Posts filed under ‘New York State’
Late Friday afternoon, New York’s Department of Financial Services (DFS) announced that it was placing $1.78 billion Melrose Credit Union into conservatorship and appointing NCUA as Conservator. Melrose is the second state-chartered credit union specializing in making taxi medallion loans to be placed into conservatorship. Montauk Credit Union was taken over by the DFS with NCUA acting as Conservator in 2015. While the ultimate outcome of Melrose’s situation remains uncertain, here are some key points to keep in mind.
Melrose is continuing as a functioning credit union. The regulatory purpose of a conservatorship is to give regulators the authority to take over management of an institution and resolve “immediate problem areas and document[s]. . .prospects for the credit union’s future.” See Examiner’s Guide Section 29-14.
In making the announcement, neither DFS not NCUA would put a timeframe on how long the conservatorship would last. But, according to NCUA’s Examiner’s Guide, NCUA aims to have conservatorships completed within two years whenever possible.
NCUA and DFS now have broad powers to address the issues confronting Melrose. For example, if the best option is a merger, NCUA’s Chartering and Field of Membership Manual stipulates that an emergency merger can be approved without regard to field of membership constraints. NCUA would be primarily concerned that any merger into a continuing credit union, if possible given Melrose’s size, took into consideration the financial strength and management ability of the continuing credit union. We saw this approach play out when Bethpage took over Montauk.
Like Montauk, Melrose is one of the only remaining open charter credit unions in the State. As explained in this 2002 Legal Opinion Letter, credit unions granted such powers prior to a 1929 revision of state law have the authority to permit membership without regard to common bond requirements. When Bethpage acquired Montauk, it acquired Montauk’s open charter.
No doubt the banking industry will seize on Melrose’s troubles as an example of problems with the industry writ large. But Melrose’s problems are nothing more or less than the lightening quick speed with which technology is now making business models obsolete. As recently as 2014, medallions sold for over $1 million. Today, the price has fallen dramatically. The cause of this decline in New York Medallions is a San Francisco based computer company, Uber, which wasn’t even formed until 2009.
New York State’s budget typically does not have a major impact on credit unions. This year is an exception. Among the Governor’s proposals is one authorizing financial institutions to impose transaction holds when they believe that individuals are being victimized by financial exploitation? The bill would have major operational implications for credit unions by giving them substantial new power and responsibility when dealing with suspected financial abuse.
Under the proposal financial institutions would be empowered to impose a transaction hold based on a good faith belief that exploitation of a vulnerable adult; may have occurred, may have been attempted or is being attempted. Interestingly the transaction holds can be placed not only on the vulnerable adults account, but also to accounts of which such person is a beneficiary, including trust and guardian accounts. Within a day of placing a transaction hold, institutions would have to report the transaction hold to Adult Protective Services and to “a law enforcement agency.” A vulnerable adult means an individual who, because of mental and/or physical impairment is potentially unable to manage his or her own resources or protect himself from financial exploitation. The Department of Financial Services would be authorized to develop a certification program, but it does not appear that training would be mandatory.
One of the key questions that I always have when analyzing a proposal like this one is how much protection financial institutions will have? After all a poorly drafted statute, no matter how well intended, could make a credit union subject to litigation for every bad financial decision made by an elderly or disabled individual. The only opinion I will offer about the draft proposal so far is that the liability protections should be strengthened.
The good news is the governor is proposing to shield institutions that impose transaction holds from criminal, civil and administrative liability for all good faith actions, including determinations not to apply a transaction hold on an account. The bad news is this protection only applies where there is a reasonable basis for such a determination. It also does not apply where an employee or financial institution acts recklessly or engages in intentional misconduct in making the determination, or the determination results from a conflict of interest.
As I have explained in previous blogs, the most unequivocal protection from liability that I have seen for credit unions is for the filing of suspicious activity reports. Comparing these protections to what NYS is proposing shows why more work has to be done if the ultimate goal is to create an environment in which institutions are confident that they can protect their vulnerable members without exposing themselves to liability.
This year’s Super Bowl pick
My Bet the Mortgage, Super Bowl pick, which is already recognized as acceptable supplemental capital for complex credit unions is…. Falcons 31 – New England 24. The Falcons use a ball control offense to keep the ball out of Brady’s hands and ultimately score a couple of late touchdowns.
There will be no blog on Monday as I am a celebrant of the new DASB, Day After Super Bowl holiday!
NCUA Details Extended Exam Cycle
In case you missed it, recently NCUA released a letter to credit unions detailing changes to its examination cycle for both federal and federally insured credit unions.
There hasn’t been much good news for state charters recently, let me tell you some. Unless your credit union meets any one of the following criteria you will receive an NCUA evaluation not less than every five years.
- Assets greater than $1 billion;
- Composite NCUA CAMEL code 4 or 5 with assets greater than $50 million; or
- Composite NCUA CAMEL code 3 with assets greater than $250 million
In addition, a working group is being formed to consider ways to further improve the examination process as it relates to state chartered credit unions. Any steps designed to decrease NCUA’s oversight of state charters are welcomed. As readers of this blog will know, yours truly has complained that NCUA has moved so aggressively to oversee the activities of these institutions that it has diminished the value of a state charter.
As for federal credit unions, they will be eligible for extended exam cycles that begin 14 to -20 months after the prior exam completion date. To be eligible for the extended cycle, a federal credit union must have:
- Assets less than $1 billion;
- CAMEL code 1 or 2, in both the composite rating and the management component rating;
- “Well capitalized” under prompt corrective action (PCA) regulations;
- No outstanding documents of resolution (DOR) items related to significant recordkeeping deficiencies; and
- Not operating under a formal or informal enforcement or administrative order, such as a cease and desist order (C&D), letter of understanding and agreement (LUA), preliminary warning letter (PWL), or a PCA directive
New Banking Chairs named
A new session triggers a game of political musical chairs as members jockey to take the helm of key committees. This year is no exception. There are two new faces that credit unions in New York State will be working with more closely over the next two years..
Senator Jessie Hamilton, the newest member of the IDC, representing the 20th Senate District in NYC, has taken the helm of the Senate Banks Committee. He replaces fellow IDC member, Senator Diane Savino, who is moving on be Vice-Chair of the powerful Senate Finance and Code Committees. Savino has been a good friend to credit unions and we wish her the best in her new assignments.
Over on the assembly side, Kenneth P. Zebrowski, was named Chair of the Banks Committee, replacing retired Assemblywomen, Annette Robinson. Zembrowski becomes the first Chairman of the Assembly Banks Committee from outside of the five boroughs in at least twenty years.
Senator Sessions: I’ll enforce Pot Laws
At his senate confirmation to be the US Attorney General, Alabama Senator Jeff Sessions strongly suggested that he would take a stronger stand against states with legal marijuana businesses then has the current justice department. According to this article , when Sessions was asked if he would continue the Obama Administration’s “don’t ask, don’t tell” policy (my characterization) on illegal drugs, the Senator responded “It’s not so much the attorney general’s job to decide what laws to enforce. We should do our job and enforce laws as effectively as we’re able,” said Sessions, adding that “Congress was entitled to change federal law if it so desired.”
Enjoy your day!
Good Morning folks,
I had the opportunity to attend yesterday’s Supreme Court oral arguments in the Expressions Hair Design case. For a lawyer this is kind of the legal equivalent to a trip to Mecca. Although it is impossible to tell from oral arguments what the ultimate outcome of any case will be, it is safe to say that the Supreme Court is not a big fan of New York’s bill drafting technique. Take a look at Section 518 of New York’s General Business Law and see if you share the court’s frustration that the intent of the law is far from clear.
This case involves an argument by merchants who claim that Section 518 violates their First Amendment rights by prohibiting them to explain the true cost of credit to consumers. In contrast, much of the argument was taken up, however, with a discussion of the statute’s meaning rather than the underlying constitutional issues. Three of the Justices’, Alito, Sotomayor and Kagan argued that the statute could be interpreted as mandating a single price for all goods. In fact, Justice Alito mused that this might be an “uninformed” interpretation and that he felt uncomfortable about ruling on the constitutionality of this statue without knowing how the New York’s Court of Appeals would interpret it.
The Truth in Lending Act used to use language identical to Section 518 to ban surcharges as a matter of Federal Law. Section 518 was passed by the legislature amid concerns that this national provision was going to expire. At the same time the legislature never defined what a “surcharge” is. In addition, although the attorney general has opined that the law permits merchants to offer cash discounts, this authority is similarly not to be found in the statute’s language.
This lack of clarity led a frustrated Justice Sotomayor to complain to the state “You’re asking me to take a lot of steps, which is start with the language of the statute, ignore it, and go to a Federal statute and apply its definitions. How many of them, you haven’t quite told me. How you differ, you haven’t quite told me. And –but I’m going to assume the Federal definitions apply, even though none of them are used here”. “So I’m –I’m very confused why you’re starting your answer to Justice Breyer by saying, look at the statute and see what the words of the statute are doing.”
Notwithstanding the fact that my powers of prognostication are not as sharp as they used to be-I would have taken Alabama over Clemson and the Giants over the Packers-I am going to guess based on yesterday’s arguments this case will ultimately be sent to the New York Court of Appeals with a request that it interpret the statue on behalf of the Federal Courts.
The funny thing is that Section 518 is by no means unique. In New York bill hearings are non-existent, committees are pro forma get-togethers, and all the real important stuff is done behind closed doors. This is not a system that lends itself to clarity. I have always been amazed it works as well as it does.
I have New York on my mind this morning, and it is not just because I am suffering from post-traumatic stress disorder after watching the second half of the yesterday’s Packers-Giants game. Is the second half over yet?
Instead, I am thinking about New York because there is a lot going on both regulatory and legislatively that financial institutions should be keeping an eye on.
Time to fill out your exemption claim forms
Once again, with a huge assist from Joan Lannon, in the Associations, compliance department, here is a link to the form that your credit union will to claim an exemption from the requirement to maintain abandon property. Remember you have until February 28, 2017 to apply for the exemption, but it makes no sense to wait.
Elder Abuse Legislation to be a top priority for Cuomo
Today marks the unofficial start of the 2016-2017 legislative sessions. This year the governor is foregoing the tradition of speaking before a joint legislative session in Albany. Instead, he is unveiling his State of the State priorities in regional speeches, the first of which is today. On Friday, he announced he would be proposing comprehensive elder abuse legislation. The specifics have yet to be released, but according to the press release, the governor’s plan would include an Elder Abuse certification program for banks as well as measures to empower banks to place holds on “potentially fraudulent transactions”. Incidentally, I don’t know if the exclusive reference in the press release to banks is an oversight or an indication that credit unions won’t be covered by these measures. I strongly suspect that it is the former.
Rocky start to Legislative Session
A hallmark of the Cuomo administration has been an end to New York’s dysfunctional budget process; most importantly every budget proposed by the governor has been enacted pretty much on time. This run will be put to a test this year. As these legislative preview articles indicate, both the governor and legislature are angry at the lack of progress in negations held late last year and there isn’t quite as much money to spend as there used to be. This could be a very interesting session.
Expressions Hair Design to be argued tomorrow
Expressions Hair Design v. Schneiderman, a case challenging New York’s ban on credit card surcharges above an items headline price, is to be argued before the Supreme Court tomorrow. Both CUNA and NYCUA wrote amicus briefs in support of New York’s law. There will be no blog tomorrow, as yours truly and Michael Lieberman will be headed to D.C to watch the arguments first hand.
As for all you depressed Giant fans, remember, we still have the Knicks. WOW it’s going to be a long winter. Maybe I will start getting ready for fantasy baseball.
On December 28th, New York’s Department of Financial Services reissued its proposed Cybersecurity Program Requirements which are to be phased in starting in March.
Although the amendments are designed to clarify that entities covered by these regulations (a category that would include state chartered credit unions and CUSOS incorporated pursuant to State Law) can develop policies that reflect individual risk assessments, it remains to be seen whether these changes will go far enough to assuage the concerns of insurance companies, banks and credit unions that will have to comply with these “First in the Nation “requirements. Remember these regulations only apply to state chartered institutions, but may very well provide a template for other states across the nation.
First the good news. The exemption from these regulations (proposed section 500.19) has been expanded; it now includes an organization with fewer than 10 employees or less than $ 5,000,000 in gross revenue in the last three years. The previous exemption only applied to entities with fewer than 1,000 customers in each of the last three calendar years.
The proposed regulation has also been amended to clarify that an organization’s policies and programs are to be based on its risk assessment. While this helps, the Department refused to clarify the extent to which compliance with federal standards can satisfy these regulations.
The amendments also clarify that a covered entity can satisfy these regulations by using an affiliate’s cybersecurity program. In other words, a state charter with a CUSO can use a single program so long as it applies to both entities.
A huge issue, particularly for larger institutions, is the state’s proposals requiring institutions to encrypt nonpublic information that is not being transmitted. I have conversed with a couple of techies about this. They argue that when information is being stored on a secured system it shouldn’t be subjected to the same encryption requirements as data being transmitted. Show revised section 500.15 to your IT people and see if the proposed changes go far enough to address these concerns. Yours truly is by no means an IT expert, nor does he play one on TV.
There is still plenty in here to make institutions moan. For example, covered entities will still have to have to undergo cybersecurity training.
Happy New Year!
Yours truly is going on vacation starting tomorrow. I’m preparing for my feats of strength. so I wanted to give you a list of things to ponder in the event you need a break from all the merriment.
Your lucky number is… With a big assist from the inimitable Joan Lannon in our compliance department, I can now tell you that tucked away on the New York DFS website is the total number of residential real property mortgages originated in New York in 2015. The number is 212,646. As readers of this blog know, under the zombie property regulations, credit unions will use this number to find out whether they originated or serviced less than 3/10 of 1% of the total loans in the state during the calendar year of 2015. (This equates to 636 mortgages, but please do the calculations for your credit union). If your credit union did less than 636 in 2015, you are exempt from the property maintenance requirements of the regulation. You are not exempt from the obligation to report abandoned property to the state.
Are you ready for global warming? One of the goals of the Biggert-Waters Act was to introduce more private sector involvement into the federal flood insurance system. Comments are due on January 6 on a joint agency proposal which explains when “private flood insurance,’’ will satisfy federal flood insurance requirements. Since it is the lender who will be responsible for deciding if the borrower’s insurance is adequate, this is one to take a look at.
Cyber Security Regulations: A work in progress? Speaking of regulations, New York’s Department of Financial Services is still considering how best to implement its “first in the nation” cybersecurity regulations. Even if you are not from New York or you are a federal charter these are important to you. They will provide a template for other states that decide they can’t wait for the federal government to get its act together on this issue. We may seem some changes proposed, perhaps as early as next week.
UPDATE A friend, neighbor and blog reader just passed along this article indicating that the implementation of the regulation will be delayed.
How much is a pay raise worth? The last time the Legislature got a pay raise Governor Pataki got the legislature to approve charter schools. Everybody wants a pay raise before the end of the 2015-16 legislative Session. So with a week left in the year there is plenty of speculation about what, if anything, will be agreed to that would get legislators back in town next week. Stay tuned.
Eight is enough: Yesterday, both the Association and CUNA filed briefs with the U.S. Supreme Court in the Expressions Hair Design case. The case involves an appeal of a ruling by the Court of Appeals for the Second Circuit upholding Section 518 of the General Business Law. This law makes it illegal for merchants to charge more than the headline price for credit card purchases. Arguments are scheduled for January 10th.
Mama mia! Although some of us apparently believe in the fantasy of Fortress America, reality has a nasty way of intruding. International events impact your credit union’s bottom line. One of the biggest potential obstacles to growth in 2017 could be the Italian banking system, in particular, and the European banking industry, in general. Just a few hours ago the Italian Government approved a bailout of its oldest bank. In a worse-case scenario, Italy’s banking problems spread over Europe as politicians, spooked by the rise of nationalist parties, are unable to agree on a continent-wide response.
I will be back next year with my batteries recharged and one of the most fascinating periods of American history about to start. Until then, I’m signing off. Happy holidays and thanks for reading.