Posts filed under ‘Legal Watch’
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.
As readers of this blog know, last week the Supreme Court unanimously reversed a lower court decision and upheld the U.S. Department of Labor’s authority to issue an opinion letter classifying mortgage loan officers as non-exempt employees for purposes of the Fair Labor Standard Act (Perez v. Mortgage Bankers Ass’n, No. 13-1041, 2015 WL 998535, at *4 (U.S. Mar. 9, 2015). What kind of impact will this have on your credit union? I can’t answer that for you, but the question you should be asking is: What are my employees’ primary duties? If an employee’s job is to act as a mortgage loan officer, then the decision may change the way he is classified and compensated. In contrast, if your supervisors originate the occasional mortgage, but spend most of their day supervising staff, then the decision won’t impact your operations. The key point is that labels don’t matter: it’s what the employee actually does that you and your HR person have to look at in the aftermath of this ruling.
First-with apologies for those of you for whom this is real basic stuff-federal law divides us up into two basic categories of workers: exempt and nonexempt. Nonexempt employees are entitled to overtime whereas exempt employees are not. The distinctions made sense in 1938 when it was obvious who the blue collar factory worker was and who was the white collar boss, but in the information age, the distinction isn’t as easy to figure out. Regulations recognize five categories of exempt employees including professional, administrative, executive, outside sales, and computer-related professions. In 2010, the Obama Administration’s DOL reversed an earlier DOL opinion letter. It ruled that mortgage loan officers were not administrative employees and had to be given overtime. Last week’s decision upheld the DOL’s right to issue this ruling.
The distinction can be tricky for credit unions, particularly smaller ones. For example, since many branch managers wear multiple hats-they not only manage staff but they sign off on most of the mortgage loan originations-does this decision mean that they are now automatically non-exempt employees? No, it comes down to what an employee’s “primary duties” are. Nothing in the Court’s decision changes this erstwhile test. As explained on the DOL’s website, the primary duty “means the principal, main, major or most important duty that the employee performs.”
Remember, the label you give a job doesn’t mean all that much. For example, our small branch manager who helps out with an occasional mortgage loan is considered a Mortgage Loan Originator under other federal regulations; after all she sometimes offers, arranges, or assists a member in obtaining or applying for a mortgage at the credit union. ( 12 CFR 1026.36.) But, while the CFPB doesn’t care what an originator’s primary duty is, the DOL sure does
They may-at least in relation to mortgage loans involving bankrupt borrowers.
Let’s recall that in passing Dodd Frank and promulgating its regulations Congress and the CFPB wanted to minimize potential dual track foreclosures whereby a bank agrees to modify a mortgage loan on a Friday only to foreclose on the same house the following Monday. As a result, the 2013 Mortgage servicing rules mandated that mortgage servicers make a “good faith efforts to establish live contact with a delinquent borrower not later than the 36th day of the borrower’s delinquency and, promptly after establishing live contact, inform such borrower about the availability of loss mitigation options if appropriate.” In addition servicers are required to provide to a delinquent borrower a written notice alerting a delinquent borrower to loss mitigation opportunities not later than 45 days of a borrowers delinquency (12 CFR 1024.39)
But what happens if the delinquent borrower has declared bankruptcy? What happens if the mortgage is owed by co-borrowers only one of whom has declared bankruptcy? These are the type of arcane riddles that keep compliance folks tossing and turning at night. They are very legitimate questions because trying to collect a debt subject to an automatic stay is illegal.
Fortunately, the Bureau That Never Sleeps shared these concerns, or so I thought. When it finalized the mortgage servicing rules in 2013 it clarified that the “Live Contact “ provisions don’t apply if the borrower has declared bankruptcy. It went onto explain that the “live contact” provisions also don’t apply if either co-borrower on a delinquent loan is delinquent. As the Bureau explains in a commentary to this provision “The exemption in § 1024.39(d)(1) applies if any of the borrowers is in bankruptcy. For example, if a husband and wife jointly own a home, and the husband files for bankruptcy, the servicer is exempt from complying with § 1024.39 as to both the husband and the wife.”
This makes perfect sense. After all can you imagine trying to make live contact with a non-bankrupt spouse while trying to avoid running afoul of the bankruptcy code with the other? Would you train your servicers to hang up if it sounds like anyone but the spouse who has not declared bankruptcy answers the phone?
Unfortunately our good friends at the Bureau can’t keep well enough alone. In December they issued a series of proposed amendments to the servicing rules. Some of these changes make sense but the Bureau is considering narrowing the live contact exemption. Specifically it is proposing that the exemption from the live contact requirements applies to only those non-bankrupt borrowers who are jointly liable on a mortgage loan with a debtor in a Chapter 12 or Chapter 13 bankruptcy case. In other words, if the Bureau goes forward with this proposal you would have to make a good faith effort to make live contact with a non- bankrupt co-borrower whose co-borrower declared chapter 7 bankruptcy.
The Bureau is responding to consumer groups who point out that there is currently no prohibition in the bankruptcy code against contacting a non-delinquent co-borrower. Fair enough. But this means that under existing law servicers get to use their own judgment in deciding when the benefits of such contact are worth the risks. How serious a problem is the CFPB trying to address anyway? Is there an epidemic of houses being lost because a co-borrower filed for Chapter 7 bankruptcy and the other co-borrower didn’t know? This is a great example of crafting a regulation that is great in the abstract just so long as no one has to try to implement it.
As for the early intervention notices the Bureau is proposing to mandate that servicers, with certain exceptions, be required to provide the written early intervention notice required by § 1024.39(b) to a delinquent borrower who is in bankruptcy or has discharged personal liability for the mortgage loan. The comment period ends Monday and I will keep you posted on what the CFPB decides to do.
Have a good weekend.
Here are three things you should know if you want to be one of the cool kids at the water cooler this morning.
Yesterday, the Supreme Court issued one of the handful of decisions each year that directly impact your credit union’s operations. Most importantly, if you have employees whose job is to assist prospective borrowers in applying for various mortgage offerings, the Supreme Court upheld a Department of Labor interpretation mandating that such persons be treated as non-exempt employees. This means, for example, that originators are entitled to overtime for the time they work over forty hours.
If you don’t do mortgages, I have some bad news and some good news for you. The bad news is that the Court gave agencies like the NCUA the green light to continue and arguably expand their practice of issuing guidance “reinterpreting” existing regulations. The case decided by the Court yesterday (Perez, Secretary of Labor, et al v. The Mortgage Bankers Association, et al) involved the validly of a legal interpretation issued by the Department of Labor in which it opined that mortgage originators should be treated as non- exempt employees. The mortgage bankers argued that the DOL’s interpretation amounted to a new rule and could only be imposed following a formal rule making process. The Court overturned lower court precedent and concluded in a unanimous decision that a formal rulemaking notice and comment period is only required when an agency amends – i.e. changes the wording – a regulation. It can issue all the interpretations it wants and the only remedy for the regulated is to argue that an interpretation is “arbitrary and capricious.” Don’t be surprised if you see amending the Administrative Procedures Act become a major component of Republican regulatory reform efforts.
The good news? You also have three Justices begging for future challenges to the APA. In the short run, the agencies won a major victory yesterday with the Court giving them expanded powers to interpret their own regulations. But, in the long run, the Court will probably give less deference to agencies drafting their own regulations. In the meantime, your credit union faces the potential of more regulatory oversight. Oh Boy!
Regulatory Relief On The Way?
There was some good news on the regulatory front yesterday. Chairwoman Matz dubbed 2015 “the year of regulatory relief.” (I think she stole that from the Chinese calendar) while outlining an impressive-sounding list of reform proposals. The list Includes expanded use of supplemental capital, authorization for large credit unions to securitize mortgage loans and greater Field of Membership flexibility.
All of this sounds promising, but let’s not get too excited until we see the detail. Let’s not forget that NCUA has already proposed changes to FOM requirements that make it more, not less, difficult for credit unions to expand their associational based memberships. In addition, even with yesterday’s Supreme Court ruling, it’s far from clear how much the use of supplemental capital can be expanded without amendments to the law.
Schneiderman Secures Credit Rating Agency Reform
NY AG Eric Schneiderman continued to raise his profile on consumer protection issues yesterday when he announced what is being described as a national settlement with the three major credit rating agencies: Experian, Equifax, and Transunion. Under the agreement, the CRA’s will, among other things, agree to enhanced dispute resolution procedures and delay the recording of medical debt for 180 days. One passage of the press release really got my attention: the settlement “prohibits the CRAs from including debts from lenders who have been identified by the Attorney General as operating in violation of New York lending laws on New York consumers’ credit reports.”
Although the settlement involves the reporting agencies, furnishers of credit information such as credit unions aren’t completely off the hook: “The Attorney General’s agreement requires the three CRAs to create a National Credit Reporting Working Group (“Working Group”) that will develop a set of best practices and policies to enhance the CRAs’ furnisher monitoring and data accuracy.” Stay tuned.