Posts filed under ‘Regulatory’

Do Vacation Policies Help Prevent Fraud?

In 1996 New York’s Banking Department issued a guidance strongly encouraging financial institutions to mandate two weeks of consecutive vacation for employees holding sensitive positions.  Its rationale was that two weeks would provide adequate time to uncover malfeasance on the part of employees who would not be able to cover up their mismanagement away from the office. 

It seems that about for as long as the policy has been in existence, state chartered credit unions and banks have argued that the guidance is an outdated relic of a bygone era which needlessly burdens financial institutions and does little to accomplish its laudable goal of detecting insider abuse. 

So yours truly was pleased to see that on January 4th DFS issued this request for information seeking feedback from financial institutions about potential changes to this guidance.  The Association has already talked to some of our state charters and will certainly be commenting to the DFS as it considers changes. 

Just rereading the guidance demonstrates how outdated it truly is.  For example, it explains that mandatory vacation policies should apply to “… those officers and employees involved or engaged in transactional business or having the ability to change the official records of the institution. This policy should also cover all other staffers who are capable of influencing or causing such activities to occur.”

Suffice it to say that a lot has changed since 1996.  Many of us still did not know what the internet was, let alone conceived of online banking.  It was 11 years before Steve Jobs introduced the iPhone!  And today, average consumers can electronically deposit checks and expect almost immediate access to their funds.  As a result, virtually every employee can, on some level, be considered a key employee who holds a sensitive position and a fraudster can do in a matter of minutes what used to take two weeks. 

The NCUA manages to address the same issues that New York addresses without adopting a stringent two week requirement.  It’s time DFS follows suit.  The existing guidance hinders both big and small institutions. 

January 20, 2022 at 9:22 am 1 comment

NCUA, Gov Hochul Outline Key Spending, Supervisory Priorities

When you combine unprecedented spending by the federal government, huge bonuses for the Wall Street crowd and an economy running at inflationary speed resulting in revenue for local governments, what you end up with is an unprecedented opportunity for New York State to devise a budget which incorporates a $5B surplus.  Yesterday the Governor released her proposed spending priorities that provides the framework for budget negotiations over next year’s spending plan. 

New York’s budget process gives a tremendous amount of power to the Governor because it gives the Executive broad discretion to include legislative programs in the budget, provided they are tied to an expenditure of public funds.  In addition, the Legislature can’t simply ignore the Governor’s proposal.  It must either accept it, get the Governor to agree to amend it or override the Governor’s plan which requires a 2/3 vote of the Legislature.  This last scenario hasn’t happened since the waning days of the Pataki administration. 

We will be going through the budget for the next several days, but one proposal that we already want to highlight would increase the ability of Community Development Financial Institutions to participate in the Excelsior Linked Deposit program.  According to the memo accompanying the proposal, the legislation “amends the state finance law to include CDFIs as eligible borrowers under the Excelsior Linked Deposit program and to allow CDFIs to subsequently make loans to small businesses using funds borrowed.” [pg. 104, Part BB of this  bill]

Needless to say, this could provide one more reason for eligible credit unions to consider becoming CDFI’s.  I will keep you posted.

NCUA Outlines Supervisory Priorities

Yesterday, NCUA issued its annual guidance detailing its supervisory priorities for the coming year.  This is a must-read for anyone reading this blog. 

Credit Risk Management tops the list of concerns this year.  This should surprise no one.  Inflation is at a 40 year high, we can expect a series of interest rate hikes and we still have members struggling as a result of the pandemic economy.  Many of these trends are accentuated in New York State.  On the one hand we have members who can afford to buy houses even as housing prices have increased by as much as 20% in some areas.  On the other hand, New York City has an unemployment rate well above the national average.  If your member is a bartender, waiter or hotel worker, they are still struggling.  Make sure you have reasonable policies in place so you can demonstrate to your examiners the steps you are taking to help struggling members while ensuring that your credit union has the resources to withstand sudden changes to the economy. 

On that note, enjoy your day.  Have fun keeping all those balls in the air.

January 19, 2022 at 9:27 am Leave a comment

Are You Responsible for “Take Home” Covid?

Although the decision by the Supreme Court to block OSHA’s implementation of an emergency vaccine mandate/ testing requirement for businesses with 100 or more employees has understandably gotten a lot of attention, all employers should remain mindful of their ongoing responsibility to ensure a safe workplace during the pandemic. A case pending in California demonstrates precisely what I am talking about.

Rose Gomez vs LOGIX Federal Credit Union, et al. involves a credit union employee who is suing the credit union for negligently protecting its employees against Covid resulting in the death of her relative after she contracted the virus. The plaintiff alleges that despite the known risks of Coronavirus spreading after the declaration of local, state, and national emergencies, the Credit Union continued to group employees close together. This case and another in California dealing with a closely related issue are being scrutinized nationally as courts begin to examine employer responsibilities in responding to the pandemic.

Among the issues that are being litigated in New York and other states are the extent to which Worker’s Compensation laws block employees from making claims such as the one being brought against the California credit union and the extent to which these laws also shield employers against the claims of third parties who claim to have been made ill after an employee “took home the Coronavirus.”

And of course because New York is New York there are increased legislative and regulatory requirements of which New York credit unions should be aware. As I have explained in previous blogs, New York’s HERO Act mandates that employers promulgate baseline protocols in response to airborne infectious diseases and authorizes employees to sue over the violation of these protocols.

In other words, if you think yesterday’s decision by the Supreme Court made your life easier you are sadly mistaken. Employers have an ongoing obligation to respond to the Covid pandemic and the courts will be defining the contours of those obligations for years to come.

January 14, 2022 at 9:23 am Leave a comment

Use This Flexibility While You Have the Chance

Yours truly has been under the weather, but now that I’m back in the saddle, there’s a lot to talk about. 

My sleeper pick for the most important regulatory amendment that no one is talking about is the NCUA’s decision to extend for another year the increased flexibility given to credit unions during the pandemic to purchase eligible obligations and loan participations. 

Loan participations, which allow credit unions to purchase parts of loans they did not originate, and eligible obligations, which permit credit unions to purchase entire loans, provide an essential means of liquidity for the industry.  When used properly, they allow credit unions to avoid excessive concentration risk by selling all or portions of some loans and permitting other credit unions to get into the action by purchasing these loans. 

There are, of course, important restrictions on both of these products.  First, when it comes to loan participations, federal regulations limit the amount of participations that can be purchased from any one lender.  Secondly, when it comes to eligible obligations, the borrower must either be a member of the purchasing credit union or the loan must be refinanced within 60 days of purchase so that the borrower is a member. There are exceptions to this rule for qualifying credit unions purchasing the assets of liquidating credit unions. 

Let’s not forget that in March 2020 the economy was put into a self-induced economic coma.  The NCUA responded by, among other things, temporarily raising the maximum aggregate amount of loan participations that a FICU may purchase from a single originating lender to the greater of $5,000,000 or 200% of the credit union’s net worth and temporarily suspending certain limitations on the types of eligible obligations that a FICU may purchase and hold. In one of its last acts of 2021, the Board concluded that the continued economic uncertainty justified continuing these regulations for another year.  This conclusion has already been vindicated as the economy continues to produce contradictory smoke signals on a weekly basis. 

These temporary amendments provide potential benefits that go beyond the immediate economic situation.  The existing eligible obligation regulations are too restrictive now that more and more platform lenders are getting into the business of facilitating loan participations and eligible obligations.  While the explosion of these services offers expanded opportunities, particularly for smaller credit unions looking for a way to use all those deposits, credit union membership requirements continue to place restrictions on the use of these platforms by the industry.  By extending flexibility for another year, credit unions can further demonstrate that traditional regulations are needlessly restrictive and actually inhibit safety and soundness.

On that note, stay warm and enjoy your day.

January 10, 2022 at 9:31 am Leave a comment

New York Readies for Electronic Notarization

In the closing days of 2021, the Governor signed legislation that will authorize the use of electronic notarization in New York State.  But even as she signed the bill, the Governor announced that she had reached agreement with the Legislature on additional changes that will both delay the effective date of Remote Online Notarization (RON) and in the interim, permit the use of Remote Ink Notarization (RIN) as outlined in this March 2020 Executive Order (I can’t believe this has been going on for almost two years).

I just re-read that paragraph and I realize my blog skills are a bit rusty after taking more than a week off, so let me unpack what I just said.  A notary is an individual authorized to swear to the authenticity of a signature.  Traditionally, this function has been carried out by the signor physically appearing before the notary with appropriate identification.  When Governor Cuomo was given Emergency Powers in March 2020, one of the measures he promulgated was an Executive Order permitting notaries to perform notarizations remotely.  This authority ended this past June. 

Now I have to go into the weeds a little.  There are two types of electronic notarizations.  There is Remote Ink Notarization (RIN) and Remote Online Notarization (RON).  The Legislation signed by Governor Hochul at the end of last year establishes a RON system under which a notary is authorized to electronically stamp documents online in real time.  In contrast, under RIN, a notary watches the signatory signing a document but is then sent the document or a facsimile for his traditional ink notarization.

In her approval memo accompanying the signing of the bill, the Governor indicated that amendments had been agreed to under which the State will be given a year, as opposed to six months, to prepare the RON framework and, in the interim, the RIN framework reflected in the Executive Order will once again be permitted.

We will still have to see precisely what the amendments say but once the legislation is approved we will be able to give you a more definitive timeline.

One more thing, remember that even with the passage of this legislation, you are still authorized to notarize documents the old fashioned way.

January 4, 2022 at 9:18 am 1 comment

RBC Reg Highlights End of Year Conclave

Like all those college kids rushing to get their term papers in, even though they had the entire semester to work on them, the NCUA Board’s last meeting of the year included the approval of next year’s budget, and a range of regulations dealing with subordinated debt, mortgage servicing rights and risk based capital.  The risk based capital (RBC) regulation is the one I find the most intriguing. 

First, for those of you nowhere near $500M in assets, you do not have to worry about a word of what I am about to say.  Since 2013, NCUA has worked on developing an enhanced RBC framework for federally insured “complex credit unions.”  The rule was originally finalized in 2015.  This has been quite the saga.  Along the way, we have seen debates over what constitutes a complex credit union, the legal authority for NCUA to implement this framework, the policy rationale of its supporters, and ultimately, when it should take effect.  I am here to report that all these debates are finally over.  Starting on January 1, 2022 the RBC rule will take effect.

This is big news in itself.  This means that federally insured credit unions with $500M or more in assets must either abide by a the RBC framework or opt in to a complex credit union leverage ratio (CCULR) which the NCUA just approved yesterday.  Under this alternative framework, credit unions otherwise subject to the RBC requirement will have to meet increased capital requirements of 9% or more.  Effectively, NCUA is giving complex credit unions the option of either complying with the enhanced RBC framework or stash away more capital.  Of course, this is a simplistic overview and someone on your team should be taking a break from holiday merriment to go over the nuances of this new framework as well as assess the impact that last second changes to some of the risk ratings could have on your credit union.

What surprises me so much about yesterday’s announcement is not that this regulation was finalized but that NCUA is so determined to get the RBC framework up and running that it is going to take effect without a further delay.  Keep in mind, however, that your credit union is not bound by its initial decision.  You can opt in and out of the competing frameworks on a quarterly basis.

On that note, yours truly must get on with the rest of his day.  I still can’t believe that Christmas Eve is next Friday.  Don’t tell my wife I haven’t gotten her present yet.

December 17, 2021 at 9:20 am Leave a comment

Does FDIC’s Dysfunction Hold Lessons For The NCUA?

Today I am turning the tables on Dr. Keith Leggett, who retired from blogging about credit union issues for the American Bankers Association in July 2020, to shine a light on recent dysfunction among bank regulators that holds important lessons for the NCUA.

The FDIC is overseen by a five-member Board including, Chairman Jelena McWilliams, Martin J. Gruenberg, Michael J. Hsu, and Rohit Chopra; there is also one vacancy.  Currently three of its members are democratic appointees, including Mr. Chopra who serves on the Board by virtue of being the CFPB’s Director.  Ms. McWilliams is a Trump appointee who is serving out a five year term as Chairman.  By tradition, the Chairman has always set the agency’s agenda. That tradition is now under attack.

This past Thursday, Mr. Chopra announced that the FDIC was considering regulations to strengthen oversight of consumer protections as part of bank merger approvals. The problem is that FDIC Chairman McWilliams did not agree to put this item on the agenda.

The resulting kerfuffle has now gotten the attention of the regulated. State banking associations across the country, including the New York Bankers Association, have written a letter to the FDIC in which they explained that

Multi-member boards and commissions are designed to bring together different points of view. Policies certainly change over time. That is understood and expected. But collegiality and a shared responsibility for maintaining market stability historically have overcome the forces that push and pull at non-independent agencies, allowing for gradual change.” 

If all this sounds familiar to you, it is because NCUA Board members Rodney Hood and Kyle Hauptman have implicitly advanced similar arguments in placing items opposed by Chairman Harper on NCUA’s agenda.

Now the regular blog has ended and yours truly is going to jump on his high horse and go outside his lane a bit. When it comes to both the FDIC and NCUA, good arguments can be made that the majorities have the authority to take the steps they have taken. But what we are seeing is yet another example of a partisan divide that is so severe that the extremes on both sides are willing to overlook common sense norms in pursuit of their respective agendas. Democracy doesn’t work simply because people follow the law. It is also essential that both sides are willing to adhere to basic traditions that effectively fill in the blanks on the issues that laws don’t address.

Common sense tells you that agencies can’t function unless their directors has control over the direction the agencies choose to go and are kept in check by their fellow board members. In other words, what is taking place at the FDIC and to a lesser extent the NCUA is another example of how democratic norms are fraying. In the short term, this dysfunction helps one side advance proposals that would otherwise not see the light of day. But in the long term, dysfunctional government is in no one’s interest.

December 14, 2021 at 10:45 am Leave a comment

Where Do Credit Unions Stand With Vaccine Mandates?

In September the President took two dramatic steps in response to COVID-19, both of which are now subject to litigation: He issued an Executive Order requiring all executive branch agency employees and their contractors to get vaccinated. Secondly, he ordered OSHA to promulgate emergency workplace safety standards mandating employers with 100 or more employees require their employees get vaccinated or agree to get tested for the vaccine on an ongoing basis.

In yesterday’s blog, I explained that credit unions are not subject to the President’s Executive Order because NCUA is an independent agency. In response, a reader asked me if this also meant that credit unions with 100 or more employees were exempt from the OSHA mandate. With the usual caveat that my opinions are my own, and not a substitute for legal advice from your retained attorney, the answer is that credit unions would be subject to OSHA’s vaccine mandate, but it remains to be seen whether or not it will ever take effect.

The financial service industry has not had to give much thought to OSHA in the past because it has never been made subject to industry specific workplace safety standards. Under the law regulating OSHA, however, an employer is any business engaged in commerce, a category which certainly includes credit unions of all shapes and sizes. As a result, if the OSHA mandated vaccine requirement ever takes effect, every credit union with 100 or more employees will have to comply. 

But it is far from certain that this requirement will ever make it through the legal gauntlet. The Court of Appeals for the Fifth Circuit has already issued a nationwide order blocking OSHA from implementing the emergency standard. In its decision, the Court explained that OSHA was exceeding the power given to it by Congress because the vaccination mandate “is a one-size-fits-all sledgehammer that makes hardly any attempt to account for differences in workplaces (and workers) that have more than a little bearing on workers’ varying degrees of susceptibility to the supposedly “grave danger” the Mandate purports to address.” BST Holdings, L.L.C. v. Occupational Safety and Health Administration, United States Department of Labor, 2021 WL 5279381, at *4 (C.A.5, 2021)

The next stop is the Sixth Circuit, but there is virtually no doubt that the issue will ultimately be decided by the Supreme Court, a court which has taken an increasingly narrow view of administrative powers.

So where does this leave credit union HR professionals as they ponder next steps? Most importantly, if you were hoping that the law would mandate that your employees be vaccinated, then you should prepare yourself for disappointment. That being said, no matter what happens with the President’s proposals, your credit union still has all the authority it needs to mandate vaccination and/or testing if it chooses to do so for those employees in the workplace.

On that note, enjoy your Thanksgiving and don’t let your crazy Uncle Al get under your skin.

November 23, 2021 at 10:13 am 1 comment

Why Executive Orders Don’t Apply To Your Credit Union

Since President Biden issued an executive order in September mandating that Executive Branch employees and their contractors get vaccinated against COVID-19 the industry has parsed the text with an intensity worthy of a Talmudic scholar, hoping to divine whether or not credit union employees are federal contractors for purposes of this mandate. After all, as drafted, an argument can be made that share insurance is a government contract to which credit unions are subject.

But the truth is much more straightforward: because credit unions are not subject to this or any other executive order issued by this or any other president. The NCUA, as an independent agency, is not an executive agency subject to the president’s executive orders. Instead, NCUA was created by congress to exercise independently of the president and make its own policy judgments. 

This is not a radical pronouncement but simply a common sense application of prevailing law. Since Humphrey’s Ex’r v. U.S., 55 S.Ct. 869, 874, 295 U.S. 602, 629 (U.S. 1935) the Supreme Court has recognized the right of congress to create independent agencies specifically designed to be free of direct executive branch oversight. Furthermore, the court has taken a very narrow view of the president’s power to issue executive orders and apply them beyond the executive branch. As the court explained in Youngstown Sheet & Tube Co. v. Sawyer, 72 S.Ct. 863, 867, 343 U.S. 579, 587–88 (U.S. 1952) “The Constitution limits his functions in the lawmaking process to the recommending of laws he thinks wise and the vetoing of laws he thinks bad. And the Constitution is neither silent nor equivocal about who shall make laws which the President is to execute.” Congress.

Against this backdrop, there is a long line of examples of independent agencies pushing back against executive branch encroachments on their power. For example, the general counsel of the Securities and Exchange Commission once wrote a 24 page “Declaration of Independence” from a Carter administration proposal that regulations be submitted in plain English for public review, on the grounds that the order could set a precedent to undermine the agency’s independence

In short, a credit union can choose to follow an executive order’s mandates if it chooses to do so, but is not required to do so. In fact, an argument to the contrary has as much validity as suggesting that the credit union down the street can mandate what policies your credit union follows. 

One caveat: The exemption just applies if the only basis for complying is your connection to the NCUA. If your CU rents space from a federal agency for example, then you are a federal contractor.

November 22, 2021 at 10:00 am Leave a comment

NCUA’s Shared Service Rule Is a Potential Game Changer

Yesterday the NCUA gave final approval to a regulation that will make it easier for credit unions of all shapes and sizes to provide services to their members. In fact, it could be one of the most important regulations the NCUA has passed in years. Here’s why:

Credit Unions across the country participate in shared branching networks, such as New York’s UsNET, which permits members belonging to a credit union within a network to perform banking services at any of the network’s branches. For example, my sister on Long Island uses the network to deposit her paycheck at an affiliated branch saving her extra drive time. Under existing regulations, multiple common bond credit unions can use these networks to satisfy shared facility requirements provided that they are an owner of the network.

Under the changes approved yesterday, these credit unions will now be able to satisfy branching requirements so long as they participate in the network. This is a potential boom for smaller credit unions which now have a cost-effective means of expanding services to more groups. Joining a shared branching network is as simple as signing a contract. Even if your credit union doesn’t plan on expanding, it’s a great service to offer your membership.

The regulation isn’t a complete slam dunk for the industry.  The board dropped plans to permit credit unions to satisfy branching requirements in underserved areas by allowing members to access an ATM. The final regulations clarify that shared branching facilities in underserved areas must allow members to make deposits and withdraw funds.

Aside from the practical benefits of the new rule, the new framework is one of the best examples I’ve seen of the credit union industry harnessing its combined resources to benefit the industry as a whole. I continue to be befuddled as to why the industry doesn’t do more to pull its resources together. You may say that I’m a dreamer, but like John Lennon, I still hope for a day in which credit unions maximize their bargaining power and back office synergies by adopting a standard core operating system.  (By the way, thinking of John Lennon made me think of that awful Christmas song he sings with Yoko Ono; I’d rather listen to fingernails scratching a chalkboard, but I digress.)

On that note, enjoy your weekend.

November 19, 2021 at 9:28 am Leave a comment

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Authored By:

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

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

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