Posts filed under ‘Legal Watch’

The Good The Bad and The Ugly of NYs Legislative Session, part 1

NY’s Legislative Recap, Part 1

On Saturday morning the Assembly gaveled out putting an unofficial end to another New York State legislative session.  With the caveat that the session never really comes to an official end, except for a couple of seconds in January, here is my first look at some of the key developments that will impact your credit union and/or the industry. 

The Political Environment

This was the year of redistricting, which means that an inherently political process becomes even more political.  As a result of a Court of Appeals decision striking down the Congressional and State Senate maps for violating new provisions of the State Constitution, we still don’t know what Congresspersons and State Senators will be running in which districts this November.  Primaries for these seats are now scheduled for August 23rd.  In contrast, we were recently chatting about legislation with an Assemblywoman who was preparing to campaign later that day for her June 28th primary.  Assembly districts were not thrown out.  All this took place as Governor Hochul navigated her first session since taking over for former Governor Cuomo.  She is seeking a full term in November.  Against this backdrop, here are some of the key legislative developments.  Part 2 will be tomorrow.

More Progress on Public Deposits

Municipal Deposits – S670 Sanders

For the first time in decades, a bill which would authorize municipalities to place their deposits in credit unions passed the Senate.  While we will have to get the Senate to repass the bill next year, and get the Assembly to go along, this is more evidence that things are trending in the right direction.  Over the last few years we have passed legislation permitting credit unions to accept public funds as part of their participation in Banking Development Districts and receive subsidies for certain types of small business loans under the Excelsior Linked Deposit program.  Incidentally, all these votes mean that we have a record of who’s with us and who’s against us.

Mortgage Foreclosure and Defense

The legislature continues to aggressively examine New York’s mortgage lending process.  For my money, the most problematic bill that passed this year was S5473-D Sanders / A7737-B Weinstein.  Although the bill is being sold as a means of preventing putative abuses in New York’s foreclosure process, in reality it would create a hyper-technical foreclosure process that will retroactively allow hundreds, if not thousands, of people to gain clear title to houses they cannot afford.  New York already has the longest foreclosure process in the country and this bill would simply make things worse.

If this bill becomes law, credit unions with delinquent mortgage loans may have to dramatically increase their loan loss provisions. The bill has not yet been sent to the Governor and we continue to join with other industry stakeholders in opposing this bill.

As for some good news, the legislature did not pass bill S2143A Kavanagh / A2428A Dinowitz, which would create a private right of action, replete with treble damages, against mortgage servicers who commit even technical violations of Part 419, which is New York’s mortgage servicer regulation.  This bill raises a host of technical and policy issues which we will continue to address in the months ahead. 

State Level Antitrust Legislation

As I discussed in this post, the Legislature seriously considered a measure  S933-A Gianaris / A1812-A Dinowitz which would impose a state level European style antitrust framework.  The new framework would impact all businesses including credit unions.  Among the concerns we have about the bill is that it would make credit unions vulnerable to class action lawsuits for providing services in underserved areas and make any type of merger more expensive and time consuming by duplicating federal law.  This bill passed the Senate but fortunately never gained traction in the Assembly. 

Stay tuned.  My recap will continue tomorrow.

June 8, 2022 at 10:08 am Leave a comment

CFPB’s Deceptively Important Guidance On “Black Box” Lending

The CFPB is issuing guidance at a hyperkinetic speed which means that it is easy to miss important statements that could impact standard operational practices.  The latest example of this trend is this circular explaining that the obligation of lenders to provide accurate reasons for the denial of credit to members extends to decisions based on complicated algorithms.  There’s more to this succinct interpretive ruling than meets the eye. 

One of the real interesting issues that I have blogged about in recent years involves the operational applicability of fair lending laws to increasingly complicated algorithms which rely on scores of data points to determine whether or not someone should get a loan.  On the one hand is the hope that integrating nontraditional data into lending decisions will increase the number of persons eligible for loans since it is often the poor or underserved who have the thinnest credit histories.  On the other hand, are those who argue that complex black box algorithms pose a threat to these borrowers by allowing lenders to deny credit based on algorithms which have the effect of discriminating against minority groups based on criteria that cannot be easily identified. In truth, we are nowhere near the point where we should be making definitive legislative or regulatory judgements on these issues, but that’s not stopping those on either side of the argument. 

Which brings us to the CFPB’s circular addressing so called “black box” lending.  It has three major implications which your credit union should keep in mind as it utilizes increasingly sophisticated algorithms. 

  • Most importantly, regardless of how sophisticated your lending criteria becomes, Regulation B still applies.  This means that you have to be able to provide your members with the principal reasons why credit was denied. 
  • Currently, most lenders meet their notice requirements by providing forms from Appendix C of Regulation B.  However, this guidance stresses that “… while Appendix C of Regulation B includes sample forms intended for use in notifying an applicant that adverse action has been taken, “[i]f the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed.””  In other words, don’t assume the existing Appendix provides you a safe harbor against legal and regulatory actions.
  • Based on these previous two points, the CFPB is basically saying that some algorithms may be too complicated for your credit union to use.  Not only that, but it also basically invites lawsuits to be brought against institutions that dare to engage with this sophisticated new technology by stating that “A creditor’s lack of understanding of its own methods is therefore not a cognizable defense against liability for violating ECOA and Regulation B’s requirements.”

Let’s hope that the CFPB plans to do more than issue this letter in addressing this core issue.  Rather than simply discourage innovative lending, let’s hope the CFPB is planning on finding the time to propose amendments to Regulation B and its accompanying Appendix C so we can have a truly thoughtful discussion about the proper role that artificial intelligence can play in the modern financial ecosystem. 

June 1, 2022 at 9:57 am Leave a comment

What CFPB Guidance Means For New York

Last week the CFPB issued an interpretive ruling clarifying the power that state regulators and attorneys general have to enforce provisions of the Consumer Financial Protection Act (CFPA) against both state and federally chartered institutions.  It could have important implications for those of us living in states such as New York with an aggressive enforcement approach to consumer protections. 

12 USC § 5552 is one of the most important provisions of the CFPA.  Prior to the Act, federal bank regulators, most notably the OCC, had aggressively preempted state law which they argued interfered with the federal bank charter.  NCUA was pulled in a similar direction but has never interpreted preemption as aggressively as its banking counterparts.  This section, entitled “Preservation of enforcement powers of States” was designed to reverse this trend.  Most importantly, for our purposes, it gives states the authority to bring legal actions against both state and federally chartered institutions for violations of regulations enforced by the CFPB.

The law hasn’t been amended in more than a decade and regulators such as New York’s Superintendent Adrienne Harris, who helped promulgate the initial regulations are certainly aware of this provision.  So why the need for this interpretation?  First, it underscores that the CFPB is encouraging states to take a more active role in enforcement.  (The problem is that those of us who live in the states most likely to be inspired by this encouragement don’t feel that additional encouragement is necessary.) 

The most important aspect of this guidance is that it explains that states not only have the authority to enforce specific regulations but that they also have the authority to utilize the CFPB’s unfair, deceptive, or abusive acts or practices (UDAAP) powers as part of their enforcement efforts [see section 1036(a)(1)(B)].  This is a big deal.  New York’s DFS does not currently have UDAP powers as a matter of state law.  The CFPB just clarified that it has this more flexible enforcement tool when it comes to enforcing key federal consumer protections. 

May 26, 2022 at 7:00 am Leave a comment

What The Zelle Is Going On Here?

That is the question yours truly has been pondering since I read the complaint in a class action lawsuit recently filed against Navy Federal Credit Union. Those of you who promote the use of payment apps should watch this case closely because if it is successful, it will provide a roadmap to sue financial institutions for years to come. The case is Wilkins v. Navy Federal Credit Union, case number 2:22-cv-02916 which was recently highlighted by Law360.

Zelle is a payment app started in 2017 by a group of the nation’s largest banks. Like Venmo, it provides members a convenient way of electronically transferring funds to other network users. Typically, these transactions are facilitated with the use of a member’s debit card.

The plaintiff in this case received a voicemail from her utility company putatively informing her that her electric bill was overdue and that if it did not receive an immediate payment that her service could be cut off. The voicemail provided the plaintiff with a number to “Zelle transfer” her overdue balance. In fact, New Jersey had a moratorium on utility payments and PSE&G would not make such a request, but the panicked plaintiff sent fraudsters $998 using Zelle believing she was transferring the money to the utility. When she called up the phony utility number, she was told that they never received the initial transfer and that she should send an additional payment.

This is the part that has me bemused and bewildered: the plaintiff isn’t contending that the credit union is strictly liable for the transaction under Regulation E, which would most likely lead to a legal dead end; instead, they argue that the credit union deceptively marketed Zelle to its members by not adequately explaining the risks of using Zelle. She argues that, had she been aware of the risks inherent in using Zelle, she never would have signed up for the product in the first place.

This is a not-so-subtle attempt to evade Regulation E, which generally provides reimbursement for consumers whose debit cards are used without their permission [§ 1005.2(m)].  In this case, Navy can argue that the debit card transaction used to facilitate the fraudulent conduct was clearly authorized by the member who initiated it using Zelle.  While the CFPB has suggested that this type of transaction is in fact subject to Regulation E’s protections, the Bureau’s interpretation is open to dispute.  In contrast, if the plaintiffs successfully sue Navy Federal, the nettlesome issue of what the law and regulation actually requires becomes largely irrelevant.

In an ideal world, Congress would step in and update the Electronic Funds Transfer Act (EFTA) to reflect the radically different world we now bank in, as compared to when the law was passed in the late 70s.  Of course, the world is not ideal which means that it is time to start reviewing your account and marketing language to see if they are vulnerable to the same legal arguments being made against Navy FCU.

May 25, 2022 at 7:00 am Leave a comment

Just When Does The Equal Credit Opportunity Act Apply?

The CFPB waded even further into a legal dispute which has direct implications for your day-to-day compliance obligations, by issuing an advisory opinion concluding that the Equal Credit Opportunity Act and its implementing Regulation B applies even after an applicant has been granted credit.  If the CFPB is right, you are all going to be sending out more notices. 

As I know most readers of this blog know, taken as a whole, the ECOA and Regulation B prohibit lending policies and practices which have the purpose or effect of discriminating against individuals on the basis of race, sex and other characteristics.  This is why an individual denied credit is entitled to a written explanation of the reasons for the denial.  Everything I just said is settled law.  In recent years, however, there has been an increase in litigation across the country seeking to sue lenders for actions taken after a loan has been approved. 

For example, in Tewinkle v. Capital One, N.A., 2019 WL 8918731 (W.D.N.Y., 2019), a Western New York resident, sued Capital One after it discontinued his line of credit.  Although he received notice of the closure as specified in his account agreement, he did not receive an explanation as to why the line was shut down.  Many financial institutions have taken similar steps in recent years, particularly following the Great Recession and Mortgage Meltdown.  The district court sided with the bank.  Similar cases are now being appealed.

Enter the CFPB.  In its advisory opinion, the Bureau stated the Tewinkle court as well as others that have reached similar conclusions have got it all wrong.  The Bureau argues as a matter of statutory history and (implicitly) the deference due to regulators interpreting ambiguous statutes that consumers like Mr. Tewinkle should receive full disclosures under Regulation B.  To be fair, other courts have agreed with the Bureau’s analysis, which means this is going to be a hotly debated issue in the federal courts, that could ultimately be decided by the Supremes.

This is an area where it is extremely important that people understand precisely what is being debated.  With or without the ECOA, lenders cannot discriminate against individuals at any point in the lending process.  For example, if a lending institution reduced credit just to African-American consumers, this would be a blatant violation of both state and federal law. 

In addition, as pointed out in Tewinkle the ECOA would have applied in this case had our disgruntled homeowner Tewinkle sought reconsideration or applied for renewal of the line of credit.  At this point, he would have been seeking new credit and been entitled to an explanation if he did not receive it;  but that is not what happened in this case. Capital One followed the terms of its account agreement in closing down a line of credit, something it and other lenders should be allowed to do in a fair, efficient manner. 

Stay tuned. This is a debate which is far from over. By the way, I hope to see some of you at tonight’s Southern Tier Chapter event at McGirk’s Irish Pub in Binghamton.

May 11, 2022 at 9:45 am Leave a comment

New York Court Invalidates Congressional and Legislative Districts

In a decision which could have a direct and substantial impact on the political environment in which credit unions operate, not only in New York State but around the country, New York’s highest court invalidated a Congressional map which would have favored Democrats to pick up at least three seats, and a state Senate map which was the first drawn by Senate Democrats since the modern redistricting process started in the 1960s and would have helped them maintain their super-majority

In the decision, the Court of Appeals not only invalidated the new maps but put a special master in charge of developing an alternative.  The Court concluded that there was insufficient time to allow the Legislature to redress the situation.  To put it nicely, the decision scrambles the political timeline.  Currently, primaries are scheduled to take place on June 28th, but with members not knowing precisely what districts they will be running in, it looks like New York is headed for a frenzy of political activity over the summer. 

This was the first redistricting cycle following amendments to the state constitution in which a bi-partisan Independent Redistricting Commission (IRC) was charged with drawing a map to be submitted to the legislature for its approval.  Under the process outlined in the Constitution, the IRC was supposed to make at least two attempts at coming up with a single plan for submission to the legislature.  The IRC deadlocked however, and its only submission to the Legislature was a set of competing maps.  State law now also mandates that maps not be politically gerrymandered. 

The Court of Appeals ruled that the maps approved by the Legislature failed both tests.  “Through the 2014 amendments, the People of this state adopted substantial redistricting reforms aimed at ensuring that the starting point for redistricting legislation would be district lines proffered by a bipartisan commission following significant public participation, thereby ensuring each political party and all interested persons a voice in the composition of those lines. We decline to render the constitutional IRC process inconsequential…”.

While this is a big deal, remember that we won’t know its precise impact until Election Day and New York is still a state with an overwhelming Democratic enrollment edge. 

April 28, 2022 at 9:35 am Leave a comment

Getting Ready For The Legislature’s Stretch Run

Yours truly is back from his Carolina vacation and has caught up with enough e-mail to finally post again.  While there is a lot I want to get off my chest – there is only so much my wife wants to hear about the banking industry during an eight-hour car ride – I think I will start with a description of some of the key legislative and regulatory issues that will be impacting New York state credit unions in the coming weeks. 

Not only is this an election year, but it is an election year following the redrawing of the election map, meaning that the legislature will want to get out of town as quickly as possible, especially with primaries scheduled for June. 

One of the most important issues we are dealing with is a bill that would retroactively impose strict new requirements on lenders foreclosing on property (S5473D Sanders).  As many of our members have already explained to their representatives during our state GAC, as currently drafted, the retroactive application of this bill and the ambiguity regarding the right of lenders and borrowers to negotiate modifications without running out of time to foreclose on property will actually make it more difficult to work with delinquent borrowers.

We are also continuing to advocate for changes to a proposed data portability and privacy bill which does not currently exempt financial institutions (S6701A Thomas / A680B Rosenthal) as well as continuing to express a strong opposition to state level anti-trust legislation (S933A Gianaris) which could negatively impact the ability of credit unions to help provide communities banking services, particularly in underserved areas. 

All this is taking place as New York’s highest court hears an appeal of a case challenging the legality of New York’s redrawn Congressional map which could allow Democrats to pick up four additional seats as they struggle to keep their majority.  Expect a decision to come down shortly.

As for the federal level, there is an interesting article in today’s WSJ reporting that privacy legislation may finally be getting traction in Congress.  This is potentially good news, provided the legislation does not impose additional requirements on credit unions and the legislation preempts state law.  But I still remain skeptical that Congress will be able to get legislation done this year.  Hopefully, I am wrong.

On the regulatory front, we are still waiting to see what will come out of the CFPB’s initiative against so-called “junk fees”.  The president of the American Bankers Association has already taken to publicly accusing the Bureau of going rouge.  My bet is that we are going to be hearing a lot about overdraft fees in the coming months. 

Last, but not least, let’s hope that the NCUA is going to be following up on its reach-out to credit unions by providing additional guidance as credit unions begin to explore the banking issues raised by distributed-ledger technologies and cyber currencies.  On May 11th yours truly will be discussing the state of regulation in this area and how it is going to impact your credit union as part of the Southern Tier’s Spring Chapter Event in Binghamton.  I noticed it’s at an Irish pub, so let’s share a half-and-half as we ruminate on how technology is once again upending the way banking is done.

Full disclosure, my wife and kids won’t be attending.  They already heard enough about how the NCUA needs to move more quickly and provide additional guidance in this area.  It was one of my favorite topics as we drove around North Carolina.

April 27, 2022 at 9:57 am Leave a comment

Why Overdraft Fees Are An Endangered Species

Good morning boys and girls, I want you all to grab a cup of coffee and gather around the virtual rug while I tell you a fascinating story about the history of overdraft protection programs and why a recent decision by the Court of Appeals for the Tenth Circuit is instructive for your credit union.

A long, long time ago, in an age before the internet and computers, banks and credit unions would decide on a case-by case basis whether to honor a member’s checks.  Let’s say Mrs. Jones didn’t have quite enough money to pay for the new vacuum she wrote out a check for. If they knew she was a good consistent member who deposited her paycheck every Friday, chances are they would cover the check. Everyone was happy, including the store owner who was dependent on checks to grow his business. 

Times changed.  Technology allowed financial institutions to automate overdraft decisions and financial institutions started charging fees for providing overdraft protection.  Financial institutions began to incorporate this practice into their account agreements and market them to their members. 

But marketing what used to be an ad-hock process into a financial product raised legal and regulatory concerns when that bank or credit union paid a check. For example, when that bank or credit union paid a check for Mrs. Jones’ granddaughter on the assumption that it would get the money back at a later date, wasn’t it extending credit, and if so, why wasn’t it providing more disclosures?   Never mind that some members absolutely loved this service.  For instance, Mrs. Jones’ granddaughter hardly knows what a checkbook is and couldn’t balance her account if her life depended on it.  After all, there are apps for this type of thing.

Responding to these concerns, in 2005, NCUA joined with bank regulators in issuing this guidance explaining the conditions under which financial institutions could provide overdraft protection services to their members and customers without running afoul of state usury laws or federal consumer protection laws, such as the Truth In Lending Act (TILA). The guidance established a common sense framework under which both federal and state credit unions were allowed to charge overdraft fees. The guidance also explained the conditions under which credit unions could offer overdraft lines of credit, but crucially, it explained that lines of credit triggered disclosure requirements under TILA. The OCC also authored an influential opinion letter for banks in 2007 in which it further explained that overdraft fees were part of a bank’s account maintenance activities for which fees could be charged, as opposed to debt collection activity subject to additional state and federal laws. 

Although overdraft fees remain controversial on a policy level, the fundamental premise of the above guidance remains good law.  Overdraft fees are not interest, so long as they are properly disclosed. In addition, members must affirmatively agree to overdraft protections when it comes to their debit cards. 

But just the other day, the Court of Appeals for the Tenth Circuit decided a case which took direct aim at this regulatory framework.  In Walker v. BOKF, National Association, 2022 WL 1052068 (C.A.10 (N.M.), 2022) involves an overdraft product under which the bank’s customers are charged an initial overdraft fee and an additional Extended Overdraft Fee of $6.50 per business day if the account remains overdrawn after five days.

The plaintiff in this case does not challenge the bank’s right to charge the original overdraft fee. He instead argues that the reoccurring charges for nonpayment amounts to interest. Interest which far exceeds the state interest rate cap of 8%. 

Stop yawning kids.  This argument takes direct aim at the core legal premise which allows financial institutions to charge overdraft fees. Remember how the bank used to honor Mrs. Jones’s checks even though there wasn’t enough money in her account? If the bank’s actions where actually classified as a loan, then virtually any fee would exceed NCUA’s interest rate cap not to mention state usury laws. The case in question was not challenging overdraft fees, but if the plaintiff in this case was successful, the next round of litigation would challenge the premise that overdraft protections are fees and not loans. The case is also crucial because it invites the courts to rule that bank regulators misinterpreted the law in 2005 and 2007 when they decided that overdraft fees should not be considered interest. Fortunately for us, the argument was rejected.

So what is the moral of the story? First, if you offer any products which charge both a fee and then recurring charges if the account remains overdrawn for a period of time, prepare yourself for a potential legal challenge.  Litigation like this does not happen in a vacuum. 

But here is an even scarier thought.  Right now the CFPB is considering taking action against so-called Junk Fees.  The distinction between interest rates and fees is a regulatory distinction developed long before the CFPB was conceived by an obscure Harvard law professor by the name of Elizabeth Warren. If the CFPB decides to aggressively challenge the existing regulatory framework, it most likely has the legal authority to do so. What one regulator can give, another can simply take away. Congress may have to be the ultimate arbiter of the overdraft debate.

On that happy note, yours truly is heading south in search of warm weather.  I will return a week from Monday.

April 14, 2022 at 9:32 am Leave a comment

Can Your Member’s Immigration Status Be Considered When They Apply for a Loan?

A married couple comes into your credit union to apply for a car loan.  The spouses, in their late 20s, have excellent credit but one of them is not a permanent U.S. resident.  Instead, one spouse is allowed to live and work legally in the U.S. under the Deferred Action for Childhood Arrivals (DACA) program, a program begun under the Obama Administration, under which children who came to this country illegally are allowed to remain indefinitely and obtain the documentation they need including obtaining valid Social Security numbers.  The credit union informs the couple that the citizen spouse must apply individually.  Since the DACA spouse is not a permanent resident of the U.S., she is not qualified to apply for a car loan under the credit union’s policy.

These facts are very similar to those in a lawsuit recently filed against Alliant Credit Union in federal district court in California alleging that the credit union engaged in illegal discrimination under federal law.  The case is by no means unique to this credit union.  There are currently several cases pending in the Ninth Circuit, which covers the West Coast, in which the rights of lenders must be squared with federal law, which generally bans discrimination, including Ruben Juarez, et al. v. Social Finance, Inc., et al.; Perez v. Wells Fargo Bank, N.A.; Garcia v. Harborstone Credit Union just to name a few.  These cases demonstrate that all credit unions should understand their policies related to loans to members whose immigration status may be in doubt. 

From a compliance standpoint, the credit union would seem to be on solid legal ground.  While Regulation B prohibits lenders from inquiring about a borrower’s race, creed or national origin, the same Regulation provides an exception for inquiries about an applicant’s immigration status.  Specifically, it provides that:  “[a] creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.” [12 CFR § 202.5(e)]

However, this authority is not unlimited.  For example, should lenders be allowed to make a distinction between unsecured loans for which they may not be able to locate an individual force to leave the country and a secured loan for which the credit union will have adequate collateral?  And, is it possible that Regulation B should be struck down as illegal since it is arguably inconsistent with the federal Civil Rights Act, which bans discrimination on the basis of alienage?  These are all open questions that underscore that your policy considerations in this area should go well beyond the plain language of the Regulation. 

This is also an example of how our increasingly divided political discourse is framing our compliance considerations.  The DACA regulation was one of the most fiercely legally contested government acts during the Trump Administration and then, effectively, reinstated by Executive Action when President Biden took office.  In the absence of legislation, it is up to businesses and the courts to grapple with policy issues that used to be dealt with by Legislators. 

From a Compliance standpoint however, DACA is extremely helpful in ensuring that persons covered under the program will have adequate documentation to comply with a lender’s obligations to know their members under Regulation B.

April 6, 2022 at 9:15 am Leave a comment

And The Most Important Regulatory Action of The Year Is…

Not even a close call, people: The most important regulatory action so far this year is the Security and Exchange Commission’s $100 million settlement announced February 14 with crypto lender BlockFi, in which the SEC alleged that the company was illegally refusing to register under federal securities law. 

The hundred million dollars given to the SEC and 32 states is chump change; but the fact that the SEC was willing to successfully and aggressively pursue litigation designed to signal crypto lenders that they are in fact, subject to laws and regulations is a key moment in the evolution of the crypto lending industry [Law360 subscription required]. It is also an important first step to helping credit unions and banks compete against these non-banks on a more level playing field. Let me explain.

According to the SEC order, starting in 2019 BlockFi has offered everyday investors BlockFi Interest Accounts (BIA) accounts. Members receive different interest rates on these accounts based on the type of currency being deposited by the member. In return BlockFi uses this pool of crypto currencies to make loans. Members are promised quick and easy access to their crypto funds. 

To me this sounds an awful lot like a depository institution. Maybe someday we will see the Federal Reserve or the OCC move to regulate crypto businesses such as these, or maybe Congress will update federal banking law, but I’m not holding my breath.

In contrast to the timidity of others in Washington, since taking over at the SEC, Chairman Gensler has described crypto finance as the Wild West.  In announcing this settlement, he explained that:

“This is the first case of its kind with respect to crypto lending platforms. Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940.”

With the SEC’s action against BlockFi, it signaled that there really is a new sheriff in town. Under the settlement, BlockFi’s quasi deposit accounts will have to register as securities and average consumers will be provided greater notice that they are making investments as opposed to depositing their hard-earned funds in federally insured accounts.

History is repeating itself and let’s hope regulators strike an appropriate balance between fostering innovation and maintaining a safe and secure financial system. In the early 1970’s, non-bank financial firms introduced the widespread use of money market mutual funds. At the time regulation Q placed caps on the interest that banks could give to account holders. 

In 1977 Merrill Lynch pushed the envelope even further when it began offering cash management accounts which allowed members to use money market funds as functional bank accounts against which they could write checks. In the mirror image of the debate playing out today, the banking industry pleaded with federal regulators to regulate these accounts and the businesses that offered them as banks. They argued that companies offering NOW accounts were acting as banks without being subject to bank regulation. The issue wasn’t definitively settled until the Supreme Court struck down regulations issued by the Federal Reserve Board intended to regulate money markets. 

In hindsight, this was one of the watershed moments in the demise of the Glass-Steagall inspired banking era. (see Taming the Mega Banks: Why We Need a New Glass-Steagall Act, pages 151-153)

On that note, I’m off to prepare for my fantasy baseball draft.  Enjoy your weekend.

March 11, 2022 at 9:20 am Leave a comment

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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