Posts filed under ‘New York State’
I would have to double check with the Compliance Department, but I’ll bet that at least twice a year a credit union tells us that an examiner is in their office and has told them that they must require their employees to take at least two consecutive weeks of vacation. Is the examiner right, they want to know.
My decisively equivocal answer to that question is, not exactly, but a from a safety and soundness standpoint, it makes a lot of sense. First, you won’t find a statute or regulation specifying the amount of vacation time your employees must take. The most authoritative documents I’ve seen on the subject are two legal opinion letters issued by New York’s Department of Financial Services. In 1995, the Department issued a general industry letter to financial institutions in which it opined that the State considered it “prudent business practice for every bank” and branch to have vacation policies that at a minimum mandate that “those officers and employees involved or engaged in transactional business or having the ability to change the official records of” an institution take at least two consecutive weeks of vacation each year. This letter would only be binding on state-chartered credit unions and even then, only strongly encourages credit unions and banks to have mandatory vacation policies.
As for NCUA, Section 4-6 of its examination manual, which assesses a credit union’s internal controls, tells examiners to find out whether or not officers and employees in “sensitive positions” take two consecutive weeks of vacation each year, “if practical.” The manual doesn’t define what practical is, but it clearly provides a bit of wiggle room for that smaller credit union to point out that it doesn’t have enough staff to mandate vacation time policies. Chapter 18 of the Guide lists an employees unwillingness to take vacation as a money laundering red flag.
The reason for these policies is obvious enough. Two weeks should give you more than enough time to figure out if an employee is engaging in illegal activity at the credit union. (And here you thought your employer just wanted you to be well rested). Still, it is clear that on both the state and federal level, credit unions that ignore the role that vacation policies play in protecting them from being used for illegal activity may raise legitimate safety and soundness concerns.
This idea seems simple enough, but this is another example of how your IT and compliance activities have to be coordinated. For example, in 2005, a Type-A bank employee asked the DFS if its vacation policy recommendation meant that she couldn’t access e-mail while on vacation. Let’s face it, some of us are more addicted to email than Donald Trump is to his own ego. The DFS explained that while employees can access email while on vacation, financial institutions should ensure that this discretion does not allow employees to blur the lines between routine email communications and communications effecting transactions.
The distinction the Department was trying to make is all the more difficult in 2015 when many employees are allowed to bring their own smartphones to work and passwords can access the most important of databases. So what conclusions should you draw from all this? First, although examiner concerns have traditionally been geared toward employees who can execute transactions, it seems to me that in this day and age, virtually all your employees have that power. As a result, while there is no statute or regulation mandating your employees take a significant, consecutive amount of time off each year, such a policy makes sense. Besides, it’s a good mechanism to ensure that your credit union isn’t dependent on one employee to perform a core function.
Second, for these vacation policies to be most effective from a safety and soundness standpoint, your IT Department should know who has access to what credit union resources at any given time. Even if you don’t rigorously enforce a vacation policy, one of the most basic steps you can take from a cybersecurity standpoint is to limit access to employees who actually need it.
Finally, don’t assume that your employees would never embezzle from your credit union. The sad reality is that good people do bad things all the time. Your typical embezzler is not a 26 year old kid whose been working at the credit union for a year; but is the trusted middle-aged executive with bills to pay.
Come to think of it, I better put in for vacation time between Christmas and New Years. See you on Monday and Happy Fourth of July!
The big news this morning is that there really is no big news this morning.
Yesterday the Supreme Court upheld the use of “disparate impact analysis” in housing discrimination cases. So, lending criteria that has the effect of discriminating against minorities continues to be illegal regardless of your credit union’s intentions. The State legislature left town without addressing what to do about Uber and other transportation companies. And, of course, the Court upheld a key provision of Obamacare.
To understand why no news is big news today, let me describe what could have happened. Everyone agrees that the Fair Housing Act outlaws intentional discrimination on the basis of a protected characteristic. But does it outlaw practices that have a disparate impact on minorities even when such practices are not motivated by a discriminatory intent? You won’t find any disparate impact language in the Fair Housing Act statute. Nevertheless, nine federal circuit courts have interpreted the statute as authorizing disparate impact lawsuits. Yesterday, a 5-4 majority of the Supreme Court sided with those circuits and held that plaintiffs who can demonstrate a disparate impact can bring anti-discrimination lawsuits. In a decision written by Justice Kennedy, the Court concluded that the precedent established by lower courts, as well as the similarity between the FHA and other anti-discrimination statutes that outlaw disparate impact policies demonstrated that Congressional intent was to authorize these lawsuits. As many commentators have pointed out this morning, the ruling will embolden the CFPB and HUD to continue to bring enforcement actions.
As for the State Legislature, there are many issues left to be taken up another day. For example, the Legislature is sure to continue to consider insurance requirements that should be imposed on transportation network companies like Uber and Lyft seeking to operate statewide. In addition, although progress was made this year, we will continue to push for legislation permitting the Comptroller to deposit state funds in credit unions. Finally, Senator Savino did a great job this year in highlighting subprime auto lending practices at dealerships and I expect that this issue will continue to be scrutinized.
As for Obamacare, if you are a credit union planning to cover your employees through a state exchange, yesterday’s decision by the Court gives you the green light to go ahead and do so. A decision against Obamacare would have ended the provision of subsidies in states where health care exchanges were set up by the federal government. I’m with the President on this one, it’s time to move on.
Ride sharing is about to have a bigger impact on your credit union than you may have thought possible.
Yesterday, the Attorney General and the Department of Financial Services reached an agreement with the Lyft Ridesharing Service that will allow it to start plying its trade in Buffalo and Rochester. Since July 2014, the AG and the DFS blocked the company from operating in Buffalo contending that it was violating the Insurance Law by not requiring people who signed up as drivers on the service to comply with basic insurance requirements. The agreement announced yesterday addresses some of the insurance concerns but could still leave credit unions holding the bag in the event one of your members gets into an accident while providing a Lyft ride.
Lyft is a ride sharing service that competes against Uber. The service matches people who need a ride with willing drivers using an App. The two parties negotiate the fare. Here’s where it gets interesting. Your typical car insurance has a livery exception, meaning that if one of your members gets into an accident providing ride-sharing services they won’t get coverage. Needless to say, this makes your collateral worthless.
The agreement reached yesterday specifies coverage for three distinct periods: the time during which the Lyft driver is waiting for pick-up requests; the period between when a driver has accepted a request and the driver is going to pick up the passenger; and the period running from when the driver begins transporting the passenger to when he drops them off. While this is a step in the right direction, drivers are still not required to obtain comprehensive collision insurance that would protect the vehicle against property damage. In other words, the agreement doesn’t go far enough to protect lenders.
The Legislature had been considering passing legislation to address the issue, but with time running out on an already past deadline Legislative session, movement in this area is unlikely. The agreement raises several questions for credit unions to consider. Most importantly, while the agreement just applies to Buffalo, it may provide a template for ride sharing services to start operating in other parts of the state. Uber is already in operation in New York City under an agreement with that city’s Taxi and Limousine Commission.
Is there a way for credit unions to protect themselves? You may be able to mandate that members get special comprehensive collision insurance if they decide to become a ride sharing driver. The problem is, that you won’t know if they have honored this requirement until they get into an accident.
I have some good news this morning. CFPB Director Richard Cordray announced yesterday that the Bureau was moving back the effective date of the integrated disclosure mortgage requirements from August 1st to October 1. (http://www.consumerfinance.gov/newsroom/statement-by-cfpb-director-richard-cordray-on-know-before-you-owe-mortgage-disclosure-rule/) The announcement comes after the Bureau had steadfastly resisted increasingly desperate calls from Congress and industry stakeholders to delay the effective date. In its statement, the Bureau explained that it was proposing the new effective date after discovering an administrative error that would have resulted in a two week delay in implementing the regulation.
The integrated disclosure rules require that closing disclosures be received by a home buyer three business days before a mortgage loan is “consummated.” The two month delay gives credit unions more time to prepare for these changes and it also gives us more time to clarify a core concern of New York credit unions: When a loan is considered “consummated” for purposes of NYS law. Stay tuned.
FED Holds Its Fire On Rate Hike…For Now
Even as it sees signs of an economy growing at a moderate pace, the Fed decided yesterday not to raise short-term interest rates. Instead it stressed, to the extent that it publicly stresses anything, that it will probably raise rates by the end of the year. It also is continuing to rollover its existing portfolio of Mortgage Backed Securities it purchased during its period of Quantitative Easing. (http://www.federalreserve.gov/newsevents/press/monetary/20150617a.htm)
If you are hoping for a reprieve from those razor-thin Net interest Margins don’t hold your breath. And remember, this period of historically low rates comes as the Bureau is expected to propose restrictions on overdraft fees in the coming months. Yes, expect running a credit union to be as challenging as ever.
One more depressing thought: This recovery, as anemic as it is, can’t last forever. What would the Fed or a divided Congress be able to do to fight another downturn? As the Economist pointed out in a recent editorial the economic recovery is entering its sixth year and if another contraction occurs, as a result of a Greek Default for example:
“Rarely have so many large economies been so ill-equipped to manage a recession, whatever its provenance… Rich countries’ average debt-to-GDP ratio has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is, but governments that want to splurge will have to win over jumpy electorates as well as nervous creditors.” (http://www.economist.com/news/leaders/21654053-it-only-matter-time-next-recession-strikes-rich-world-not-ready-watch)
Move Over Alex
Alexander Hamilton, the nation’s first Treasury Secretary, will have to share space on the $10 bill with a yet unnamed woman. The Treasury announced that, starting in 2020, it will either start issuing some bills with Hamilton on one side and the unnamed matriarch on the other or a mix of bills, some with Hamilton and some with his female counterpart. My vote would be Maria Reynolds who would serve as a reminder that our politicians haven’t changed as much as we think we have and yet we managed to grow into a great country.
As explained in this Huffington Post Blog from 2011:
“In the summer of 1791, Hamilton was the target of what a modern-day espionage novel would call a “honey trap,” set by a blonde 23-year-old named Maria Reynolds. Hamilton then became the target of outright blackmail, by the woman’s husband (who was quite likely in on the whole scheme from the beginning), while Hamilton continued to see Maria for more than a year. This information eventually found its way into the hands of his political enemies, who confronted Hamilton. Hamilton explained that he was not (as had been charged) been playing fast and loose with the nation’s money; but rather he had merely been playing fast and loose with another man’s wife, and paying him off for the privilege, out of his own pocket.”
Today he would be charged with Structuring to evade BSA reporting requirements.
Incidentally, Hamilton was also NYS’s first Chancellor of its Board of Regents and you can find his portrait in the Education Department building in Albany. (http://www.huffingtonpost.com/chris-weigant/americas-first-political-_b_1080813.html)
That is the implicit question raised by NY”s Attorney General Eric T. Schneiderman. The WSJ is reporting this morning that the man who holds the position known for its unofficial title,” Aspiring Governor”, sent a letter to large banks on Friday warning them that their customers are at risk from insider identity theft and urging them to be more alert to employee conduct.. (http://www.wsj.com/articles/bank-tellers-draw-scrutiny-1433720000).
The AG’s letter is the latest in a series of steps taken by his office highlighting the access tellers have to personal information. For example, earlier this year his office secured a guilty plea from a teller at a JP Morgan Chase branch in White Plains. According to a press release, she would target customers with common names and over $50,000 in their accounts. She would copy this customer data and smuggle it out to co-conspirators who used it to create fraudulent checks and identification documents. These fake documents were then used to impersonate account holders and to withdraw money at bank branches in Westchester County, New York City and Long Island, as well as Connecticut and Massachusetts.
The AG’s letter is a reminder that, even as the financial industry gets swamped by increasingly sophisticated and well-funded cyber thieves, the core of your data security still must be based on knowledgeable employees who not only know the rules but are willing to follow them.
SC Rules on Underwater Mortgages
Last week was a surprisingly fertile one for blog topics and one of my more astute readers pointed out that I haven’t yet mentioned an important bankruptcy case decided by the last Monday.
The case to which he was referring is Bank of America. V Caulkett in which the Supremes upheld the rights of creditors holding junior mortgages. ( http://www.supremecourt.gov/opinions/14pdf/13-1421_p8k0.pdf).
Section 11 USC506 (d) of the Bankruptcy Code provides that “ To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In Caulkett, the court had to decide how to apply this provision in the case of underwater junior lien mortgages. The houses securing the mortgages in question had fallen so much in value that if they were sold immediately the second mortgages were worthless.
Two lower courts voided the liens, concluding that an underwater mortgages were not “secured” claims. The Supreme Court reached a different result. It defined a secured claim under Section 506 “ to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.”
Given the length of time that can pass in NY between when a homeowner becomes delinquent, files for bankruptcy, his house is foreclosed on and eventually sold this case is important in a narrow set of increasingly common circumstances. The case affirms existing practice in New York.
The case is also a good example of why you should never just read a statute when you have an important question to answer. This is the third time I’ve read this case and every time I read the statute I’m more convinced the debtors have a pretty good argument. But the Supreme Court is bond not only by the words of a statute but how it has been previously interpreted.
Besides, the Supreme Court gets the final word and as former Justice Jackson once quipped “We are not final because we are infallible, but we are infallible only because we are final.”
Those of you hoping for a reprieve from the August 1st start date for the CFPB’s new integrated disclosures got one-third of a loaf yesterday: In a letter to Congress and a blog post the Bureau That Never Sleeps explained that it “will be sensitive to the progress made by those entities that have been squarely focused on making good-faith efforts to come into compliance with the rule on time.”
Given the frenzy to which the CFPB was responding, this announcement is the equivalent of “Dam the torpedoes full speed ahead.”
That being said the CFPB’s blog post exposed for all to see a serious problem with the regulations that has to be clarified if they are going to be properly implemented. In yesterday’s Blog Post the Bureau explained that “One of the important requirements of the rule means that you’ll receive your new, easier-to-use closing document, the Closing Disclosure, three business days before closing. This will give you more time to understand your mortgage terms and costs, so that you know before you owe.” (My underline).
The problem is that this is not what the regulation says. Effective August 1, creditors shall ensure that consumers receive the required disclosures “no later than three business days beforeconsummation.”12 C.F.R. § 1026.19. Consummation is defined in state law. (http://www.consumerfinance.gov/blog/know-before-you-owe-youll-get-3-days-to-review-your-mortgage-closing-documents/)
Why does this matter? Because in NYS there is case law suggesting that consummation occurs when a lender and borrower exchange signed mortgage commitment letters. Murphy v. Empire of Am., FSA, 746 F.2d 931 (2d Cir. 1984); Zelazny v. Pilgrim Funding Corp., 41 Misc. 2d 176, 244 N.Y.S.2d 810 (Dist. Ct. 1963). If these cases conclusively settle the question of when consummation occurs , then the CFPB’s regulations require NY members to receive closing documents three days before receiving commitment letters. In other words, weeks before your member signs a note and owns her house you will have to send out final disclosures. To me this sounds like a mess and certainly not what the CFPB intended, but it is what it is.
Now I’m not saying that these cases make it unequivocally clear when consummation occurs in New York State. For instance Murphy involved a federal court interpreting consummation for purposes of the Right of Rescission and Zelazny was decided before TILA was enacted. But there are attorneys who will tell you these cases are spot on. Anyone planning on doing mortgages in New York State in August should be aware that this interpretation is out there and use their best judgment about how to comply with the integrated disclosure requirements..
In the meantime the Association is reaching out to New York State. All this confusion would be avoided if the DFS was to promulgate a regulation, or the legislature was to pass legislation explaining that, for purposes of closing disclosures, consummation means closing. Better yet, the CFPB could explain that for purposes of the integrated disclosure regulations, consummation occurs at closing when the note is signed.
It’s usually not good news when credit unions are one of the lead stories in the Wall Street Journal and today is no exception. The paper is reporting that fifty credit unions have been identified in a “confidential” FinCEN Report citing “their increased vulnerability to potential money laundering.” Crucially, the report was based on data analysis and didn’t accuse credit unions of wrong doing. Nevertheless, it expressed concern about the increased exposure to money-services businesses.
First, let’s put the report in context. For those of us who follow regulation, it’s not surprising that FinCEN is scrutinizing MSB relationships. MSB is a catch-all definition referring to businesses that engage in check cashing, wire transfers, travelers checks and pre-paid cards, among other services. They present unique risks from a BSA standpoint because they are cash intensive operations that are themselves subject to BSA reporting requirements. There is nothing wrong with a credit union opening an account for these businesses, provided of course, that the MSB is within its field of membership. But, regulators correctly point out, as I commented on in a previous blog, that credit unions that take on MSBs as members also take on heightened compliance responsibilities.
Late last year, North Dade Community Development Federal Credit Union was effectively put out of business after it was fined by FINcen for its lack of oversight of its MSBs. In addition, NCUA came out with a supervisory letter in 2014 stressing that even as MSBs provide valuable services to customers, the cash intensive nature of the businesses “may pose elevated risk for potential money-laundering activities.” As a result, credit unions that service MSB accounts within their fields of membership are expected to “exercise heightened due diligence” when overseeing these accounts.
Now that the genie is out of the bottle, it’s important that credit unions get the word out to the public at large that, contrary to the implication of the article, they, regardless of their size, make incredibly diligent efforts in the aggregate to comply with BSA regulations. I know this to be true as someone who has been involved in countless conversations related to BSA compliance. Also, let’s keep in mind that regulators are more than willing to cripple small institutions in the name of BSA compliance.
Whereas for the behemoth, the BSA fine is just the cost of doing business, the article correctly points out that money-launderers are increasingly turning to smaller institutions that they perceive as more vulnerable to money laundering. But it incorrectly suggests that larger institutions should no longer be the primary focus of BSA compliance. The reality is that with their defined field of membership, credit unions are ideally suited to scrutinize the activities of their members. There is nothing about the credit union model that makes it inherently more vulnerable to money laundering and to suggest otherwise is to let the bigger institutions, some of which have flagrantly ignored BSA rules for the last decade, off the hook.