Posts filed under ‘New York State’

Wednesday Potpourri

If at First You Don’t Succeed. . .

Visa and Target announced a settlement intended to compensate card issuers for the high profile data breach of the Minnesota retailer that compromised an estimated 40 million debit and credit cards. The price tag is reportedly $67 million. The agreement comes months after issuers, including credit unions, scuttled a proposed $19 million settlement with MasterCard. NAFCU’s Carrie Hunt is quoted in the WSJ: “This settlement is a step in the right direction, but it still may not make credit unions whole.”

Stay tuned. This will be an interesting issue to keep an eye on in the coming weeks as the specific terms are analyzed.

Foreclosures in New York: Alive and Well

NY’s foreclosure problems are far from resolved, especially in NYC’s suburban communities according to State Comptroller Thomas Dinapoli, who has the numbers to back it up. Between 2006 and 2009, the number of new foreclosure filings jumped 78%. They leveled off in 2011, hitting a low of 16,655, but shot up again. Filings climbed to 46,696 by 2013 before edging back to 43,868 in 2014, still well above pre-recession levels, according to the report.

By the end of 2015, there were over 91,000 pending foreclosures with Long Island and the Mid-Hudson accounting for a disproportionate share. The four counties with the highest foreclosure rates are all located downstate: Suffolk (2.82 percent, or one in every 35 housing units), Nassau (2.47 percent, or one in every 40 housing units), Rockland (2.26 percent, or one in every 44 housing units), and Putnam (2.10 percent, or one in every 48 housing units). Counties in Western New York and the Finger Lakes regions, in contrast, tended to have lower pending foreclosure rates and decreasing caseloads.

The good news is that these numbers most likely represent a backlog of delinquencies rather than a further deterioration of economic conditions. The Comptroller reports that there are fewer foreclosures at the beginning of the process while activity at the end of the process (notices of sale, notification that the property has been scheduled for public auction) is accelerating.

The backlog of foreclosures reflects not only the aftershocks of the Great Recession but also the inevitable result of a foreclosure process that is hopelessly byzantine and invites delay. Maybe there will be a grand bargain in which state policymakers take steps to expedite foreclosures in return for lenders having to comply with one of the nation’s most onerous and lengthy foreclosure processes. In the meantime, I’m curious if the trends persisting in New York began to spread nationally thanks to the adoption of New York style regulations on the national level. Here is a link to the report.

http://www.osc.state.ny.us/press/releases/aug15/081715.htm

Time Extended for Two-Cents on Online Lenders

You have more time to sound off about the extent to which online marketplace lenders should be regulated if you are so inclined. The Treasury has extended until September 30th the deadline for responding to its Request for Information on the proper regulation of online lenders. The RFI asks a series of questions related to companies operating in three general categories of online lending: (1) balance sheet lenders that retain credit risk in their own portfolios and are typically funded by venture capital, hedge fund, or family office investments; (2) online platforms (formerly known as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable third parties to fund borrowers; and (3) bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, originate loans and directly assume the credit risk.

Are these flash-in-the-pan industries that will fold with the next economic downturn or innovative disruptors of the banking model? If they are the later they may hit credit unions particularly hard. According to the Treasury, small businesses are already more likely than their larger peers to go online for their products and services. Online lending may provide them with a means to quickly access the cash that traditional lenders are reluctant to provide them during economic downturns.

https://www.federalregister.gov/articles/2015/08/18/2015-20394/public-input-on-expanding-access-to-credit-through-online-marketplace-lending

August 19, 2015 at 8:53 am 1 comment

Banker Hypocrisy And Municipal Deposits

One of the first arguments the banks regurgitate in opposition to municipal deposit legislation is that tax dollars shouldn’t go to institutions that don’t pay taxes.  First, we all know that credit unions do pay taxes; but, more importantly for this post, banks have never quite explained why their for-profit tax status automatically makes them better protectors of the public Fisc than credit unions.

That question is worth asking the Legislature next year in light of the New York Bankers Association successful efforts to keep New York City from scrutinizing the community investment performance of banks holding the City’s deposits.  On Monday, a federal court ruled that a NYC ordinance mandating that banks holding or wishing to hold municipal deposits be subject to a local review of their investment activities was preempted by federal law and could not be enforced.  (The New York Bankers Association, Inc., v. The City of New York, 15 Civ. 4001).

The Responsible Banking Act had its roots in the worst days of the Great Recession.  NYC council members grew frustrated by the juxtaposition of mounting foreclosures and shoddy banking practices even as billions of dollars of public money was being deposited into banks for safe keeping.  The bill established an advisory board that would report on how well banks were doing meeting financial benchmarks.  The report would be used in evaluating institutions wishing to hold municipal deposits from the City.

To be fair, the information the advisory board was seeking was much more extensive than what needed to be supplied under the Community Reinvestment Act.  For example,  the banks were to be evaluated on  how they addressed serious material and health and safety deficiencies in the maintenance and condition of their foreclosed property; developed and offered financial services needed by low and moderate income individuals throughout the city, and how much funding they provided for affordable housing.

Mayor Bloomberg hated the bill so much that he vetoed it and refused to appoint members to the advisory board after his veto was overridden.  When Mayor DeBlasio was elected, he embraced the idea and the advisory board came to life.  It was time to call in the lawyers.

In arguing against the legislation, the Bankers Association argued that both Federal and State law preempted the ordinance.  They pointed out that the Community Reinvestment Act was intended to establish the framework for nationally chartered banks to be assessed for their community works.  On the state level the Banking Law gave the Department of Financial Services  broad powers of regulation to control and police the banking institutions under their supervision.

In response, the City argued that it was not regulating bank activity; but simply carrying out a proprietary function.  It should be able to establish its own standards for deciding who gets the city’s money the same way it gets to decide what companies are awarded city contracts.  It also argued that the activities undertaken by the Advisory Board were “purely informational.”  Its findings were not binding on anybody deciding where the money should be placed.

Southern District Judge Katherine Polk Failla ruled in favor of every major issue raised in opposition to the bill concluding that “the RBA’s very structure secures compliance through public shaming of banks and/or threatening to withdraw deposits from banks that do not provide information to the CIAB. The Court sees no reason why regulation through coercive power, rather than by explicit demand or stricture, should be immune from preemption scrutiny.”

While the lawsuit may have solved the immediate legal problem facing banks it doesn’t change the fact that banks didn’t do enough in return for their public bailout.  Nor does it change the fact that there are local leaders who feel that banks still don’t do enough for the communities in which they operate.  Giving localities the ability to work with credit unions. which by their very structure invest in the communities in which they operate,  would be a perfectly legal way of ending the banker monopoly and perhaps make these banks more responsive to local concerns.

Epilogue A Failure To communicate?

NCUA officials have fallen into the habit lately of making bold statements one day that have to be clarified the next.  First, we had Chairman Matz’s   clarification of her Congressional testimony that credit union CEOs  aren’t representing their members when they advocate for budget hearings. Yesterday NCUA felt  the need to clarify to the CU Times its  position on how much information the  public is entitled to about the Overhead Transfer Rate methodology following the release of a letter  from its General Counsel to NASCUS on that very subject(See yesterday’s blog).  I think it’s fair to say that NCUA is suffering from some communication problems.

The article  quotes Board renegade Mark McWatters, who is  emerging as a much needed voice of reason, as saying  that “The agency will make the final determination as to the calculation of the OTR and I see no harm in subjecting the agency’s OTR methodology to public comment as a proposed rule under the APA,” Here is a link

http://www.cutimes.com/2015/08/11/mcwatters-ncua-weigh-in-on-otr-transparency?ref=hp-top-stories&page=3

 

August 12, 2015 at 8:47 am Leave a comment

Mile High Confusion Has National Implications

The legal fog surrounding banking and marijuana got thicker on Friday.  New York State announced the five companies that would be allowed to legally produce and distribute marijuana for medical purposes.  On the same day NCUA and the Federal Reserve Bank in Kansas City were being sued in federal court after blocking a Colorado credit union from gaining access to the banking system.  This is going to get interesting.

Colorado was one of the first states to fully legalize the use of marijuana.  But cannabis remains illegal under federal law.  As a result, banks and credit unions are hesitant to open accounts for marijuana businesses.  The Justice Department and FinCen responded to these concerns by explaining how credit unions and banks  could serve pot businesses and comply with BSA requirements but depository institutions remained uneasy.   Colorado eventually came up with the idea of forming a state-chartered credit union.  The Fourth Corner Credit Union was granted a state charter contingent on obtaining Share Insurance.  Its Field of Membership is composed of licensed cannabis businesses; businesses that serve the marijuana industry; and people who support Colorado’s efforts to legalize marijuana.

As I’ve discussed in a previous blog, the credit union’s application for share insurance  put NCUA in a difficult spot.  On the one hand, it was being asked to grant insurance protection to an institution designed to aid an industry that is illegal under federal law.  On the other hand, NCUA has instructed examiners to utilize the U.S. Department of Justice’s guidance when examining credit unions in Washington State, where marijuana has also been legalized.

The lawsuit contends that the NCUA has violated both the federal constitution and the Administrative Procedures Act by denying Share Insurance to the credit union.  In its complaint, the credit union argues that  it has developed an intensive BSA framework and that NCUA has not adequately described how its procedures fail to address safety and soundness concerns.

NCUA’s decision does not kill the credit union.  It has indicated that it may be able to obtain private insurance.  Since the credit union is state-chartered, NCUA would no longer have any jurisdiction over the credit union. In contrast, It is hard to see how the credit union can operate however without access to the federal reserve so the even bigger news   was that the Federal Reserve Bank of Kansas City followed the NCUA’s lead and refused to open up a Federal Reserve Master Account for the credit union.  Without access to the Federal Reserve System, the credit union won’t be able to facilitate basic banking services such as ACH transactions. The credit union on Friday also filed a suit to overturn the Federal Reserve’s decision.

So, here’s what we know so far.  Marijuana remains illegal under federal law.  Both FinCEN and the Justice Department have issued memoranda detailing how  financial institutions can open accounts for marijuana businesses. Notwithstanding this guidance,   Both the Federal Reserve and NCUA have suggested that opening credit unions to cater to this industry may raise virtually insurmountable safety and soundness concerns.

The blame does not lay with the regulators but with a Congress that refuses to amend federal law,  an administration which has made a virtue out of picking and choosing which  federal laws should be enforced and state lawmakers that ignore federal law.

For those of you who might end up dealing either directly or indirectly with marijuana businesses in New York State, it goes without saying that servicing such accounts should be coupled with heightened compliance oversight. But remember New York’s cannabis industry is going to be among the most tightly regulated in the country while Colorado’s is among the most freewheeling    here is a link to a previous post on the topic.

https://newyorksstateofmind.wordpress.com/2014/02/18/marijuana-limited/

Get Ready For More Mortgage Reporting,

A three-month extender of the Highway Transportation bill approved by Congress last week includes a provision requiring mortgage lenders to report more information to the IRS.  This morning’s American Banker is reporting that “the provision requires the reporting of the origination date of a mortgage, the property address for the collateral and outstanding balance on the loan at the beginning of the tax year.”

The good news is that you won’t have to start reporting the new information until January 2018 which gives Congress plenty of time to find an alternative revenue source.

 

http://www.nytimes.com/2015/08/01/nyregion/new-york-state-awards-5-medical-marijuana-licenses.html?_r=0

 

August 3, 2015 at 9:40 am Leave a comment

Handle Acceleration Clauses With Care

If you look at your mortgage notes, chances are they include an acceleration clause stating that in the event a mortgage payment is overdue, a borrower is in default and the entire mortgage becomes payable. These so-called acceleration clauses still exist, even though the courts continue to chip away at their efficacy.

(Another clause you might see is one stipulating that an unauthorized transfer of residential property also accelerates payment of the mortgage.  Interpreted literally,  a child who receives mortgaged property upon the death of his parents  would immediately have to pay the entire mortgage.   Federal law has, however,   long since invalidated these clauses as applied to successors in interest. 12 U.S.C.A. § 1701j-3)

The latest example of this trend is a case recently decided in Queens (B & H Caleb 14 LLC v. Mabry). The facts in the case are fairly straightforward. Karen C. Mabry took out a mortgage to buy property in Queens from Greenpoint Mortgage. Under the terms of the mortgage, all payments had to be made by the first of each month. The mortgage notes stated that in the event payment is late by at least ten days, a late fee of 5% of the total monthly payment due could be charged. It further stipulated that the failure to make this payment constituted a default for which the entire remaining mortgage could become payable. Karen Mabry did not send her April 1 payment until April 8 and it was not received by the Bank’s attorney until April 14. The amount she sent did not include a late fee of $118.

B & H, which assumed the mortgage from Greenpoint, brought a lawsuit seeking to accelerate the entire mortgage and foreclose on the property. Interestingly, the Court noted that there is little case law in New York analyzing the validity of mortgage acceleration clauses. In 1991, the Third Department, which has jurisdiction over much of Eastern New York, stated that the law is clear that when a mortgagor defaults on loan payments, even if only for a day, the mortgagee may accelerate the loan, require that the loan balance be rendered, or commence foreclosure proceedings.

Conversely, the Court cited with approval cases in which a “mortgagee’s opportunistic bad-faith in accepting payment of a check and subsequently seeking to foreclose on the property was considered unconscionable conduct.”

As a result, the Court concluded that in the event Ms. Mabry could show that her late payment was the result of an inadvertent mistake that she intended to cure as soon as she realized what she had done, she could prevent foreclosure notwithstanding the plain language of the mortgage. The case underscores just how radically foreclosure law has evolved in the last decade.

As I mentioned in a previous blog, a veteran attorney once told me that the only question in foreclosure cases used to be whether or not a homeowner had made his payment on time. As this case demonstrates, the law is now a lot more complicated.

Have a nice weekend folks, I’m taking tomorrow off.

July 30, 2015 at 8:57 am Leave a comment

Getting Dopey in New York?

As early as this week, New York is expected to take its next big step toward legalizing the distribution of marijuana for medical purposes. Its Department of Health is expected to announce the five companies that will be responsible for producing and distributing cannabis throughout the State. These five entities will be authorized to establish up to four “dispensing facilities,” meaning that if all goes according to plan, on January 5, 2016, qualified ailing New Yorkers will be able to purchase and use cannabis.

Regardless of whether you think medical marijuana is the greatest wonder drug since penicillin or that legalizing drugs will unleash refer madness across the state, New York is entering into a legal haze, which is unlikely to clear any time in the near future. Most importantly, cannabis remains illegal as a matter of federal law. This has several implications for states such as New York that have legalized marijuana. Most importantly, as I’ve discussed in previous blogs, credit unions are still responsible for filing Suspicious Activity Reports (SARS) on institutions with accounts that engage in the business of legally selling marijuana pursuant to state law. The Department of Justice and FinCEN have issued guidance authorizing credit unions and banks to issue so-called “marijuana limited SAR filings.”

The basic idea is that the Department of Justice and FinCEN will not prosecute certain types of legal marijuana businesses so long as they do not, among other things: distribute marijuana to minors; facilitate distribution of drug money to criminal gangs, facilitate the distribution of marijuana to states where it is not legal; use legal marijuana sales as a pretext to sell illegal drugs; or aid in the growing of marijuana on public land where it poses public safety or environmental risk. Institutions that choose to help legal marijuana dispensaries take on a huge oversight responsibility. They will have to have the ability to monitor these companies on an ongoing basis to make sure that they are complying with the federal government’s criteria. The amount of paper work and staff is enough to prevent all but the largest institutions from aiding these organizations.

Does this mean that New York’s law will not impact your credit union? Not by a long shot. For example, your HR department will have to decide how to deal with the employee who informs you that she uses medical marijuana. In addition, even though there are only a total of 20 dispensaries at this point, many of you may have business accounts with doctors who may become certified prescribers of marijuana. In my opinion, such activities will require your credit union to exercise increased oversight of these accounts.

Now I don’t mean to scare anyone away. New York is implementing one of the most tightly regulated medical marijuana industries in the country. As a result, it should be easier to comply with oversight requirements. However, at the end of the day cannabis remains illegal as a matter of federal law. Until Congress takes a serious look at this issue, there is nothing to stop a future President from ordering the DOJ to prosecute businesses that legally dispense drugs on the state level.

July 20, 2015 at 8:35 am Leave a comment

Is All Debt Created Equal?

In May of this year New York’s A.G. Schneiderman reached a settlement with the three major national credit reporting agencies. While I am somewhat skeptical of the attention regulators are paying to the credit bureaus lately – implying that consumers are victimized by inaccurate reports as opposed to their own poor credit decisions – a recent blog post from Fico analyzing the impact of medical debt on credit scores, strengthens at least part of the AG’s case.

Fico’s research suggests that persons with previously unpaid medical debts are better credit risks than members with other kinds of unpaid bills. Specifically, Fico found that when the only “derogatory” information in a person’s credit file was a third party debt collection of a medical debt that was paid off, disregarding this information created a slightly more predictive credit score than integrating this information in the credit score.

In addition to the usual stuff, the AG’s settlement stipulates that Credit Reporting Agencies will now wait 180 days before a medical debt is reported on a credit report. Remember that your credit union is a credit “data furnisher,” so it isn’t directly impacted by this settlement. Nevertheless, the settlement suggests that medical debt collection efforts are receiving enhanced regulatory scrutiny. Fico’s research suggests the need for a more nuanced approach to these debts.

As an outsider to the credit union industry, one of the best ways for me to learn has been to talk and listen to industry veterans. I love talking to the person in charge of collecting delinquent loans in particular. At their best, they combine the empathy of Mother Teresa with the tenacity of a pit bull. They know intuitively what Big Data can confirm quantifiably: not all debt is created equal. I bet Fico’s research confirms what your debt collector already knew intuitively: financially responsible people get sick and medical bills pile up but a single illness doesn’t make someone a credit risk for the rest of their life.

July 14, 2015 at 10:02 am Leave a comment

What is the Fort Drum Loophole?

With its usury caps of 16 and 25 percent, New York effectively bans pay day loans. Then why does it seem that pay day lenders continue to do business in the State? The story behind the so-called Fort Drum Loophole demonstrates why pay day loans are one area that can only be effectively controlled on the federal level.

Licensed lenders are neither banks nor credit unions. They are state-licensed corporations authorized to simply lend money. As state licensed entities, it would seem that they clearly have to comply with New York’s laws and regulations. So, how is it that for more than a decade Omni Loan Company, a Nevada corporation, has been able to provide loans well in excess of New York’s usury limits to members of the military in the Fort Drum area.

Article IX, Section 40 of the New York Banking Law regulates the loans made by licensed lenders to “individuals then resident in this state.” In 2005, Omni Loan obtained a legal interpretation from the then-Banking Department opining that the “resident” requirement in the statute permitted it to make loans to non-resident military personnel stationed on New York military bases. Fast forward to Monday, when the Cuomo administration announced that it was withdrawing this opinion and that Omni had agreed to become licensed in New York State.

The Fort Drum exception demonstrates yet again that if someone really wants a pay day loan in New York State, they are going to get one, despite the best efforts of the DFS. The simple truth is that we have a multistate, dual charter financial system and technology makes it easier than ever to connect unscrupulous lenders to desperate borrowers. Credit unions should more aggressively market and highlight the pay day loan alternatives they offer to their members. In addition, they should support the CFPB’s nascent efforts to regulate these loans provided that the regulation is not drafted too broadly.

July 8, 2015 at 7:29 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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