Posts filed under ‘New York State’

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

Is Vacation Mandatory?

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!

July 2, 2015 at 8:32 am Leave a comment

The Day of the Legal Dud

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.

June 26, 2015 at 8:38 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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