Posts filed under ‘Regulatory’
I have some good news and some bad news for those of you working yourself into a panic over the Federal Accounting Standards Board proposal on accounting for Current Expected Credit Loss. The bad news is that the FASB decided to go forward with the proposal and expects a final standard to be issued in June. The good news is that the FASB decided to delay by a year, until December 2020, the compliance deadline.
In addition a sharply divided board also decided to scale back a requirement that financial institutions disclose credit quality indicators by year of origination. Specifically, as explained by FASB board member Hal Schroeder, “Current GAAP requires banks to disclose “credit-quality indicators” for each class of loans. The new requirement would further disaggregate those disclosed amounts by year of origination (or vintage).”
Community banks and credit unions argued that such detailed break downs are not necessary for smaller thrifts that don’t have large institutional investors. They argued that members in credit unions and investors in traditional thrifts are already familiar with their institution’s finances. The Board agreed yesterday so now you won’t have to disaggregate and disclose data. This is a small narrow but important exception but it doesn’t exempt credit unions from complying with CECL . http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168100698
Although the delayed effective date is welcomed for those credit unions most impacted by this proposal, the new accounting standards could have an impact analogous to the Risk-Based Weighting Requirements since portfolios may have to be adjusted to account for the recognition of potential losses earlier in the lending cycle. This is not one to put on the proverbial back burner. http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176168101253
An IPhone Inspired Reminder?
Lest any banks out there were considering beefing up their encryption too much, the OCC issued a concise warning – I mean Guidance – yesterday reminding banks that examiners have the right “to require prompt and complete access to all of a national bank’s relevant books, records, or documents of any type” and that it is therefore “inappropriate.to use technology designed to permanently delete internal communications, especially if occurring within a relatively short time frame.” This just applies to banks, but I wouldn’t be surprised to see NCUA come out with a similar guidance in the near future. Security officials and apparently examiners are concerned by the development of technology that both encrypts and quickly erases messages. http://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-13.html The IT job is becoming more thankless by the day. Tech people are told to make their financial institutions as safe from hackers as possible but not so safe that information can’t be easily accessed by examiners.
Fed Holds Interest Rates Study
I’m beginning to long for the days when the Federal Reserve’s Open Market Committee shrouded its deliberations in silence. That way we could all convince ourselves that the stewards of the economy were maestros overseeing economic growth with scientific precisions. Instead, we get bland equivocal announcements about the state of labor and employment that make it quite clear that the Fed is as confused as everyone else about where inflation is headed. So it decided to put off, at least until June, another interest rate hike. Here is its latest statement. http://www.federalreserve.gov/newsevents/press/monetary/20160427a.htm.
The Home Based Credit Union Lives!!
Remember when the NCUA proposed doing away with home-based credit unions? (https://newyorksstateofmind.wordpress.com/2014/04/07/matz-to-home-based-cus-drop-dead/)
It argued that they were potentially unsafe for examiners and that banking had just grown too complicated to be run out of a basement. Well, common sense and nostalgia prevailed. The WSJ reported last week (Sorry, I just missed this one) that NCUA has decided not to push the proposal, meaning that the 85 home-based credit unions can continue their unique brand of banking. Still, Chairman Matz insists NCUA “is doing its best to help home-based credit unions transition to more appropriate office space that will better serve consumers, provide greater security and, ultimately, give these credit unions a chance to grow and thrive.” Of course, there are many credit unions that naturally grew out of the homes where they were started. There isn’t a need for NCUA to push them out the door. http://www.wsj.com/articles/home-based-credit-unions-dodge-regulatory-threat-1461255599
It’s All Over But the Counting
Newsday is reporting that Democratic Assemblyman Todd Kaminsky increased his 780-vote lead over Republican Chris McGrath by about 200 votes as the Nassau County Board of Elections began to count paper ballots for the 9th Senate District special election. If, as appears likely, Kaminsky takes the seat previously held by convicted former Senate Majority Leader Dean Skelos, Democrats will hold a majority of seats in the State Senate even as Republican John Flanagan remains the Senate Majority Leader.
Late last week, Uber announced it had settled two class action lawsuits brought by drivers claiming, among other things, that the ride sharing service was violating the labor law by classifying drivers as independent contractors. For those of you with either a direct or indirect stake in the taxi industry through the financing of medallions, the settlement of these lawsuits is another blow. Here’s why.
The Uber model is based fundamentally on the assumption that the company is nothing more or less than the provider of an App that enables individuals in need of a ride with those willing to provide one. In Uber’s view of the world, ride sharing allows the mom on the way to the store to make a few extra dollars by taking Sally down the street along for the ride. Under this best case scenario, our mom is an independent contractor picking and choosing what rides to take as she makes her way through her busy day.
To critics of Uber and other ride sharing services, the mom is not so much an independent contractor as a poorly paid employee. For instance, under Uber’s model drivers who consistently turn down rides can be dropped from the service and each ride comes with a suggested price and gratuity.
If the critics are correct, the Uber model is illegal and the traditional taxi medallion model is alive and well. This is why the settlement is such a big deal. Uber agreed to pay drivers up to $100 million and end its practice of automatically removing drivers who refuse too many rides. At the same time, the drivers will continue to be classified as independent contractors in Massachusetts and California.
Uber is by no means out of the woods. Similar lawsuits are still pending. And just last week California’s Commissioner of Labor ruled that an Uber driver was an employee rather than an independent contractor. But this ruling is being appeal and is not binding on anyone beyond the employee involved.
While the settlement of the Massachusetts and California cases leaves the independent contractor issue undecided, in my ever so humble opinion, anyone looking for the courts to provide a silver bullet, at least in the near future, when it comes to regulation of ride sharing businesses is likely to be disappointed. For those of you who feel that the system should be better regulated in order to put medallion taxi and ridesharing service on an equal footing, the places to look for relief are State legislatures.
At Chairwoman Matz’s last NCUA board meeting yesterday, a proposal was forwarded that will give federal credit unions greater flexibility to occupy buildings with retail space. It also explains in quantifiable terms when a building purchased by a credit union is “partially” occupied. This might not sound all that exciting, but NCUA’s fixed asset rules have been among the most needlessly troubling mandates with which credit unions have had to deal.
Let’s say your credit union wishes to buy property located at a prime street corner location. The building not only includes space for a branch but has retail and residential space on its upper floors. Presently, FCUs must have plans to fully occupy the building. During the meeting, Chairman Matz pointed out that this means credit unions can only buy mixed-use property if they plan to evict the other occupants. When this regulation is finalized, this will no longer be the case so long as a credit union has plans to use at least 50% of the building within six years.
Let’s say you aren’t interested in a mixed-use building but are looking to move your headquarters to a bigger space. Under existing regulations, a federal credit union must “partially” occupy property within six years of acquisition. However, there is not a quantifiable definition of when a building is partially occupied. Once this Reg is promulgated, you will be complying with the law provided at least 50% of the property is occupied within six years.
NCUA deserves a thumbs-up on this one. Here is the proposal.
Better Late than Never
One of the lessons drawn from the Great Recession was that CEOs shouldn’t have compensation plans that incentivize short-term and\or reckless behavior. So, Section 956 of the Dodd Frank Act requires federal banking regulators to issue joint regulations “not later than 9 months after the date of enactment of this title,” (I wonder if I could be this late on my taxes?) or “guidelines” to require financial institutions to disclose to the appropriate Federal regulator the structures of all incentive-based compensation arrangements offered by such covered financial institutions. This is the second time the regulators have taken a swing at crafting regulations for this provision.
The good news is that the proposal just applies to credit unions with at least $1 billion in assets. According to NCUA’s summary of the proposed regulation, impacted credit unions will have to, among other things, ensure that any new compensation incentives be approved by a credit union’s board of directors or a committee appointed by it. They will also have to give examiners all on-site records maintained on compensation plans. Here is the summary: https://www.ncua.gov/About/Documents/Agenda%20Items/AG20160421Item2c.pdf
On that note, the Blogger Formally Known As Henry is off to Party Like It’s 1999. Enjoy your weekend.
I have many important lessons to impart to you this morning:
Most importantly, if you live in the Northeast, never ever move the snow blower to the back of the garage before May even if it has been such a freakishly warm winter that golf courses are already open.
Second, always record any sporting event that starts after nine PM on the off-chance that you will sleep through one of the greatest endings in college basketball history.
Third, you should all take the time to read a legal opinion letter on the custodial powers of federal credit unions recently issued by the NCUA.
In response to an inquiry from Paul T. Clark of the Seward & Kissel Law Firm, NCUA’s General Counsel said that a federal credit union is authorized, at a member’s direction, to place funds, which initially have been deposited into the FCU, into an FDIC account and to serve as custodian for that account, provided that several conditions are met. It is an important clarification of the flexibility FCUs have to serve members without crossing the line between acting as custodians of funds to becoming trustees and broker dealers.
Why is this flexibility important? Unfortunately, the letter does not explain what the firm was seeking to do with this authority, but I can think of situations where a credit union and its member may want the flexibility to move funds into a FDIC account without leaving the credit union. For example, as explained in a legal opinion letter from 2009, the CDARS service enables a bank to accept large deposits from its customers and, on behalf of the customer, spread the deposits in excess of FDIC insurance limits to other FDIC-insured banks, so the funds are fully insured. In its 2009 letter, NCUA authorized the participation of credit unions in this program but that opinion dealt specifically with credit unions authorized to accept public funds. (https://www.ncua.gov/Legal/OpinionLetters/OL2009-1022.pdf#search=cdars). NCUA’s most recent letter makes it clear that federal credit unions are authorized to place funds in FDIC accounts while still being the custodian of a member’s accounts. This letter also makes it easier for credit unions to place a portion of a member’s money into a trust.
But be careful when using this letter. The General Counsel stresses that credit unions “generally” don’t have trust powers or broker dealer authority. Why is this distinction important? Because, as explained by Blacks’ Law Dictionary, a trustee must “protect and preserve the trust property, and to ensure that it is employed solely for the beneficiary, in accordance with the directions contained in the trust instrument.” In contrast, a custodian is simply responsible for holding funds, making sure they are available and making sure that only authorized persons have access to them.
Which leads us to my fourth important lesson of the day. I have a sneaking suspicion that there are many credit unions that confuse custodial and trust powers. My simple rule of thumb is that if you find yourself reading a trust document to understand the credit union’s responsibilities, you are probably doing more than you can or should. All you need to do is properly label the account and make sure that only authorized trustees can access it. It is the trustee’s job to make sure the account is properly administered.
Here is where you can access the letter:
One of the terms you may be hearing more about in the coming days is an open charter. An open charter allows a credit union to serve members without Field of Membership restrictions. Federal, natural person credit unions have never had open charter authority. In contrast, until 1929, New York State Law authorized such charters. This charter authority was eliminated but existing credit union authority was grandfathered. Montauk was incorporated with an open charter in 1922.
According to an article, as part of its agreement to acquire Montauk, Bethpage also acquired its open charter, which means that the community chartered credit union is now authorized to service members without geographic restrictions. However, the article also said that Bethpage has no immediate plans to expand beyond the New York City area.
Here is an opinion letter from the Banking Department, which provides some background on the open charter’s history and application.
If you’re interested in finding out more. . .
We are understandably already getting questions about New York’s paid family leave benefits law, enacted in this year’s State budget. On the off chance that some of you want to take a look yourselves, but don’t enjoy plowing through New York State’s budget bills, you can find pertinent information in Part SS of S.6406-C. This is one of the so-called Article VII bills, which provide programmatic language to support budget appropriations.
Sometimes it’s the little changes that end up making the biggest difference.
At its March 24th meeting, the NCUA Board unanimously approved the creation of two IT positions for the purpose of modernizing the collection and dissemination of data among NCUA and field staff. This may not sound like a big deal, but when the initiative is finalized it’s envisioned that examiners and credit union personnel will have quicker access to necessary information. If it works properly, it will probably result in fewer examiners having to park in your offices for a shorter amount of time. It could even, some speculate, pave the way for an 18 month exam cycle.
To show you what a great idea this is, Board gadfly McWatters questioned NCUA staff as to whether they thought two staff positions over a four year period were sufficient to get the job done. Good luck and Godspeed, this initiative makes a lot of sense.
Investment Authority Expanded
Also at the meeting, the NCUA Board finalized regulations amending 12 CFR 703.14(f)(5) to remove the requirement limiting federal credit unions to investing in bank notes that have “original” weighted average maturities of less than five years. The amendment means that the five year restraint is still in place but NCUA argues that the amendment will provide FCUs with some mandate relief since the current regulations tie a bank note’s maturity to its original date of issue. The amendments will allow FCUs to purchase notes from a larger pool.
Congressmen and women continue to confuse the issue surrounding why so many banks and credit unions remain reluctant to open accounts for marijuana businesses, even though the DOJ and FinCEN have both issued guidance explaining the circumstances under which institutions will not be accused of violating the law or regulations if they do. THE SALE, DISTRIBUTION, AND POSSESSION OF POT REMAINS ILLEGAL AS A MATTER OF FEDERAL LAW. Rather than prodding regulators to overlook this fact, they should be working on amending federal law so that it is consistent with the law in the many states that have chosen to legalize pot to varying degrees.
What has me going this morning is a letter sent by Oregon’s Senator Jeff Merkley, Senator Patty Murray (D-WA), Senator Michael Bennet (D-CO) and Senator Ron Wyden (D-OR) urging federal financial regulators, including Debbie Matz and Janet Yellen, “to issue clear guidance for financial institutions serving legal marijuana businesses, making it easier for those businesses to access banking services rather than operating on an all-cash basis.”
To be clear, FinCEN has already issued detailed guidance explaining how financial institutions can service these businesses, and DOJ has explained the circumstances under which it will not prosecute them; but, what neither FinCEN, NCUA nor any other federal regulator can do is amend federal law. Last I checked, only Congress can do that. All regulators can do is explain the circumstances under which they will not enforce the law, a troubling enough proposition without Congressmen further confusing the issues with letters seeking guidance.
This isn’t just the Monday morning rant of a father who just hours ago was stuck on the world’s greatest parking lot, otherwise known as the Long Island Expressway on a holiday weekend, with a seven year old who had to go to the bathroom. Perhaps the legislators should take another look at United State’s District judge R. Brooke Jackson’s decision upholding the right of the Federal Reserve to deny Four Corners Credit Union access to the federal reserve system despite the existing guidance. In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress. Fourth Corner Credit Union v. Fed. Reserve Bank of Kansas City, No. 15-CV-01633-RBJ, 2016 WL 54129, at *4 (D. Colo. Jan. 5, 2016).
Nevertheless, the Senators note with approval that yet more guidance might be forthcoming. We don’t need more guidance; what we need is federal law that explicitly sanctions activities that states have already permitted. Here is the letter.