Posts filed under ‘Regulatory’
Although efforts to repeal and replace the Affordable Care Act are getting all the attention, as New York employers, credit unions have much more immediate concerns. The State is now accepting comments on proposed regulations implementing paid family leave.
Beginning January 1, 2018 the state will start phasing in the new mandate under which employees will be eligible to receive some pay during the time they are away from their job in order to bond with a child, care for a close relative who has a serious health condition, or help care for family of someone who is called to active duty. For example, starting in 2018, an eligible employee would receive 50% of their salary for a maximum of 8 weeks during a 52 week period. When it is fully phased in by 2021, employees could receive up to 12 weeks of paid family leave in an amount equal to 67% of their salary. However, the payment benefits are capped to a percentage of the State’s average weekly wage. To be eligible, an employee must have been with a covered employer full time for 26 weeks or part time for 175 days. Covered employers are those covered by the Workers Compensation Law.
If all goes according to plan, employees will pay for the expanded benefit through payroll deductions analogous to contributions that support the Workers Compensation Fund. I have my doubts, but the time for questioning the wisdom of the proposal is over and the time for getting your HR person focused on compliance has begun.
As with all complicated regulations, the devil is always in the details, particularly when we are dealing with an area of law that interacts with existing federal mandates. Please feel free to reach out to the Association if you spot something that needs clarification. By the way, my kids just got their second consecutive snow day. I understand completely why states like North Carolina and Georgia get crippled by snow storms but something is wrong when upstate New York can’t handle a two-footer. Are we becoming a state of wimps?
The long reach of the Telephone Consumer Protection Act of 1991 was highlighted last week by two Congressional hearings and a joint letter issued by our trade Associations and the bankers strongly opposing a petition to make this onerous law even more difficult to comply with. Believe it or not, this may be the single biggest compliance issue your credit union should be monitoring. If you don’t think your credit union is impacted by the TCPA, you’re likely wrong.
The TCPA and its regulations prohibit any call to a land line or cell phone that uses an automatic dialing system, artificial or pre-recorded voice that is made without the prior express consent of the called party. According to the FCC, which administers the law, this prohibition now applies to texts. The key to understanding the TCPA’s reach is to understand that it applies to calls made by your employees with equipment with the capacity “to store or produce telephone numbers to be called using a random sequential number generator” and the ability to dial such numbers. Arguably, the only phone that doesn’t meet this definition is that roto dialer wasting away in the back of your garage. The fact that you don’t autodial your members or bombard them with prerecorded messages is irrelevant.
Traditionally, businesses such as banks and creditors could demonstrate that a member implied consent to receive calls by, for example, including their phone number on a credit application. (See In the Matter of Rules & Regulations Implementing the Tel. Consumer Prot. Act of 1991, 23 F.C.C. Rcd. 559, 559 (2008)). Remember that the implied consent standard does not apply to advertisements or telemarketing.
Why has this statute become such a big issue? Combine this level of nuanced compliance requirements with restrictions on text messages sent to an ever growing number of smart phones and you have a classic legal speed trap. There were a mere 14 TCPA lawsuits in 2008. This increased to more than 1,900 in 2014 followed by a 32% increase of such lawsuits to a total of 4,860, including 30 with settlements of over a million dollars. No wonder then, as pointed out in the joint letter, the expansive definition of auto dialer has even led credit unions and other financial institutions to stop texting messages to members who previously received them.
While some of this may ultimately be an overreaction, the issue gets even more complicated now that a petition has been filed with the FCC, which would have the effect of making it more difficult to prove that a member has consented to receive TCPA communications. Specifically, petitioners are requesting that the FCC issue a rule requiring that all calls subject to the TCPA only be authorized with express consent from the receiving party. The fact that a member has previously put his number on that credit application would no longer constitute consent.
This proposal would be great for trial lawyers, but lousy for consumers for whom the cell phone has become an electronic appendage, and financial institutions which, as pointed out in the joint comment letter, often have to make live contact with members to comply with federal law. By the way, the implied consent standards just apply to informational, as opposed to marketing, phone calls.
The good news is that the FCC is poised to take a decisive shift away from many of its more onerous interpretations, now that the Trump Administration can appoint the head of the commission. Still, this is yet another example of how regulations have over taken the statutes that they are intended to implement. It is time for Congress to revisit the TCPA. The problem is that a statute was written when there was an estimated 8 million Americans using cell phones. Today the number of cell phones exceeds the US population, with many adults having more than one cell phone.
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.
Is it a violation of federal law to deny someone a student loan based on their status as a Dreamer? That is the central question posed by a class action lawsuit brought byCalifornia college students who claim that Wells Fargo denied them student loans in violation of both, Federal and California Law. The lawsuit has the potential of putting financial institutions front- and- center in the debate over the protections the country affords to immigrants.
In June 2012, President Obama’s Department of Homeland Security announced that it would no longer deport young immigrants who had lived in this country for most of their lives, but whose parents were here illegally, and who themselves had never obtained legal status. Under the Deferred Action for Childhood Arrivals (DACA), eligible individuals receive a renewable two year authorization granted by the federal government to stay in the country. Eligible individuals receive a work permit and obtain employment authorization documentation, which entitles them to legally look for work.
The lawsuit was brought by Mitzie Perez, she claims that in August of 2016 she applied for a student loan online. While completing the application she indicated that she was neither a US citizen or a permanent resident. She was immediately denied the loan. Curious as to why she was denied, when she completed the same application a second time, she indicated she was a permanent resident, she was told that “based on the citizenship status you provided, a US Citizen Co-signer will be required for this application”. Should would be able to obtain a co-signer.
She claims the bank violated 42USCA Section 1981. This law provides that “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens…” She also argues that because of the documentation she is able to provide the bank under DACA, Wells Fargo can provide her a loan without violating the Customer Identification Procedure requirements of the Bank Secrecy Act.
Leaving aside the emotional pull of the argument, the responsibility of financial institutions towards persons who are not permanent legal aliens is ambiguous. Regulation B, which implements the Equal Credit Opportunity Act, makes it illegal to discriminate against an applicant on a prohibited bases, including the applicants’ national origin. Here is where it gets tricky; the commentary accompanying this prohibition explains that while “A creditor may not refuse to grant credit because an applicant comes from a particular country.” A financial institution “may take the applicant’s immigration status into account. A creditor may also take into account any applicable law, regulation, or executive order restricting dealings with citizens (or the government) of a particular country or imposing limitations regarding credit extended for their use.” (12 C.F.R. § Pt. 1002, Supp. I).
Wells Fargo is in a tough spot. On the one hand, I agree with those who argue that there is something distinctly un-American about throwing DACA individuals out of the country. Many of them have spent almost their entire lives growing up as Americans. That being said, the law is the law and just as President Obama extended legal protections with an Executive order in 2012, President Trump could eliminate their legal status with the stroke of a pen. Financial institutions not only have the right but the legal obligation to consider this possibility when deciding whether or not to extend loans to students like Ms. Perez. What decisions they should make based on this information is a much tougher call. This case underscores why congress needs to craft common sense immigration reform.
On Tuesday, a Federal District Court in Virginia dismissed a lawsuit brought with much righteous indignation and fanfare by the Independent Bankers Association. (Indep. Cmty. Bankers of Am. v. Nat’l Credit Union Admin., No. 1:16CV1141 (JCC/TCB), 2017 WL 346136, (E.D. Va. Jan. 24, 2017). They worked themselves into a foam-mouthed frenzy following the promulgation of regulations by NCUA, giving credit unions greater flexibility to make MBL loans without first seeking waivers from the agency. Although the case was dismissed on technical grounds, make no mistake about it, if this was a boxing match it would have been a TKO. This was about as complete a victory as the NCUA could have gotten in the first round of what could be extensive litigation ultimately involving not only NCUA’s authority to promulgate changes to its MBL regulations, but also its authority to promulgate changes to field of membership requirements.
In 2003, NCUA amended its regulations. It allowed credit unions to purchase nonmember loan participations without counting such participations against the MBL cap, provided that they get NCUA’s approval to do so. In its 2016 revisions to the MBL rules, NCUA decided that credit unions no longer have to seek prior approval before acquiring nonmember participation interests. The clux of the IBA’s complaint was that credit unions never should have been given the authority with or without NCUA’s approval. The court ruled that the bankers could have brought their complaint more than a decade ago, and their decision not to do so meant that the six year statute of limitations to bring such action had expired long ago.
But wait there is more! In a typical lawsuit it is fairly easy to show that a plaintiff has suffered an injury. For example, if I was hit by a car this morning on my way to work no one would question my right to sue the driver if he was speeding. But in the land of Association litigation standing is a crucial issue. Too broad a view of what constitutes harm makes it easier for Associations like the IBA to sue over credit union laws and regulations. So, I was pleasantly surprised that the judge also concluded that the bankers had not shown that they were in fact harmed by NCUA’s MBL changes. This passage is worth quoting at length because it could be useful in challenging banker’s standings in subsequent lawsuits.
It is not clear at this point that Defendant’s 2016 regulation will result in increased competition against Plaintiff’s member banks. Credit unions were able to compete with banks in the commercial loan arena before the 2016 Rule. Indeed, Plaintiff represents that they have done so vigorously. The 2016 Rule on its face does not permit additional competition. All it does is dispense with the requirement that, after taking on a certain amount of member business loans, a credit union obtain permission to purchase an additional interest in a nonmember business loan.
Finally, the court noted that even if it was to rule on the merits of the case, the bankers would still loose. NCUA did not abuse its discretion in amending its MBL regulations but was instead acting within its authority to interoperate an ambiguous statue.
In yesterday’s blog, I provided an overview of NCUA’s Supplemental Capital ANPR addressing a potential Supplemental Capital framework. I know requests for feedback are white noise to many of you, who actually have more immediate concerns to worry about, like running a credit union. But there are some big issues tied in with this proposal that affect the industry as a whole and you should take the time to weigh in.
Just how big are the issues? Well, this is the first ANPR I have ever seen that raises the prospect of credit unions putting their tax exempt status at risk. The ANPR notes that “With respect to federal credit unions, the Board is aware that part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise Capital.” It further points out in a footnote that Mutual Savings Banks and Savings and Loan Associations were stripped of their tax exempt status in part because they “had evolved from mutual organizations to ones that operated in a similar matter to banks.”
To me, the core issue is how much credit unions with $100 million or more in assets need Supplemental Capital both to comply with their enhanced risk based capital obligations and continue to grow to meet member needs. The simple truth is that the Basel iii framework, for which NCUA’s Risk Based Capital was the inspiration, was designed with large banks in mind. These institutions can satisfy capital requirements by issuing stock. Credit Unions have no such option. Supplemental Capital would give them greater flexibility to meet these new demands.
And let’s not forget that the credit unions that are most likely to directly benefit from Supplemental Capital are the same ones large enough to bring down the entire industry. Supplemental Capital could provide an added buffer against future financial meltdowns.
Ultimately, I believe that the industry needs to have Broad Based Supplemental Capital as an option available for all credit unions that choose to use it. But seeing legislation like this pass any time soon is about as likely as seeing President Trump’s spokesman, Sean Spicer leading the Washington Press Corp. in a yoga class. (That man really has to take a chill pill.) Supplemental Capital regulations could show Congress how additional capital flexibility helps credit unions grow to meet member needs and enhances the safety and soundness of the industry.
On that note, Namaste
Greetings from the icy confines of Albany, New York where the snow plows are busy salting the roads and the kids are back in bed, secure in the knowledge that they have the most magical of days – a snow day. For the rest of us, grab a second cup of coffee and let me tell you about supplemental capital.
Last Thursday, the NCUA released an Advance Notice of Proposed Rule Making asking a broad range of fundamental questions on which it would like the industry’s feedback as the Board tentatively considers whether it can and should offer supplemental capital. The ANPR follows up on a briefing staff provided the Board at its October meeting. Because the issues involved are complicated, and I actually do try to keep this blog fairly short, I am breaking this discussion into two parts.
First we need a little context. All credit unions are subject to net worth requirements. In addition, so called complex credit unions are subject to additional risk-based net worth requirements. NCUA now defines a complex credit union as one with $100 million or more in assets. As you may recall, after much angst, NCUA is imposing a risk-weighted capital ratio on these complex credit unions beginning in 2019. As an outgrowth of this discussion, credit unions called yet again for the expanded use of supplemental capital to help them meet their net worth requirements. The result is this ANPR.
What is supplemental capital? Right now, it does not exist. In its ANPR, NCUA defines it as including “any form of capital instruments credit unions that are not designated as low-income might be authorize to issue and count only for inclusion in the risk-based net worth requirements.” There is a lot packed away in this definition. First, it would only apply to complex credit unions since they are the ones that have to meet the risk-based requirements. This is because NCUA has concluded based on a plain reading of the law that it may only have the regulatory flexibility to allow additional capital for meeting the risk-based requirements.
Secondly, low income credit unions are already authorized to issue secondary capital and yes, there are complex credit unions that are designated as low income. This proposal would provide these credit unions an additional form of capital.
However, there are certain subtle distinctions between secondary capital as it exists today and supplemental capital as envisioned by NCUA. Most importantly, secondary capital is uninsured and must be subordinate to all other claims of the credit union, including the claims of creditors, share holders and the Share Insurance Fund. It also can only be provided by what the regulations describe as non-natural persons. Supplemental capital would also be uninsured and subordinate to claims from the National Credit Union Share Insurance Fund, but, not necessarily subordinate “to all other claims.”
Finally, supplemental capital would be a debt instrument classified as a security as a matter of federal law. This raises a host of potential issues, particularly for federally insured state chartered credit unions, which may have to get clearance from the IRS to ensure that supplemental capital does not put their tax-exempt status at risk. Remember that while both state and federal credit unions are tax exempt, their exemption derives from different parts of the code.
Now that I’ve provided you some of the basics, it’s time to dig into the plusses and minuses of this proposal. More on that tomorrow – I am sure you can’t wait.