Posts filed under ‘Legal Watch’
As expected, at yesterday’s board meeting the NCUA proposed raising the cap below which a credit union is considered a small credit union for regulatory relief purposes from $50 to $100 million. According to NCUA, the increase means that an additional 745 credit unions will be eligible for potential relief from future regulations for a total of approximately 4,869.
Great job by the agency in coming forward with the proposal; but we won’t really know how much this helps the industry for some time to come. First, the agency has already exempted credit unions below the threshold from onerous mandates including those dealing with enhanced protections against interest rate risk and the proposed enhanced Risk-Based Capital framework. Second, many of the biggest mandates are out of NCUA’s hands. For example,the CFPB has been willing to extend mandate relief to institutions with as much as $2 billion dollars in assets, but these exemptions come with strings attached – such as a requirement that exempted institutions hold most of their mortgages. Thirdly, the fact that NCUA justifiably feels the need to dramatically raise the small credit union designation after having raised it from $10 million approximately two years ago shows you how quickly the industry is changing and not for the better. NCUA examined rates of deposit growth, rates of membership growth, rates of loan origination growth, and the ratio of operating costs to assets and determined that credit unions below $100 million are at a “competitive disadvantage” to their peers.
The branch is dead! Long live the branch!
I actually found myself muttering in disagreement as I read a report issued by the FDIC yesterday. It concluded, based on an analysis of bank branching patterns from as far back as 1935, that:
“New technologies have certainly created convenient new ways for bank customers to conduct business, yet there is little evidence that these new channels have done much to replace traditional brick-and-mortar offices where banking relationships are built. Convenient, online services are here to stay, but as long as personal service and relationships remain important, bankers and their customers will likely continue to do business face-to-face. “
Maybe the researchers who came to this conclusion can use their Blackberries to see if RadioShack could use their help. More on this in a future blog, but for those of you who still believe the branch model is alive and well, read away.
What would Karl Malden say?
Yesterday, the Justice Department scored a major antitrust victory when a federal judge in New York found American Express guilty of anti-trust violations. I haven’t read the 100+ page decision yet, but if I was Amex I would have gone to trial too.
One of the touchstones of antitrust law is market dominance. Amex isn’t exactly a card that your typical merchant has to accept these days if he wants to stay in business. It has been a long time since Karl Malden convinced consumers that they shouldn’t leave home without their American Express Card. The win underscores just how dominant a hand merchants have when it comes to demanding changes to the plastics industry.
By the way, if you are wondering what to do this weekend as you try to stay warm, On the Waterfront, starring Karl Malden and Marlon Brando, would be an excellent movie pick. It’s one of those cultural reference movies and includes the classic line “I could have been a contender.”
New York Attorney General Eric T. Schneiderman used a recent appearance before the New York State Association of Towns to announce that he would soon be introducing new and improved legislation aimed at making lenders more responsible for abandoned property that has not been foreclosed upon. Under this version, fines levied against lenders for non-compliance with property maintenance requirements will be given to local governments “to hire additional code enforcement officers.” According to the press release, independent Democratic conference leader Jeffrey Klein and Assemblywoman Helene Weinstein will be sponsoring the legislation.
First, a caveat. The views I express on legislation in this blog are mine and mine alone and do not necessarily reflect the views of the Association as a whole. There’s a second caveat. I understand why AG Schneiderman and the town leaders are so concerned about vacant property. According to the AG, in some areas of the State up to 42% of the properties in foreclosures are abandoned before the process is complete. The result is that property lays vacant and deteriorates as homeowners walk away from their responsibility to care for their homes and lenders are less than enthusiastic about assuming the legal responsibility for a deteriorating piece of real estate.
Schneiderman’s bill seeks to address this problem by imposing requirements on mortgagees and servicers. Specifically, Section 1307 of NY’s Real Property Actions and Proceedings Law currently imposes maintenance obligations on a plaintiff in a foreclosure action who obtains a judgment of foreclosure. The most important thing this bill will do is impose maintenance obligations on lenders and servicers whenever property is vacant and abandoned or a foreclosure action has been commenced. Among other things, vacant and abandoned property can be any property that is at least three months delinquent and vacant or the mortgagor has informed the mortgagee in writing that they no longer intend to occupy the property. Assuming your typical delinquent homeowner won’t be quite so conscientious, property can also be classified as vacant where there is “a reasonable belief that the property is not occupied.”
What frustrates me about proposals like this is that they refuse to address the core reasons behind zombie property in the first place. New York has one of the most difficult and time consuming foreclosure processes in the nation. It’s not uncommon for lenders to take four years to complete a foreclosure. Rather than imposing obligations on lenders with regard to property they don’t own, why not simply expedite the foreclosure process?
For example, we should use this legislation’s definition of vacant and abandoned property as a basis for allowing foreclosures to go through without many of the procedural hurdles that are currently in place including the requirement under New York Law for pre-foreclosure settlement conferences. In addition, any party that fails to show up in a foreclosure proceeding should be understood as having waived any and all defenses to the foreclosure.
Ironically, many of the towns supportive of this legislation are well aware of what a disaster a foreclosure in New York can be. Under New York Law, municipalities have a first-lien right to foreclose on property on which delinquent taxes are owed. It seems to me somewhat disingenuous to complain about lenders not taking responsibility for real estate they don’t own when municipalities could, in many instances, take control of the same property but choose not to. I wonder why?
And one more thought. It’s one thing for a lender who has taken over foreclosed property to be responsible for proper maintenance. It is another thing to impose on that lender the obligation to refurbish property that may not have been up to code for years before the lender entered repossession. Under this bill, municipalities would have the right to intervene in foreclosure actions to mandate that property be maintained up to code. Let’s think about this for a second. The GSEs have already complained that New York mortgages are not as valuable as in other parts of the country because of foreclosure costs. Now we are going to make the system even more expensive by allowing municipalities to impose a back door maintenance tax on mortgagees.
Finally, I personally would love to know how much of the stock of zombie property not only in New York but nationwide is owned by Fannie and Freddie. My guess is that we might find that these government sponsored entities are not particularly conscientious absentee landlords.
“Buying a home is easier if you’re white” reported CNN yesterday based on the findings of a research report put together by Zillow with a forward by the National Urban League. The report, which was much more measured in its conclusions than some of the news headlines it generated, makes these headline grabbing assertions in its executive summary:
-Fewer minorities apply for conventional mortgages. Although Hispanics and Blacks make up 17 percent and 12 percent of the U.S. population, respectively, they represented only 5 percent and 3 percent of the conventional Mortgage application pool.
-Blacks experience the highest loan application denial rates. 1 in 4 blacks willbe denied their conventional loan application, as opposed to 1 in 10 whites.
-Wide disparities in homeownership rates among ethnic groups persist.73.9 percent of whites own a home, whereas 60.9 percent of Asians, 50.9percent of Hispanics and 46.5 percent of blacks own.
-The rise and subsequent fall of home values in the U.S. housing bubble disproportionately affected black and Hispanic homeowners, measured by indexed home values between the peak of the market and the bottom, or“trough.”
Look beyond the bullet points and a more nuanced picture emerges. Economics not race is what really determines how difficult it is to buy a home For instance, while not precluding the possibility that stark differences in homeownership may be a reflection of racial bias the report notes that on average White Americans, earn $62,000 thousand per household. In comparison, black American households earn $39.000 thousand and Hispanics $43,000. As the report notes “lower incomes mean a greater share of earnings goes towards living expenses and less towards savings. It is then unsurprising that blacks and Hispanics are less likely to have the savings needed to apply for a mortgage to make a home purchase,”
The report notes that racial disparities are less pronounce among applicants for FHA loans since these applicants tend to have fewer savings irrespective of race.
What troubles me so much about the headlines reports such as these generate is that they lend themselves to quick conclusions and simple solutions to complicated problems If you want to believe that lenders are a cabal of racists conspiring to deny homeownership to people based on how they look than you can get on with your day; these statistics speak for themselves.
But the truth behind these numbers is much more complicated. To suggest that racial animus is at the core of our housing disparity is to overlook the legal, moral and operational changes that lending has undergone in the last 50 years. Intentional housing discrimination is illegal and lawsuits are rightly brought when discrimination is uncovered; socially we live in a much more tolerant society than we used to. Technologically the vast majority of lending decisions are made by computers based on mathematical formulas where race can’t be used as a factor.
None of this is to suggest that we live in a colorblind world free of racism: We never have and unfortunately never will. What I’m suggesting is the problems with lending disparities underscored by this report reflect societal complexities that go well beyond underwriting practices and standards. In the last 50 years a lot has been done to reform lending for the better. It is time to acknowledge these improvements and grapple with the complicated economic and social issues that will make this country even better 50 years from now.
I have complained in this blog that the Government subsidized secondary housing market sets up a seller beware system. Under this system the terms that banks and credit unions must abide by strict underwriting terms when they sell a mortgage to a GSE or get it insured by the FHA and have been forced to buyback mortgages that may have performed just fine for years before the Great Recession. Once a mortgage goes into foreclosure a GSE can scrub a loan file and force a lender to repurchase a loan based on small mistakes in the underwriting process that bear no relationship to why a mortgage went into foreclosure. The lender has to put a loan back on its books. Is there any wonder why financial institutions are gun-shy about selling their mortgages?
I have good news this morning. The WSJ is reporting that the FHA is considering loosening its own standards so that “banks continue to be liable for high damages on significant underwriting errors but not for smaller mistakes that wouldn’t have affected the decision to extend the loans.” Here is a link to the article:
The news that Wells Fargo entered into a $4 million consent decree with NYS’s Department of Financial Services typically wouldn’t be blog worthy. After all, $4 million ($2 million fine and $2 million in restitution to 1,300 NY Consumers) is cushion change for your average mega bank and by some measures Wells Fargo is the biggest of the Big. But when the settlement involves one of the most unique operational constraints placed on New York State chartered financial institutions and touches on how and when state laws are preempted, it is worth taking a look at.
Section 413 of NYS’s Personal Property Law prohibits the use of credit cards secured by real property. As a result, state chartered institutions, including credit unions, are prohibited from offering HELOCS that can be accessed with cards with credit features, as explained in this legal opinion letter from the Department of Financial Services.
New York’s prohibition against credit card HELOCS is arguably the most significant operational difference between state and federal credit unions. NCUA has clearly preempted such laws as applied to federal credit unions. For example, this opinion letter from NCUA noted that a Connecticut law that banned HELOC credit cards was preempted by federal law. As the letter explained:
“NCUA’s lending regulation expressly recognizes that FCUs are subject to state law in certain matters, including insurance laws, issues related to the establishment and transfers of security interests, issues of default and so forth. 12 C.F.R. §701.21(b)(2). The Connecticut statute is not within the area of permissible regulation by the states because it affects conditions related to the purpose of the loan and the distribution of loan proceeds. ” RE: PREEMPTION OF CONNECTICUT OPEN-END MORTGAGE LAW, 2002.
What caught my eye about the settlement and has sent me scrambling through the legal opinion letters is that Wells Fargo is a nationally chartered Bank. Why would it be subject to New York’s Personal Property Law? As it turns out, Wells Fargo had brought the line of business from a non- bank entity that wasn’t federally chartered.
The bottom line: federally chartered institutions are no more subject to New York’s HELOC prohibition today than they were yesterday but if you are state chartered, the state is serious about enforcing its HELOC limitations. If you are a federal charter don’t assume that the exemptions that apply to your credit union automatically apply to your CUSOs.
Law and Order NY Style
For political junkies our morning political blogs are reading more like crime blotters.
Fresh on the heels of the Silver indictment former Senate Majority Leader Malcolm Smith was found guilty of trying to bribe his way onto the ballot as a Republican in his still-born run for NYC Mayor in last year’s election. His successor, John Sampson is awaiting trial. Meanwhile a $580,000 settlement involving alleged sexual harassment of staffers by former Assemblyman Vito Lopez has been reached. Taxpayers will be on the hook for $545,000 of the settlement.
Yesterday, the Government announced a settlement with S & P and its parent company McGraw-Hill in which the ratings agency effectively conceded that it violated its own policy by letting business considerations influence the ratings it gave to issues of mortgage-backed securities and collateralized debt obligations. The $1.375 billion settlement is ostensibly “historic” since it represents the first such admission of wrong doing by a ratings agency in a case brought jointly by the Department of Justice and 19 states’ attorneys general. New York did not participate in the litigation.
Like so much else in relation to the Government’s response to the mortgage meltdown, there’s less here than meets the eye. S & P’s major concession was that it will do what it already is publicly committed to, which is objectively rate the issues it assesses so that investors like credit unions can invest with confidence. However, does anyone really think that credit rating agencies, which are still dependent on doing business with debt issuers to stay in business, won’t continue to feel pressured to let business relationships influence their ratings? Remember that one of the most important, and in my mind silliest, Dodd-Frank reforms is to mandate that financial institutions, including credit unions, not rely exclusively on credit agency judgments when making investment decisions. But at the end of the day, credit rating agencies will continue to be relied on. After all, your average investor simply doesn’t have the expertise that good credit rating agencies do to make judgments about the quality of debt they are buying.
Bottom line, this is yet another example of how credit unions were more impacted operationally as a result of the mortgage meltdown than were many of the institutions responsible for causing the mess. Oh well.
Meet the New Boss
Bronx Assemblyman Carl Heastie was elected to replace Sheldon Silver as Speaker of the New York State Assembly. As such, he becomes one of the three most important people in State Government. The Speaker has been a supporter of credit unions in the past, and the Association looks forward to working with him going forward.
NY Attorney General Eric T. Schneiderman yesterday announced an agreement with Citibank under which it has agreed to change its policies for prescreening account applicants so that “applicants are not rejected for accounts based on isolated or minor banking errors, such as paid debts or a small overcharge.” Specifically newspaper reports indicate that Citibank will only decline applicants if they have two or more reported incidents of account abuse in recent years. A similar agreement was reached with CapitalOne earlier this year.
I know there are credit unions that use ChexSystems and similar services . Their use is not illegal and the AG’s announcement is certainly not binding on other financial institutions; however the writing is on the wall and it wouldn’t be a bad idea to examine the criteria your CU uses to disqualify applicants from membership. To their critics ChexSystems and other similar companies disproportionately impact the poor unbanked since these applicants are at greater risk of having bounced a check, for example. My personal advice would be that you disqualify applicants based on a clear pattern of account abuse.
I have also argued in a previous blog that credit unions have a unique obligation to the unbanked and underserved. Disqualifying potential members based on past misconduct could undermine that goal at institutions where membership is too restrictive.
Here is a copy of the press release
The limits of Operation Choke Point
In recent years regulators and the DOJ have become increasingly aggressive about pressuring the banking system not to facilitate legal banking activities that may ultimately aid down stream illegal conduct. . For example, New York’s DFS criticized the NACHA system for facilitating electronic payments of Pay Day Loans and some banks stopped opening accounts for gun dealers.
Yesterday the FDIC pushed back against these overly aggressive tactics. In a letter to FDIC insured institutions it encouraged them to ” take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk. Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customer operating in compliance with applicable state and federal law.”
It further assured them that “Isolated or technical” BSA violations “do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance.”
I wonder if NCUA will be issuing similar Guidance? Here is a link
The state of Monetary Policy
The FOMC issued a statement following its two day powwow in the nation’s capital. Even though it gave itself the typically abundant supply of qualifiers and caveats the best reading of the statement is that the Fed remains likely to raise short term interest rates in the middle of the year.
To me the most telling line in the statement is that “on balance, a range of labor market indicators suggests that under utilization of labor resources continues to diminish.” Why is this important? Because Chairman Yellen has consistently expressed the view that the most commonly used measures of unemployment haven’t provided an accurate snapshot of employment conditions facing American job seekers and the under employed. The generally upbeat assessment of the broader economy tells me that the Fed currently is inclined to believe that the economy is now strong enough to withstand slightly higher interest rates as a hedge against the inflation bogey man.
Here is a link to the statement.
And their off…
With Assembly Democrats moving ahead with plans to officially remove Sheldon Silver as Speaker as early as Monday jockeying for the position has begun in earnest. The Capitol Tonight Morning Memo is reporting that, Manhattan Assemblyman Keith Wright, who was considered a possible candidate for the Speakership, endorsed Bronx Assemblyman Carl Heastie. Also Rochester area Democrat Joe Morelle, who will likely be Acting Speaker pending a vote on a permanent replacement for Silver, announced Wednesday that he wants the job permanently. Another candidate is veteran J Assemblyman Joe Lentol.
Ding Dong, the witch is dead.
With the Supreme Court’s decision not to hear an appeal by merchants complaining that the Federal Reserve’s interchange fee cap is too high – and I thought we lived in a free market system – the latest round of merchant interchange litigation has come to an end. Remember that the litigation never directly impacted your credit union unless you work for one of the relative handful with $10 billion or more in assets. Still, the victory is an important one because of concerns that the interchange cap puts downward pressure on what all issuers ultimately receive.
The litigation came down to how much deference the Federal Reserve should be given by the courts in implementing Durbin’s mandate that it devise an interchange fee cap. The amendment tasked the Federal Reserve with making sure that interchange fees were “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” It further specified that “in making this determination distinguish between … the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular debit transaction, which cost shall be considered …, [and] other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered.” NACS v. Bd. of Governors of Fed. Reserve Sys., 746 F.3d 474, 480 (D.C. Cir. 2014) cert. denied sub nom. NACS V. BD. OF GOVERNORS (U.S. Jan. 20, 2015).
The merchants argued that the twenty one cent transaction cap was too high because the Board took costs into account that the statute didn’t allow. The Government argued, and the federal DC appellate court agreed, that the statute was less than clear. The Board properly utilized discretion in filling in the congressional blanks. Yesterday’s denial to take up this decision by the Supremes puts an end to this round of litigation. But let’s face it, when it comes to litigation, merchants are like those Taken movies starring Liam Neeson, who, I vaguely recall, used to be a good actor. Even though it seems like the bad guys have taken or killed all his family members, as long as someone is making money off these sequels we haven’t seen the last of them. . .
Luck Would Have It
While we are on the subject of regulations and litigation, it’s kind of fitting that on the same day the interchange fee litigation ended, the NCUA released a legal opinion explaining why it has the authority to categorize credit unions as either “adequately” or “well capitalized” under whatever risk-based capital framework it imposes on complex (i.e. larger) credit unions. http://www.ncua.gov/News/Pages/NW20150120Opinion.aspx
The merchants argued that the Federal Reserve Board lacked authority to devise the cap the way it did because the Durbin Amendment was clear enough to be implemented without exercising discretion. Credit unions have suggested to NCUA that it lacks the authority to impose “well capitalized requirements” on complex credit unions – a group that NCUA is now proposing include any credit union with over $100 million in assets – because Congress clearly prohibited NCUA from doing so. NCUA was spooked enough by the argument to go out and get a legal opinion on the subject from the Paul Hastings laws firm. The firm concluded that Section 216 of the Federal Credit Union Act was vague and as a result NCUA had the flexibility to establish requirements for complex credit unions to be considered “well capitalized” under a risk based capital framework, so long as the agency provided “a sufficient explanation” for imposing “a higher and more conservative” capital requirement on complex credit unions.
As Washington Turns
We wouldn’t have to be delving so much into the arcane world of regulatory interpretation if Congress actually passed laws with clear directives. Like estranged lovers, as Congress and the President have drifted apart both have turned to others to meet their needs. The President has turned to Executive Orders for validation of his powers; Congressional Republicans have turned their affections to courts. Anyone hoping for a change to this dynamic was woefully disappointed by the President’s State of the Union address last night. Don’t get me wrong. If you turn on Rachel Maddow every night you loved the speech because it hit all the right liberal notes of what the world would be like if only there were no Republicans. Conversely, if you don’t miss a day of Rush Limbaugh the speech undoubtedly confirmed your worst fears of an impending socialist takeover. But, if you thought that the idea of a State of the Union address was to propose ideas that could actually become law, you were out of luck.
If you want to see just how out-of-whack Washington is, be sure to tune into today’s State of the State address by Governor Cuomo. He will actually propose ideas that can be accomplished in the coming months and occasionally even compliment Republicans without fear of being brought up on impeachment charges.