she not be required to lift heavy packages. Apparently, the issue is not as clear cut as I thought. The Court’s ruling seems to make dealing with the claims of pregnant employees more complicated than it was just a few days ago. As summarized by the SCOTUS blog, the ruling “sets up this scenario for a female worker claiming she was the victim of pregnancy bias: she must offer proof that she is in the protected group — that is, those who can become pregnant; that she asked to be accommodated in the workplace when she could not fulfill her normal job; that the employer refused to do so, and that the employer did actually provide an accommodation for others who are just as unable, or unable, to do their work temporarily.”
A man, even one who blogs, has to know his limitations. This is a case to ask your seasoned HR professional about.
Yesterday, the Supremes heard oral arguments in a key bankruptcy case it will decide this term. As I discussed in a previous post, in Bank of America, NA v. Toledo-Cardona the Court must decide whether a second mortgage lien can be voided in a Chapter 7 bankruptcy proceeding where the debt owed on the first mortgage exceeds the value of the property.
For example, in one of the cases under review by the Court, a homeowner declared Chapter 7 bankruptcy. He held two mortgages. Bank of America held the second mortgage which had a value of $100,000. The bankrupt homeowner successfully argued to the lower court that the second mortgage should be treated as an unsecured debt since the value of the property had tumbled far below his outstanding first lien. Bank of America appealed to the Supreme Court arguing that banks rely on a decades-old interpretation of bankruptcy law under which second mortgages survive Chapter 7 bankruptcies.
To consumer advocates, lenders holding wholly underwater junior liens should be out of luck. They argued in a brief before the Court that junior lien holders “hold up” efficient resolution of housing problems by blocking short sales and loan modifications. Conversely, lenders argued, with the support of the United States, that voiding junior lien is too draconian a result. For example, housing values in many areas are beginning to rise again. But under the approach being advocated by the homeowners in this case, lenders would have no means of capturing the value of these increases.
A decision in this case will come before the Court’s session ends in June.
That seems to be the attitude of many millennials based on the number of surveys that consistently report that those born between 1982 to 2000 are at best indifferent and at worst skeptical when it comes to financial institutions.
For example, according to recent research conducted by Goldman-Sachs, 33% of millennials don’t think they will need a bank in the near future. In addition, 50% of the surveyed millennials are counting on tech startups to overhaul banks. Interestingly, this group is not only skeptical of banking, but profoundly impacted by the Great Recession. According to this survey, less than half of them have a credit card.
This is consistent with what I’ve described in previous blogs: a generation that will make its banking relationship decisions in a vastly different way than any previous generation. In addition, this is a generation that is more than willing to scrap traditional banking models. After all, Facebook announced recently that it is debuting an App to allow its users to make account to account transfers. Can you imagine the previous generation so willing to transfer cash without breaking out the checkbook or walking down to the bank.
I came across this survey as I was taking one more look at a proposal by the CFPB to make reloadable general purpose prepaid cards subject to Regulation E. I just can’t make up my mind when it comes to the proper role of regulation and the prepaid card. On the one hand, as an advocate for credit unions, it makes sense that as prepaid cards provide consumers with almost all the same benefits they get from a traditional banking accounts and debit cards that these accounts be subject to the same regulatory requirements such as disclosures and overdraft protections. On the other hand, the growth in prepaid cards reflects, in part, a generational shift away from traditional banking. Like them or not, the availability of these cards in stores such as Walmart have provided access to financial products for a group of people who may have otherwise chosen to forego or at least delay entering traditional banking relationships.
My concern is that by making prepaid cards more like traditional accounts from a regulatory perspective, we run the risk of squelching innovation. Rather than imposing traditional account regulations on prepaid cards, let’s assume that in the aggregate your average consumer opting for the prepaid card knows what he or she is doing, and is willing to take the risk in return for a different kind of consumer product. After all, from a generational standpoint, millennials have seen what traditional banking can do to their parents. Who can blame them if they are not all that impressed.
NCUA Sues HSBC
HSBC became the latest investment bank to be sued by NCUA over its alleged failure to properly scrutinize mortgage-backed securities purchased by bankrupt corporates. This time, NCUA is headed to Manhattan Federal Court.
HSBC was a trustee for 37 trusts that issued residential mortgage-backed securities. As with almost all its other cases, NCUA is arguing that HSBC breached its fiduciary obligation to properly assess the quality of the mortgages it used to create these securities. As alleged in the complaint, “an overwhelming number of events alerted defendants to the fact that the trusts suffered from enormous problems, yet it did nothing.” Money recovered in these and other lawsuits after legal payouts will be used to reduce credit union costs related to losses to the Share Insurance Fund.