Posts filed under ‘Regulatory’
The selection of Ben Carson as the Trump Administration’s nominee to be the Secretary of Housing and Urban Development (HUD) puts the former Johns Hopkins neurosurgeon turned conservative presidential candidate in a position to decisively and quickly reshape the fair lending landscape in a way that will make it easier for your credit union to deny mortgage loans without fearing a lawsuit.
HUD is responsible for enforcing the Fair Housing Act. As I’ve written in previous blogs, it interprets this law in its regulations as prohibiting lending practices that are intentionally discriminatory as well as those that have the effect of discriminating on the basis of someone’s protected status.
HUD has been steadfast in holding to this interpretation even as it has faced challenges questioning the propriety of its interpretation. For example, in 2013 it issued an updated interpretation of its analysis. At the time, it was assumed that the Supreme Court would be taking a look at how the FHA should be interpreted. HUD also refused to exempt lenders who make Qualified Mortgages that comply with CFPB’s regulations from possible enforcement actions if their Qualified Mortgages had a discriminatory effect on mortgage lending to minorities.
It’s always dangerous to speculate about what will happen in a Trump Administration and perhaps even foolhardy to speculate about the policy predilections of Dr. Carson, who has no formal background in this area, but I’m feeling lucky. I expect him to reexamine and narrow HUD’s interpretation of the Fair Housing Act. Conservatives believe that intent matters. Criminalizing lawful conduct because of its incidental impact is a recipe for regulatory overreach that deters lenders from making reasonable judgements about who can and can’t afford a home.
Yesterday NCUA released an updated examiner’s guide on including, among other things, new guidance on member business loans and commercial lending regulations scheduled to take effect in January unless they are blocked by the courts.
I hate when people tell me what to read on my free time, but today I am going to be one of those people. If you do MBL/Commercial Loans or are considering them in the future, you should put some time aside to go over this material. Besides, the Giants game doesn’t start till 4:30 p.m., the Jets aren’t worth watching, and the Patriots don’t have a chance of winning anything beyond the AFC East now that their beloved “Gronk “ is out for the season.
Let’s take a trip down memory lane to March of this year: NCUA signed off on a radical redesign of MBL/commercial lending regulations. Specifically, it shifted from a regulatory framework heavy on specific requirements and potential waivers, and replaced it with a more general principles based approach to regulations. For example, whereas regulations currently require credit union MBL programs to be overseen by a person with at least two years of commercial lending experience, the new regulations require them to hire qualified lending personnel.
But this new approach should not be misconstrued as the equivalent of mom and dad leaving the keys to the car, telling the kids not to get into any trouble, and going away for the weekend. Regulations are replaced with requirements for detailed policies and procedures. In the preamble to the final rule, NCUA explains that it remains committed to “vigorous and prudential supervision of credit union commercial lending activities” and that “responsible risk management and due diligence remain crucial to safe and sound commercial lending. “
While I am very supportive of this new approach in concept, in practice, just as less specific regulations give credit unions greater flexibility, they also give examiners greater flexibility to manage aspects of programs with which they disagree or are uncomfortable. That is why the examination guide is so important; it provides the first glimpse of what the new examination parameters are going to be.
The guide also provides a helpful primer between the distinction of member business loans- which are counted against the aggregate MBL cap-and commercial loans, which are not.
Finally, remember that the final regulation also contains important mandate relief. Credit unions with less than $250 million in assets that fall below certain thresholds are not subject to more extensive board management and oversight responsibilities, or the requirement to develop extensive commercial lending policies.
If I was one of those conspiracy theory nuts who dream up wild theories and spend late nights scouring the Internet for evidence vindicating my worst fears, I would believe that Wells Fargo is actually working with Massachusetts Senator Elizabeth Warren on a top secret plan to keep the CFPB alive. The bank’s phantom account scandal was bad enough, but its continued mishandling of the consequences shows why so many well-meaning but misguided people feel that the Bureau in its current form must be protected at all costs and why it’s so important for credit unions to continually distinguish their conduct from that of the banking industry in both word and deed.
Exhibit A- On Monday, the CFPB issued a Supervisory guidance warning institutions against overly aggressive incentive based sales tactics. It warns that strict controls should be used at all financial institutions “where incentives concern products or services less likely to benefit consumers or that have a higher potential to lead to consumer harm, reward outcomes that do not necessarily align with consumer interests, or implicate a significant portion of employee compensation.” One of the examples cited by the Bureau That Never Sleeps as an area of potential abuse is overdraft opt-In procedures. The Bureau noted that it took action against a financial institution that it alleged was deceiving consumers to opt-in to overdraft services.
In the old days, way back on November 7th, I would have told you that bulletin like this deserves close attention because, even though the CFPB has direct oversight over only the largest of credit unions, these types of warnings signaled that proposed regulations could be coming soon. This assumption has been thrown into doubt by the Republican sweep. But until further notice, the Bureau remains a, 1200 pound gorilla that is best not to be ignored. Besides, the guidance is consistent with a similar guidance issued by NYS’s DFS, which regulates state chartered credit unions.
Exhibit B, With the Bureau pondering regulations that would prohibit financial institutions from including in their account agreements provisions forbidding members from joinning class action lawsuits and forcing them to arbitrate disputes, Reuters is reporting that Wells Fargo is seeking to dismiss a class action lawsuit stemming from the account opening scandal on the grounds that such lawsuits are banned based in their account agreements.
Don’t get me wrong, if I represented the bank, I would be making the same exact argument, but on a policy level, Wells Fargo’s conduct provides the best argument I have seen for why categorical class action bans are a bad idea. Never mind the fact that class actions benefit lawyers a heck of a lot more than consumers or that a well-designed arbitration can provide a cost effective and swift alternative to the legal system.
On that note… enjoy your day!
Mortgage Consummation Bill Set To Become Law
A bill clarifying that a mortgage is consummated at closing in New York State is on the verge of becoming law. The legislation, (S.7183/Savino A.9746/Richardson) was sent to the Governor on November 16. The Governor has 10 days excluding Sundays to veto a bill after it has been sent to him or it automatically becomes a law. (N.Y. Const. art. IV, § 7). This means that we should know by tomorrow morning at the latest whether or not the bill has been approved by the Governor. He is expected to approve it.
Overtime Regs Blocked
Black Friday came early for employers. In case you missed it, on Tuesday a Federal District Court in Texas blocked the Department of Labor from implementing regulations that would have increased the number of employees eligible for overtime effective December 1, 2016.
Under the Fair Labor Standards Act, non-exempt employees who work more than forty hours a week must receive overtime pay. Regulations set to take effect on December 1, 2016 would have doubled the salary threshold from $455 per week ($23,660 annually) to 921 per week ($47,892 annually). This meant that if your branch manager made less than that amount starting December 1 she would be entitled to overtime.
It also stipulated that the salary threshold would be automatically adjusted every three years to equal the minimum salary level based on the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage region of the country.
The lawsuit brought by a group of states challenged the authority of the US DOL to automatically index the exemption threshold. Not only did a Federal District judge agree with this argument but he imposed a nationwide injunction against its imposition.
He explained that “The State Plaintiffs have established a prima facie case that the Department’s salary level under the Final Rule and the automatic updating mechanism are without statutory authority. The Court concludes that the governing statute for the EAP exemption, 29 U.S.C. § 213(a) (1), is plain and unambiguous and no deference is owed to the Department regarding its interpretation.” Nevada v. United States Dep’t of Labor, No. 4:16-CV-00731, 2016 WL 6879615, (E.D. Tex. Nov. 22, 2016)
Does this mean all that work you did reclassifying your employees was for nothing? Not at all. For one thing, the injunction could be reversed. In addition, the pending regulation provided credit unions the opportunity to examine how their employees should be classified. Finally, as explained by this Bond, Schoeneck & King blog, New York is promulgating state level regulations which will increase the exempt employee threshold.
This is yet another example of the increasing tension between an Executive branch aggressively using its regulatory powers and a Judiciary increasingly unwilling to defer to agency judgements. For those of us who believe that federal agencies have been given too much flexibility over the years to interpret laws as they see fit and not as Congress intended, this is a good thing.
Chris Christie Named Secretary of Transportation
Explaining that no one understands the importance of transportation to a political career better than he does, President- Elect Trump recently named N.J. Governor Chris Christie as his Secretary of Transportation. Trump also announced that Howard Stern will be his Communications Director.
Just joking, I wanted to make sure you were still awake.
The next time someone tells you the more things change, the more they stay the same, remind them about the election of 2016. No one, including Donald Trump, knows precisely what all this means for credit unions, but there are some very intriguing possibilities.
- Mandate relief is a real possibility. One of the most conservative Congresses in history will now have a Republican president. The Democrats only picked up one Senate seat and although the House majority was trimmed, the flame thrower faction will see last night’s results, with some justification, as vindication of their scorched earth approach to governing. Without the threat of a veto, legislation to scale back the CFPB and provide mandate relief to smaller financial institutions may grow legs.
- CFPB will be in the cross hairs. When the United States Court of Appeals for the District of Columbia ruled that the CFPB’s director was an at-will servant of the President, credit unions were disappointed that the Court didn’t go further in invalidating the whole enterprise. Now that case has some real teeth. With anti-regulation Trump coming to town, the Bureau is effectively in limbo. Who do you thing his Director will be?
- What regulators give, they can take away. Expect every single controversial regulation and guidance, ranging from the exempt employee threshold to the accommodation of transgender employees, to get a second look.
Some New Old Faces Go to Washington
By the way, the newly emboldened majority in the House will include former NYS Assembly Republican Minority Leader John Faso (R) and Assemblywoman Caudia Tenney. Former Nassau County Executive Tom Suozzi (D) is back in the game, claiming NY’s third Congressional district. State Senator Adriano Espaillat easily won the seat vacated by the retiring Charlie Rangel.
Senate Republicans Holding On
On the state level, the results are almost as remarkable in their own way but there are still a couple of races in the Senate that are too close to call. As of right now it appears that reports of the demise of a Republican Senate have been greatly exaggerated. Here is the breakdown as reported by the Times Union this morning
Last night’s “results” left the Senate breakdown: 32 Republicans, 23 mainline Democrats, seven members of the Independent Democratic Conference, and one Simcah Felder (a Democrat who conferences with the Republicans).
If everything holds, with Felder, the GOP would have an outright majority of 33 members. “
The Democrats hold a slight lead in a Long Island race that is headed for a recount. The key point is that, even though the IDC has grown, it has done so at the expense of the Senate Democrat caucus. Furthermore, it’s possible that the Republicans will be in the majority without the IDC’s help.
Last week I saw one of the best examples in years of why it is so important for all credit unions in New York that there be a viable State Charter. In the aftermath of NCUA’s decision to amend its field of membership regulations to give credit unions greater flexibility in taking on additional members, Department of Financial Services, Superintendent Maria T. Vullo, issued a statement in which she pointed out that NCUA made these changes, in part in response to the more flexible FOM’s offered by states such as New York. She also encouraged “all credit unions to take advantage of New York law to provide financial services to all New Yorkers and pledges to timely review all applications by new or existing credit unions seeking to be chartered by New York State”.
The Press Release warmed my cynical heart for several reasons. First, the Superintendent is spot on. NCUA Board members were refreshingly frank in acknowledging that they were putting forward FOM reforms, in part, to keep the federal charter as attractive as possible. New York is an anomaly in that all but 17 of its credit unions are federally chartered. Nevertheless, its FOM makes this state among the most attractive for field of membership purposes because credit unions can mix- and- match community, association , and employer groups. It’s possible that federal law gives your credit union all the flexibility it needs, but if charter expansion is a primary concern, the state’s law is worth taking a look at.
Second, it is great to see the DFS openly encouraging credit unions to consider taking advantage of New York’s Law. There is a lot more that we can accomplish for all credit unions with a truly committed state level partner.
Third, while I am encouraged by the DFS’s statement, both the legislature and the DFS should remember that new mandates have consequences. For example, any Federal Credit Union thinking of converting to a state charter would be nuts to do so before the state finalizes its new cybersecurity regulations and explains precisely what it expects credit unions to do to comply with this surprisingly detailed mandate.
Does anybody really know what time it is?
I love the extra hour sleep but could someone please explain to me why, in a country as technology savvy as our own and the internet capable of telling me that I’ve run out of milk we can’t come up with a way of automatically updating all clocks to reflect the actual time? As I was getting ready for work this morning, I had to repeatedly remind myself that I wasn’t running an hour late. By the way, why do they make car clocks so difficult to change that only James Bond can make it look easy?
On Halloween, the Supreme Court decided that it would not hear an appeal challenging the constitutionality of a Connecticut law which takes direct aim at the MERSCORP model. If you provide mortgages, there is a good chance that you benefit from the efficiencies brought about by the MERS system
Connecticut has a typical mortgage recording framework. Lenders pay the clerk in the locality in which the real property is located for the right to record the mortgage and secure their lien. Traditionally, if that mortgage was sold, a new record would have to be made and additional fees paid.
Starting in the 1990s, MERSCORP changed that model. When a MERS member makes a mortgage loan MERS is recorded as the mortgage holder. When a MERS mortgage or its servicing rights are sold to another MERS member the transfer is electronically recorded in a MERSCORP data base but MERS remains the mortgage holder.
This clever system is perfect for facilitating quick and efficient secondary market sales. The GSEs are among its users. We now have a de facto national banking system. While this creates risks by making it possible for an investor in New York to buy bundled mortgages from Nevada that go delinquent, the secondary market is here to stay. The more efficiently it operates, the more cheaply you can provide mortgages to our members.
|But on the local level recording fees remain a major source of income and by facilitating multiple mortgage transfers that don’t have to be recorded localities miss out on potential revenue. Connecticut addressed this problem by passing a law charging a company operating an electronic database almost three times as much for recording a mortgage as a traditional mortgagee. When the Connecticut Supreme Court upheld this statute (MERSCORP HOLDINGS, ET AL. V. MALLOY, DANNEL P)|
MERS appealed to the Supreme Court which decided not to take the case.
One state won’t kill MERS but other states now have roadmap for taxing MERS transactions. As the Supreme Court recognized a long time ago the power to tax really is the power to destroy.