Posts filed under ‘Legal Watch’
The blog is going on its summer hiatus. I could say that I am using the upcoming week to help get the kids ready for school, but the truth is that with two fantasy football drafts to prepare for I need to take a break from analyzing credit union news and regulations to ponder really important questions like: Who will Green Bay’s primary receiver be this year? Are there any running backs worth drafting in the first round? And just how many weeks will Tom Brady miss?
But before I get started I wanted to remind you of NCUA’s proposed MBL amendments and why they are even more important than they appear to be.
In case you missed it, NCUA is proposing to give credit unions greater flexibility in making MBL loans. It is moving to what it describes as a principles-based approach under which the existing detailed mandates will be replaced with a requirement that credit unions actively engaged in making MBL loans, or that are over $200 million in assets, design and implement a broad range of policies and procedures addressing MBL lending. For example, the existing requirement that a credit union have at least one person with two years of experience underwriting its MBL loans would be replaced with a requirement that staff have experience directly related to the specific types of commercial lending in which the credit union is engaged. This is including, but not limited to, demonstrated experience in conducting commercial credit analysis and evaluating the risk of a borrowing relationship using a credit risk rating system.
Credit unions will be evaluated on the basis of “supervisory guidance to examiners, which would be shared with credit unions, to provide more extensive discussion of expectations in relation to the revised rule.” Which brings me to why this proposal is even more important than meets the eye: it will give both credit unions and the NCUA the opportunity to hash out once and for all the difference between supervisory guidance and regulations. Based on my reading of the case law-and keeping in mind this is my opinion- from a compliance standpoint there is no practical distinction between an agency’s interpretation of its regulation and a regulation itself.
For example, earlier this year the Supreme Court upheld the right of the DOL to issue an interpretation making mortgage originators nonexempt employees eligible for overtime. (Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1212, 191 L. Ed. 2d 186 (2015). The mortgage bankers argued that this “interpretation” was an amendment to a rule which could only be changed after notice and comment. The Supreme Court said that a regulation is only amended when language is changed. As Justice Scalia commented in a concurring opinion “[a]gencies may now use these rules not just to advise the public, but also to bind them. After all, if an interpretive rule gets deference, the people are bound to obey it on pain of sanction, no less surely than they are bound to obey substantive rules, which are accorded similar deference. Interpretive rules that command deference do have the force of law.”
Also remember that even when an agency interpretation is intended to give a credit union greater flexibility that same guidance gives examiners greater flexibility to determine if a credit union is acting properly.
Now don’t get me wrong. I’m not saying that NCUA isn’t genuinely interested in giving CUs greater flexibility. It is, and it deserves a tremendous pat on the back for its willingness to do so. But because the new MBL framework will only be as useful as NCUA’s guidance and examiner oversight, an ongoing dialogue with the agency is crucial. Everyone needs to be on the same page.
That’s why industry stakeholders, including the New York Credit Union Association, are urging NCUA to submit its MBL guidance to a formal notice and comment period. Doing so will help everyone understand just how much additional flexibility they have to make MBL loans. In addition, everyone has to understand that there will be bumps along the road. Adults have to be willing to sit around a table and talk out their differences.
On that note – see you next Tuesday as the blog marks its fourth anniversary.
If at First You Don’t Succeed. . .
Visa and Target announced a settlement intended to compensate card issuers for the high profile data breach of the Minnesota retailer that compromised an estimated 40 million debit and credit cards. The price tag is reportedly $67 million. The agreement comes months after issuers, including credit unions, scuttled a proposed $19 million settlement with MasterCard. NAFCU’s Carrie Hunt is quoted in the WSJ: “This settlement is a step in the right direction, but it still may not make credit unions whole.”
Stay tuned. This will be an interesting issue to keep an eye on in the coming weeks as the specific terms are analyzed.
Foreclosures in New York: Alive and Well
NY’s foreclosure problems are far from resolved, especially in NYC’s suburban communities according to State Comptroller Thomas Dinapoli, who has the numbers to back it up. Between 2006 and 2009, the number of new foreclosure filings jumped 78%. They leveled off in 2011, hitting a low of 16,655, but shot up again. Filings climbed to 46,696 by 2013 before edging back to 43,868 in 2014, still well above pre-recession levels, according to the report.
By the end of 2015, there were over 91,000 pending foreclosures with Long Island and the Mid-Hudson accounting for a disproportionate share. The four counties with the highest foreclosure rates are all located downstate: Suffolk (2.82 percent, or one in every 35 housing units), Nassau (2.47 percent, or one in every 40 housing units), Rockland (2.26 percent, or one in every 44 housing units), and Putnam (2.10 percent, or one in every 48 housing units). Counties in Western New York and the Finger Lakes regions, in contrast, tended to have lower pending foreclosure rates and decreasing caseloads.
The good news is that these numbers most likely represent a backlog of delinquencies rather than a further deterioration of economic conditions. The Comptroller reports that there are fewer foreclosures at the beginning of the process while activity at the end of the process (notices of sale, notification that the property has been scheduled for public auction) is accelerating.
The backlog of foreclosures reflects not only the aftershocks of the Great Recession but also the inevitable result of a foreclosure process that is hopelessly byzantine and invites delay. Maybe there will be a grand bargain in which state policymakers take steps to expedite foreclosures in return for lenders having to comply with one of the nation’s most onerous and lengthy foreclosure processes. In the meantime, I’m curious if the trends persisting in New York began to spread nationally thanks to the adoption of New York style regulations on the national level. Here is a link to the report.
Time Extended for Two-Cents on Online Lenders
You have more time to sound off about the extent to which online marketplace lenders should be regulated if you are so inclined. The Treasury has extended until September 30th the deadline for responding to its Request for Information on the proper regulation of online lenders. The RFI asks a series of questions related to companies operating in three general categories of online lending: (1) balance sheet lenders that retain credit risk in their own portfolios and are typically funded by venture capital, hedge fund, or family office investments; (2) online platforms (formerly known as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable third parties to fund borrowers; and (3) bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, originate loans and directly assume the credit risk.
Are these flash-in-the-pan industries that will fold with the next economic downturn or innovative disruptors of the banking model? If they are the later they may hit credit unions particularly hard. According to the Treasury, small businesses are already more likely than their larger peers to go online for their products and services. Online lending may provide them with a means to quickly access the cash that traditional lenders are reluctant to provide them during economic downturns.
One of the first arguments the banks regurgitate in opposition to municipal deposit legislation is that tax dollars shouldn’t go to institutions that don’t pay taxes. First, we all know that credit unions do pay taxes; but, more importantly for this post, banks have never quite explained why their for-profit tax status automatically makes them better protectors of the public Fisc than credit unions.
That question is worth asking the Legislature next year in light of the New York Bankers Association successful efforts to keep New York City from scrutinizing the community investment performance of banks holding the City’s deposits. On Monday, a federal court ruled that a NYC ordinance mandating that banks holding or wishing to hold municipal deposits be subject to a local review of their investment activities was preempted by federal law and could not be enforced. (The New York Bankers Association, Inc., v. The City of New York, 15 Civ. 4001).
The Responsible Banking Act had its roots in the worst days of the Great Recession. NYC council members grew frustrated by the juxtaposition of mounting foreclosures and shoddy banking practices even as billions of dollars of public money was being deposited into banks for safe keeping. The bill established an advisory board that would report on how well banks were doing meeting financial benchmarks. The report would be used in evaluating institutions wishing to hold municipal deposits from the City.
To be fair, the information the advisory board was seeking was much more extensive than what needed to be supplied under the Community Reinvestment Act. For example, the banks were to be evaluated on how they addressed serious material and health and safety deficiencies in the maintenance and condition of their foreclosed property; developed and offered financial services needed by low and moderate income individuals throughout the city, and how much funding they provided for affordable housing.
Mayor Bloomberg hated the bill so much that he vetoed it and refused to appoint members to the advisory board after his veto was overridden. When Mayor DeBlasio was elected, he embraced the idea and the advisory board came to life. It was time to call in the lawyers.
In arguing against the legislation, the Bankers Association argued that both Federal and State law preempted the ordinance. They pointed out that the Community Reinvestment Act was intended to establish the framework for nationally chartered banks to be assessed for their community works. On the state level the Banking Law gave the Department of Financial Services broad powers of regulation to control and police the banking institutions under their supervision.
In response, the City argued that it was not regulating bank activity; but simply carrying out a proprietary function. It should be able to establish its own standards for deciding who gets the city’s money the same way it gets to decide what companies are awarded city contracts. It also argued that the activities undertaken by the Advisory Board were “purely informational.” Its findings were not binding on anybody deciding where the money should be placed.
Southern District Judge Katherine Polk Failla ruled in favor of every major issue raised in opposition to the bill concluding that “the RBA’s very structure secures compliance through public shaming of banks and/or threatening to withdraw deposits from banks that do not provide information to the CIAB. The Court sees no reason why regulation through coercive power, rather than by explicit demand or stricture, should be immune from preemption scrutiny.”
While the lawsuit may have solved the immediate legal problem facing banks it doesn’t change the fact that banks didn’t do enough in return for their public bailout. Nor does it change the fact that there are local leaders who feel that banks still don’t do enough for the communities in which they operate. Giving localities the ability to work with credit unions. which by their very structure invest in the communities in which they operate, would be a perfectly legal way of ending the banker monopoly and perhaps make these banks more responsive to local concerns.
Epilogue A Failure To communicate?
NCUA officials have fallen into the habit lately of making bold statements one day that have to be clarified the next. First, we had Chairman Matz’s clarification of her Congressional testimony that credit union CEOs aren’t representing their members when they advocate for budget hearings. Yesterday NCUA felt the need to clarify to the CU Times its position on how much information the public is entitled to about the Overhead Transfer Rate methodology following the release of a letter from its General Counsel to NASCUS on that very subject(See yesterday’s blog). I think it’s fair to say that NCUA is suffering from some communication problems.
The article quotes Board renegade Mark McWatters, who is emerging as a much needed voice of reason, as saying that “The agency will make the final determination as to the calculation of the OTR and I see no harm in subjecting the agency’s OTR methodology to public comment as a proposed rule under the APA,” Here is a link
In her recent appearance before Congress, Chairman Matz was asked which regulations she gets the most complaints about from credit unions. Her answer was the Bank Secrecy Act.
I think there are two reasons for this. First, most people have better things to do with their time than memorize the regulatory alphabet. So when they are asked by a regulator what regulations most harm their credit union, the one everyone seems to remember is the BSA acronym. A second, more substantial reason, is that smaller credit unions don’t see the value in imposing the same regulatory framework on their smaller operations as are imposed on the largest banks and credit unions.
The second point has a certain facial appeal, but the reality is that technology has blurred the line between big and small financial institutions. When it comes to BSA, there really are no small credit unions. Those of you who think I am overstating the case should pay attention to a case brought by the U.S. Attorney for the Southern District of New York. It demonstrates why small financial institutions are becoming increasingly attractive and vulnerable targets to tech savvy criminals seeking a place to hide their criminal activity. Plus, it actually reads like a pretty good movie script.
In 2013, bank accounts were opened in the name of the Collectables Club. It claimed to be a members-only association of collectable and trading enthusiasts dedicated to discussing collectible items such as cars, coins and stamps. A small fee was charged to everyone who wanted to join. In fact, the Collectables Club was a front for an illegal Bitcoin exchange called Coin.Mix, which facilitated the exchange of money for Bitcoins. This was illegal both because it was operating as an unlicensed Bitcoin exchange and because its operators knew that the exchange was being used to launder criminal proceeds. For example, one customer who wanted to transfer $100,000 into the account was told to stop the transfer and instead wire most of the money to an account in Bulgaria. An email quoted by the complaint explained that “we hope you understand the concerns. If the US wasn’t so damned screwed up about this stuff, we wouldn’t have to deal with this.”
Remember that the Bitcoin is particularly attractive to criminals because it is almost impossible to trace. Electronic “coins” are transferred computer to computer over the Internet. According to the complaint, thousands of incoming deposits in varying amounts used these accounts to make payments in Bitcoins.
Business was apparently going well. In late 2014, the creators of the illegal exchange took control of a 107 member credit union in New Jersey with no full time employees in order to process ACH transactions. The complaint’s not clear as to how this control was achieved, but the Bitcoin operators took control of the board. When the NCUA learned that this low-income credit union was suddenly engaged in a high volume of ACH processing, specifically $30 million in transfers a month, it became suspicious and stopped the credit union from continuing to offer these services. It also required the credit union to remove the new board members.
A couple of quick points. Press reports have highlighted the fact that the exchange controlled a credit union. The facts, however, demonstrate that the criminals were able to utilize both a traditional bank account and a credit union to facilitate its illegal activity. Secondly, the system worked. NCUA recognized the red flags and took actions to shut down the operation. Thirdly, some credit unions have turned to money service businesses as an attractive source of income. When they do so, they must understand that they take on heightened due diligence responsibilities. When one credit union is used for money laundering, the reputation of the entire industry can suffer. Finally, there is no such thing as a small credit union when it comes to money laundering. It is now easier for criminals to plug into the financial system using a credit union in New Jersey or a bank account in Florida as it is to open a bank account in mid-town Manhattan.
If you look at your mortgage notes, chances are they include an acceleration clause stating that in the event a mortgage payment is overdue, a borrower is in default and the entire mortgage becomes payable. These so-called acceleration clauses still exist, even though the courts continue to chip away at their efficacy.
(Another clause you might see is one stipulating that an unauthorized transfer of residential property also accelerates payment of the mortgage. Interpreted literally, a child who receives mortgaged property upon the death of his parents would immediately have to pay the entire mortgage. Federal law has, however, long since invalidated these clauses as applied to successors in interest. 12 U.S.C.A. § 1701j-3)
The latest example of this trend is a case recently decided in Queens (B & H Caleb 14 LLC v. Mabry). The facts in the case are fairly straightforward. Karen C. Mabry took out a mortgage to buy property in Queens from Greenpoint Mortgage. Under the terms of the mortgage, all payments had to be made by the first of each month. The mortgage notes stated that in the event payment is late by at least ten days, a late fee of 5% of the total monthly payment due could be charged. It further stipulated that the failure to make this payment constituted a default for which the entire remaining mortgage could become payable. Karen Mabry did not send her April 1 payment until April 8 and it was not received by the Bank’s attorney until April 14. The amount she sent did not include a late fee of $118.
B & H, which assumed the mortgage from Greenpoint, brought a lawsuit seeking to accelerate the entire mortgage and foreclose on the property. Interestingly, the Court noted that there is little case law in New York analyzing the validity of mortgage acceleration clauses. In 1991, the Third Department, which has jurisdiction over much of Eastern New York, stated that the law is clear that when a mortgagor defaults on loan payments, even if only for a day, the mortgagee may accelerate the loan, require that the loan balance be rendered, or commence foreclosure proceedings.
Conversely, the Court cited with approval cases in which a “mortgagee’s opportunistic bad-faith in accepting payment of a check and subsequently seeking to foreclose on the property was considered unconscionable conduct.”
As a result, the Court concluded that in the event Ms. Mabry could show that her late payment was the result of an inadvertent mistake that she intended to cure as soon as she realized what she had done, she could prevent foreclosure notwithstanding the plain language of the mortgage. The case underscores just how radically foreclosure law has evolved in the last decade.
As I mentioned in a previous blog, a veteran attorney once told me that the only question in foreclosure cases used to be whether or not a homeowner had made his payment on time. As this case demonstrates, the law is now a lot more complicated.
Have a nice weekend folks, I’m taking tomorrow off.
Like a bad horror movie where the Villain seemingly reaches from beyond the grave-I’m thinking Glen Close in Fatal Attraction-the antitrust litigation between merchants and Visa and Master Card could be coming back to life. Merchants have filed a motion in federal district court in New York seeking to vacate the $7 billion settlement that was reached between merchants and the card payment networks in 2012 that was supposed to put an end to litigation claiming that interchange fees violated the law.
A motion by the merchants alleges that Gary Friedman, an attorney who represented merchants in a suit against American Express at the same time the Visa/ MasterCard litigation was taking place, passed on confidential information without authorization to an attorney and friend who was representing Visa and MasterCard. The motion contends that by “illegally” passing on this information Friedman was “helping the enemy.” In doing so merchants claim they were denied adequate representation, they argue that the attorney’s conduct amounts to a conflict of interest that necessitates vacating the settlement. They are also seeking to keep him from collecting the $32 million he earned representing them. Attorneys representing Visa and MasterCard have until August 18th to respond to the motion.
This allegation is serious. Clients are entitled to the undivided loyalty of their attorney and if that right is denied them it can lead to lawsuits being reopened.
This litigation has been dragging on since 2005. In addition to the record settlement, Visa and MasterCard agreed to changes to their merchant agreements, For example merchant contracts no longer prohibit merchants charging more for credit card transactions. According to court records the lawsuit has resulted in a mere 400 depositions and the production of 80 million documents.
Is The CFPB unconstitutional?
Since we are talking about lawsuits I feel like mentioning one of my favorites. In 2012 State National Bank of Texas challenged the constitutionality of the Dodd Frank Act. With the backing of several State AGs it argued, among other things, that (1) Dodd-Frank gave the CFPB powers that only Congress could exercise and (2) that it was unconstitutional to vest all of the Bureau’s powers in a single director.
The suit has always been a longshot and no one was all that surprised when it was dismissed in August of 2013 on the grounds that the bank lacked standing to sue the CFPB. Last week the Court of Appeals for DC caught more than a few court watchers by surprise; The Court held that the bank could bring its lawsuit because it was regulated by the CFPB and impacted by its regulations. State Nat. Bank of Big Spring v. Lew, No. 13-5247, 2015 WL 4489885 (D.C. Cir. July 24, 2015).
As an unabashed constitutional dinosaur when it comes to the ever-expanding powers of regulators, I have a real soft spot for this lawsuit even if it is the longest of long shots. I’m not saying that the CFPB is going away but what I am saying is that, since the 1930’s-like I said I’m a dinosaur-Congress has gotten too used to delegating too much power to agencies. These agencies are ostensibly constrained by Congress, but as Dodd Frank demonstrates, so much legislation is so broadly written there are few actual constraints on regulators. By letting this case go forward the courts can begin reexamining what limits, if any, the constitution places on Congress to delegate de facto legislative power to unelected regulators.