Posts filed under ‘Legal Watch’
The selection of Ben Carson as the Trump Administration’s nominee to be the Secretary of Housing and Urban Development (HUD) puts the former Johns Hopkins neurosurgeon turned conservative presidential candidate in a position to decisively and quickly reshape the fair lending landscape in a way that will make it easier for your credit union to deny mortgage loans without fearing a lawsuit.
HUD is responsible for enforcing the Fair Housing Act. As I’ve written in previous blogs, it interprets this law in its regulations as prohibiting lending practices that are intentionally discriminatory as well as those that have the effect of discriminating on the basis of someone’s protected status.
HUD has been steadfast in holding to this interpretation even as it has faced challenges questioning the propriety of its interpretation. For example, in 2013 it issued an updated interpretation of its analysis. At the time, it was assumed that the Supreme Court would be taking a look at how the FHA should be interpreted. HUD also refused to exempt lenders who make Qualified Mortgages that comply with CFPB’s regulations from possible enforcement actions if their Qualified Mortgages had a discriminatory effect on mortgage lending to minorities.
It’s always dangerous to speculate about what will happen in a Trump Administration and perhaps even foolhardy to speculate about the policy predilections of Dr. Carson, who has no formal background in this area, but I’m feeling lucky. I expect him to reexamine and narrow HUD’s interpretation of the Fair Housing Act. Conservatives believe that intent matters. Criminalizing lawful conduct because of its incidental impact is a recipe for regulatory overreach that deters lenders from making reasonable judgements about who can and can’t afford a home.
In mid-October, NCUA announced that it had made over $1 billion in contingency fee payments to compensate the law firms that it retained to recover losses incurred by the failed corporates as a result of their purchases of mortgage-backed securities. The large sum of the payout, representing approximately 25% of the $4.3 billion in settlements that the agency has reached has understandably raised some eyebrows and provided ammunition to the agency’s critics. Credit Union gadfly and frequent reader of this blog Keith Leggett posted that South Carolina Congressman Mick Mulvaney has asked NCUA to answer these three questions:
- Why did the agency pursue these cases under contingency fee arrangements?
- What was the original analysis of why this was the better approach? And,
- Has there been a post-settlement analysis to see if this was actually the best approach, financially, given the outcome?
These are all very legitimate questions given the amount of money involved. But at the end of the day, let’s not demagogue NCUA’s actions. It has made a worthwhile investment that has already helped the credit union industry recoup billions of dollars.
Let’s look at the facts.
Most importantly, there was absolutely no guarantee that NCUA was going to win any money as a result of taking on the largest financial institutions in the world. The litigation was risky, both because there were novel legal issues involving statutes of limitations and the disclosure obligations of investment banks that bundle and sell complicated mortgage securities. NCUA not only had to prove that the securities tumbled in value, but that the companies that sold these products knowingly failed to disclose material information. Both of these were aggressive legal arguments. Without a contingency fee arrangement, NCUA would have had to choose between risking hundreds of millions of dollars of credit union money, or forgoing the litigation all together. Had it chosen the later course, your credit union would most likely still be paying special assessments.
You don’t bring a knife to a gun fight. Given the complexity of the litigation and the reputational and financial risk to the institutions that NCUA was suing, it was going to go up against the best lawyers. It needed to do the same thing. The best lawyers cost a lot of money. A first year Associate at a top New York law firm – typically, a bright 25 year old right out of law school – is making a base salary in excess of $170,000 a year before her bonus. In addition, top partners are now demanding in excess of $ 1,000 an hour. Is this an excessive amount of money? Perhaps, but this is the marketplace with which NCUA had to deal. Look at the quality of the work NCUA got in return for its contingency fee arrangements: both on the trial and appellate level, it won important decisions that put NCUA in the position to demand substantial settlements.
Finally, when people question the cost of this litigation, such concern should be weighed against its benefits, not only to the bottom line of credit unions but to the public at large. NCUA’s litigation has an established precedent that will make it easier for financial institutions that engage in similar conduct in the future. Credit unions and the public got their money’s worth.
What Executive Orders give, they can also take away. In this video released by President Elect Donald Trump he outlines the Executive Orders that he plans to make in the first 100 days of his Administration. Most importantly for our purposes, the President Elect says he will promulgate a requirement that for every new regulation proposed by an agency it has to eliminate two existing regulations. It appears that the Trump Administration plans a new meaning of two-for-one.
While proposals such as this are enough to make compliance people giddier than a five-year-old on Christmas Eve, their direct impact on credit unions remains to be seen. Our good friends at the CFPB are challenging a decision by the federal Court of Appeals for the District of Columbia, which found that the CFPB was only Constitutional if its Director could be hired and fired at will by the President. PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 31 (D.C. Cir. 2016). The NCUA is an independent agency with a three member board appointed to staggered six year terms. Intriguingly, federal law does not explicitly provide that NCUA board members can only be removed “for cause” by the President. Swan v. Clinton, 100 F.3d 973, 988 (D.C. Cir. 1996).
This is pure speculation on my part, but if, as seems probable, the Supreme Court decides to hear an appeal of PHH Corp, the case could be used as a vehicle by a conservative leaning nine member Supreme Court to re-examine the broader question of whether independent agencies are themselves Constitutional.
In a case called Humphrey’s Executor v. United States, 295 U.S. 602, 624, 55 S.Ct. 869, 79 L.Ed. 1611 (1935), the Supreme Court upheld the creation of independent executive branch agencies. But even as it upheld the Bureau, the D.C. Court questioned the premise of this decision and the existence of independent agencies.
“[I]ndependent agencies are unaccountable to the President and pose a greater threat to individual liberty because they operate free of the President’s supervision and direction. Therefore, they traditionally have been headed by multiple members who check one another. An independent agency operates as ‘a body of experts appointed by law and informed by experience.’”
Thanksgiving by Executive Order
Speaking of Executive Orders you have Proclamation 106—Thanksgiving Day, 1863 issued by Abraham Lincoln for having Thursday off. In October of that year he proclaimed that:
“It has seemed to me fit and proper that they should be solemnly, reverently, and gratefully acknowledged, as with one heart and one voice, by the whole American people. I do therefore invite my fellow-citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next as a day of thanksgiving and praise to our beneficent Father who dwelleth in the heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans. mourners, or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty hand to heal the wounds of the nation and to restore it, as soon as may be consistent with the divine purposes, to the full enjoyment of peace, harmony, tranquility, and union.”
CFPB Looks into Information Sharing Practices
The Bureau That Never Sleeps is in the crosshairs of the Judiciary and the incoming Administration but that is not keeping it from continuing to churn out proposals. Last week it issued a Request For Information regarding consumer access to financial records. These RFIs have been used by the Bureau to help structure more formal regulatory proposals.
It is asking a series of twenty questions starting with wanting to know what types of products and services are currently made available to consumers that rely in part on consumer permission to access consumer account data.
Your faithful blogger will be back on Monday after going over the river and thru the woods to grandma’s house on Long Island. I hope you all have a great Thanksgiving, and that no one gets too fired up when the family banter inevitably turns to politics. I have already promised my mother that I will be on my best behavior.
With employers pulling out their hair trying to control increasingly high health care costs, health wellness programs that incentivize employees to adopt healthier lifestyles in return for lower healthcare premiums have grown in popularity. Critics have argued that, depending on the incentives provided in these wellness plans, employers could be violating the American’s with Disabilities Act, which bans discrimination against employees on the basis of their disability, as well as the Genetic Information Non Discrimination Act, which bans discrimination based on medical history. This dispute is going to be resolved once and for all as a result of a lawsuit filed on Monday by the AARP.
Many health wellness programs are coupled with health screenings that require employees to disclose personal medical information and medical history. No one disputes that employees can choose to voluntarily provide this information, but critics argue that the incentives provided to participants are so large that they essentially coerce employees into participating. In May of this year, the EEOC issued regulations which authorize incentives worth up to 30% of the cost of the cheapest healthcare plans to employees who agree to participate in wellness plans that include screenings starting in January.
On Monday the AARP filed a lawsuit in the District of Columbia seeking an injunction against the EEOC’s rule (complaint) It argues that a 30% incentive, which can also be applied to a participating spouse, is so large that it will “coerce many of AARP’s members to surrender theirs and their spouses’ information.” It wants the court to freeze the regulation so that healthcare plans cannot start implementing 30% incentive.
The case will provide guidance on what will inevitably be a tricky balance between encouraging employees to get healthy and discriminating against those for whom exercise just isn’t their thing. Even if you don’t offer, or plan to offer wellness programs that include a screaming component, the case provides another example of how regulators and, increasingly, the courts are the only policy makers on the national level. Hopefully, no matter who wins the election Congress will actually start passing meaningful laws again. Somehow I doubt it.
Does the accounting firm retained to do your audit owe your credit union a fiduciary obligation? That was the question pondered by the Supreme Court of North Carolina. In a decision released in late September that state’s highest court said the answer is No. (CommScope Credit Union v. Butler & Burke, LLP, No. 5PA15, 2016 WL 5335250 (N.C. Sept. 23, 2016)
CommScope Credit Union sued Butler & Burke, LLP, the certified public accounting firm that the CU hired to conduct annual independent audits of its financial statements for its failure to find that the credit union’s manager had not filed an IRS Form 990 from 2001-09. The oversight resulted in IRS penalties of $374,000 and the credit union wanted the firm to pay. One of the arguments it made was that, in failing to inform the credit union about the missing forms the firm breached its fiduciary duty to the credit union. Hold on, said the accounting firm, auditors typically don’t owe a fiduciary obligation to the businesses they audit and credit unions are no exception.
(Although this argument involved an interpretation of North Carolina law the credit union’s argument resonated across the country as can be seen by the fact that the US Chamber of Commerce and the National Association of State Boards of Accountancy filed briefs).
What’s the big deal? As the court explained “All fiduciary relationships are characterized by “a heightened level of trust and the duty of the fiduciary to act in the best interests of the other party” The higher the duty the firm owed to the credit union the more responsible it becomes for the 990 mishap.
The credit union won at the appellate level and the firm appealed to North Carolina’s highest court. It successfully argued that audits are conducted in part for the benefit of the public to insure investors that they can trust the financial disclosures being made by businesses. This obligation to the public as well as the credit union means that an auditor doesn’t have the obligation of undivided loyalty that typifies fiduciary relationships.
The credit union could have created a fiduciary relationship with the auditor as part of its engagement agreement but did not do so. By agreeing to perform the audit consistent with accepted audit standards the firm “agreed to find internal control deficiencies only to the extent necessary to perform its audits. Because defendant did not agree to affirmatively search for deficiencies outside of the performance of its audits, it did not agree to do anything beyond what an independent auditor normally does.”
The case isn’t over yet. The credit union can still argue that the firm’s failure to spot the missing 990’s amounted to negligence. But no matter what the ultimate outcome the accounting industry notched an important victory.
Before your supervisory committee sends out its next engagement letter it might be worth it to review what you expect to get out of your audit and the language that you have been relying on to get you there. If you thought your auditor was a fiduciary responsible for noticing that basic forms haven’t been filed think again. Put your expectations in writing. At the very least, you will start a discussion with your auditor about precisely what you are getting when you pay for its services.
The most interesting statistic I heard last week at the Association’s annual Northeast Economic Forum was that 48% of new mortgages last year were originated by nonbanks. Technology has come to mortgage lending and the companies that emphasize electronic mortgage applications and processing are beating the pants off lenders that rely on having people apply at their brick-and-mortar branches.
I was thinking about this factoid this morning as I read an interview with the OCC’s General Counsel, Amy Friend, in the American Banker. The OCC is rolling out plans for creating a special charter for fintech companies. Now here is a regulator that sees the writing on the wall and wants to remain relevant.
Why would companies want to be regulated by the OCC? The OCC says that the idea has appeal to a lot of companies that don’t want to be regulated by fifty different state regulators. Anyone who has taken a look at New York’s proposed cybersecurity regulations can understand why.
She explains that “We can provide a single charter with some uniformity, and that makes it very appealing. But, we also take that authority very seriously, and understand its implications. The comptroller has made it clear that if we decide to grant a national charter in this area, the institution that receives the charter will be held to the same high standards of safety, soundness and fairness that other federally chartered institutions must meet.” She further explains that institutions might want to get both a traditional bank charter and take deposits in which case they will also need to be regulated by the FDIC. Why not the NCUA as well?
The plan is still in the conceptual stages but in March the OCC released a white paper on supporting financial innovation in the banking system and last month it proposed regulations clarifying its authority to wind-down bankrupt non-depository financial institutions that are not insured by the Federal Deposit Insurance Corporation . The regulation is seen as a first step in explaining how the OCC could oversee bankrupt Fintech charters.
More on Navy
In Thursday’s blog I highlighted the CFPB’s consent order against Navy Federal and the impact it could have on credit unions who suspend services to members who have caused them a loss. Judging by the number of readers I really hit a nerve.
According to the Bureau, it was an unfair and deceptive practice for Navy to freeze electronic account services to members who were delinquent on loan payments. That simply isn’t true-at least according to the NCUA. To add a little fuel to the fire here is a 1997 opinion from the NCUA in which it explains that credit unions may restrict services to members who are delinquent:
“In the past, we have allowed for suspension of services when the member caused a loss as a result of bankruptcy, an NSF check or a charged-off loan, but we have never addressed the issue of a delinquent loan. You advise that a delinquent loan increases the FCU’s collection costs resulting in a loss to the credit union. As long as the FCU has a rational basis for limiting services, we would have no legal objection.”
So how can Navy be fined, in part, for adopting practices explicitly authorized by its primary regulator for almost thirty years? Is this another example of CFPB overreach? Inquiring minds want to know.
You can be forgiven if, upon seeing the initial headlines yesterday morning that the CFPB was ruled unconstitutional, you allowed yourself to drift into a world of no TRID, no HMDA amendments and no short-term loan restrictions, and you are a little disappointed this morning with the news that, even with yesterday’s ruling in PHH CORPORATION, ET AL., PETITIONERS v. CONSUMER FINANCIAL PROTECTION BUREAU, RESPONDENT, No. 15-1177, 2016 WL 5898801,(D.C. Cir. Oct. 11, 2016), the Bureau that never sleeps is alive and well. In the short- term this decision, if it is upheld by the Supreme Court, will have no impact on your compliance burden.
But don’t be too depressed. The Court’s ruling is a significant victory for those of us who believe that Congress gave too much power to one person. It makes the Bureau more accountable to the political process and, by implication, potentially more receptive to the concerns of the credit union industry. It also clarifies some important RESPA issues that I will address in a future blog
The case dealt with the legality of a $109 million fine imposed on PHH by an administrative law judge after the CFPB alleged it was violating the anti-kickback provisions of RESPA. Originally PHH just wanted the fine vacated but in appealing the ruling it broadened its argument to challenge the constitutionality of the Bureau itself. It argued that the separation of powers mandated by the constitution was violated because the CFPB’s Director could only be removed by the President “for cause.” Congress has created, and the Courts have approved , independent agencies but these agencies have been overseen by boards of individuals; not a single director empowered to promulgate whatever rules and take whatever enforcement actions he or she deems appropriate.
The Court agreed. “The single-Director structure of the CFPB represents a gross departure from settled historical practice. Never before has an independent agency exercising substantial executive authority been headed by just one person.” It ruled that the CFPB as structured was unconstitutional.
But its remedy was as simple as its application of precedent was straightforward: Rather than disband the Bureau it simply invalidated that portion of Dodd Frank which stipulated that the Director could only be removed “for cause.” This means that the President could give Director Cordray his walking papers today, no questions asked.
Does this matter to you? In the long-term I think it does. I am fond of calling the Director the Benign Dictator of Consumer Protection. From now on credit unions can blame the president for not doing enough to distinguish between the Big Banks and credit unions. And it’s probable that an agency no longer insulated from politics will be more willing than the Bureau has been recently to listen to legitimate industry concerns before promulgating regulations in the first place.
Frankly, the Bureau has grown more arrogant and intrusive with each passing month. Anything that constrains the actions it can take is a step in the right direction.
NY Issues Incentive Based Compensation Guidance
The only regulator pumping out mandates quicker than the CFPB lately is New York State’s Department of Financial Services. That’s not a good thing for those of us who want to maintain a viable state charter.
Reacting to the Wells Fargo Account Opening Scandal, the DFS released a guidance yesterday on Incentive Compensation Arrangements applicable to state chartered banks and credit unions. Here is one of its highlights:
“The Department advises all regulated banking institutions that no incentive compensation may be tied to employee performance indicators, such as the number of accounts opened, or the number of products sold per customer without effective risk management oversight and control.”
On that note get busy implementing all those Bureau regulations. I hope I see you this week at the Economic Forum.