Posts filed under ‘Regulatory’
When you find out a final regulation has been published, most of you do a good job of figuring out how to comply. Let’s say a “Guidance” on the same subject came across your desk. Do you:
- Place the notice in your to-do bin where it gathers dust along with that great article on mortgage lending that came out in January 2007?
- Skim the cover page, breathe a sigh of relief it isn’t a regulation, and toss it into the garbage?
- Assign someone to implement its dictates the same way you would a promulgated regulation?
- Use it as a place mat for your lunch?
Readers of this blog know where I am going on this one. There is too little conformity in how regulatory guidance from NCUA is issued. This leads to a great deal of unnecessary confusion among regulators, examiners, and credit unions about how much weight Guidance should be given and when a Guidance can be used by an agency instead of the more formal regulatory process. The problem isn’t unique to NCUA but reflects a need to amend federal law to give regulators more guidance on Guidance.
Yesterday, the Government Accountability Office (GAO) released a report detailing the procedures used by four agencies in deciding when to issue a “significant” Guidance as opposed to a new regulation. Although the NCUA was not among the analyzed agencies – the Agriculture Department (USDA), Education Department (ED), Health and Human Services (HHS), and the Department of Labor (DOL) – the report’s conclusions were hardly surprising to anyone who has delved into the regulatory morass and tried to make sense of the regulation/Guidance dichotomy.
The Agencies did not use standard terminology for guidance. For instance some used a Q &A format while others used an Industry Letter format. “They often based the decision between guidance and regulation on whether the direction was meant to be binding (in which case they issued a regulation). In some cases, issued guidance clarified existing regulations, educated the public, addressed particular circumstances, or shared leading practices.”
The problem is that there is little consistency and a dearth of criteria used when determining when an issue should be dealt with as a regulation as opposed to a guidance. For instance, the Education Department and the USDA’s written procedures explained the approval and clearance procedures for significant guidance. DOL officials said they did too but that these procedures “were not readily available” during the GAO audit. I’m going to go out on a limb and say that not too many DOL employees know these procedures exist.
Like it or not, we live in a regulatory state. Things were already bad but the Supreme Court’s decision earlier this term in Perez v. Mortgage Bankers Ass’n, No. 13-1041, slip. op (U.S. Mar.9, 2015) upholding the right of the DOL to issue an opinion letter classifying mortgage originators as nonexempt employees gives all regulators even more power and flexibility. It may not win many votes come election time but a constructive change that may have bipartisan support would be to amend the Administrative Procedures Act to implement standard procedures for the promulgation of Guidance and to clarify precisely how much legal weight a Guidance has as opposed to a regulation vetted via the rule making process. http://www.gao.gov/assets/670/669688.pdf
Nothing to do with credit unions, but here is a great question from Rep. Jeb Hensarling, (R-Texas) Chairman of the House Financial Services Committee, who is leading the charge against the reauthorization of the Export Import Bank. “How are we ever going to reform the social welfare state if we can’t reform the corporate welfare state?…Success in America ought to depend on how hard you work on Main Street not who you know in Washington.”
Regulators are once again proposing restrictions on the way federal student loan aid is distributed and banks are once again crying foul. It’s a predictable and increasingly tiresome sideshow that keeps us from focusing on the real problem confronting our higher education system: the skyrocketing cost of a college degree.
Before I get on my soapbox, here is the informational part of today’s blog. According to the U.S. Department of Education, there has been a proliferation of agreements between financial institutions and colleges whereby financial institutions offer prepaid cards and debit cards on which students can receive their federal student aid. These cards can also be co-branded with the college’s logo. According to the Government Accountability Office, 11% of colleges and universities participating in federal student aid programs have entered into these kinds of agreements and 40% of all post-secondary students are enrolled in such institutions.
On Friday, the U.S. Department of Education proposed regulations to clamp down on these contracts. According to the Department, the proposed regulations would prohibit institutions from requiring students or parents to open specified accounts into which credit balances are deposited; require institutions to ensure that students are not charged overdraft fees on an account offered by a financial institution with which the school has a contractual relationship; require colleges and universities to provide a list of options from which students may choose to receive credit balances; and require institutions to ensure that payments made to a student’s pre-existing accounts are as timely as and no more onerous to the student as those accounts marketed to the student. The regulation is published in today’s Federal Register.
Banks responded quickly to this proposal saying that these existing arrangements offer students a cost-effective means of accessing their funds and suggesting that the Education Department may be overstepping its jurisdiction by prohibiting overdraft fees.
Now I am climbing on to my soapbox. For more than a decade now, advocates for higher education reform have complained bitterly about the cozy relationships that some colleges have entered into with financial institutions. For instance, Governor Cuomo drew national attention as Attorney General for his investigation into the relationship between academic institutions and banks.
There is nothing wrong with any of these proposals, but let’s not delude ourselves into thinking that banking practices are to blame for the skyrocketing cost of a college education. According to the College Board, the average cost of tuition at a public, four-year college for an in-state student is $9,100. The average tuition at a four-year private college is $31,231. Remember this doesn’t cover living expenses, books and beer money. I wish the groups advocating for the type of regulations proposed by the Education Department would call for an investigation into the skyrocketing cost of getting a college degree in this country. Increasingly, it seems to me as if the children of middle class parents are being held hostage by institutions of higher learning: pay us whatever we ask for or risk your child’s future.
No one celebrates Cinco de Mayo like the Irish, so it’s only natural that NCUA Chairwoman Debbie Matz went to Ireland to ratchet-up her spot-on criticism of the Department of Defense’s well intended but ill-conceived proposal to cap most consumer credit at a military APR of 36%. The proposal sounds nice, but as she made clear in her speech before a gathering of the Defense Credit Union Council’s Overseas Subcommittee, it would do more harm than good when it comes to providing credit union services to members of the armed forces.
As I explained in a previous blog, the military is concerned about continued lending abuses. It argues that there are too many ways to get around restrictions on Payday loans, vehicle title loans, and refund anticipation loans. Its solution is to cap the APR on most consumer loans to active duty military personnel at a military APR of 36%. That means that there would now be a regular APR and a Military APR (MAPR). The MAPR would be calculated differently than the regular APR. It would include certain fees currently excluded from the calculation of APR under Regulation Z.
Just how restrictive is the proposed APR calculation? As Matz explained in her speech yesterday “We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the 36 percent Military APR limit. Unfortunately, the Military APR limit would be violated even using what we know are reasonably priced products designed to provide affordable alternatives to predatory loans.” This means that the payday loan alternatives offered by credit unions such as Pentagon Federal would violate these regulations. Is this a good thing? Only if you don’t want members of the armed forces to get access to reasonably priced credit.
Chairwoman Matz also used the speech to urge the CFPB not to implement payday loan protections that are so restrictive that they also inhibit the ability of credit unions to offer legitimate shorter term loans. She was commenting on what my colleague Mike Carter has described as the Bureau’s proposed proposal to impose ability-to-repay underwriting requirements on payday loans. I’m not as concerned about the Bureau’s proposal at this point. A formal regulation has not been put forward and the CFPB commented with approval on NCUA’s short term lending alternatives even as it proposed payday lending restrictions.
Chairwoman Matz deserves credit for forcefully criticizing the MAPR proposal first in a comment letter and now in yesterday’s speech. But I will take the criticism one step further. Even if credit unions are excluded from its grasp, establishing a two-tiered lending system with separate lending criteria for the military and the general public is a dumb idea that will make it impossible for all but the largest institutions to cost effectively offer consumer credit to military personnel.
Recently, the House Armed Services Committee narrowly defeated a proposal sponsored by Democrat Tammy Duckworth to delay any further rules in this area pending additional review. This is unfortunate. If the DOD goes forward with its MAPR regulation in anything close to its existing form, I’ll bet that Congress will have to overturn the regulation within two years. As soon as the best intentions of consumer advocates clash with reality, no one is going to be in favor of a regulation that makes it more difficult to give consumer credit to members of our armed services.
When I tell people that a good chunk of my professional life is spent reading and responding to regulations, they smile and their eyes glazed over as they try to suppress a yawn. But, believe it or not, an infusion of new members on the NCUA Board means that regulators are really looking to make some meaningful changes. Here are my thoughts on yesterday’s board meeting. All of these regulations and proposals were influenced by industry comments.
Associational Common Bonds Rule
This was the most controversial rule of the day. Responding to concerns that some credit unions were creating sham associations simply for the purpose of increasing membership eligibility, NCUA finalized regulations strengthening its oversight of associational membership requirements. On the bright side, the proposal increases to 12 the types of associational groups that receive automatic pre-approval, including “organizations promoting social interaction or educational initiatives among persons sharing common occupational professions.”
If I wanted to be a glass half-full kind of guy I would say that the final regulation is much improved from the initial draft thanks to industry suggestions. If I wanted to be a glass half-empty kind of guy, I would continue to question why NCUA felt the need to go forward with this regulation in the first place. The only organization that really thought associational membership was being abused was the American Bankers Association.
When Congress expanded the ability of credit unions to offer Interest-On-Lawyer Trust Accounts (IOLTA) late last year, it also empowered them to offer “similar” escrow accounts. Yesterday, the NCUA proposed regulations defining those similar accounts. Under the proposed rule, they would include accounts for pre-paid funeral expenses, for example. At yesterday’s board meeting, NCUA officials stressed that they are more than willing to consider expanding the types of accounts eligible for insurance coverage under this law. This is one area where a well-written comment letter could clearly benefit the entire industry.
“Technical” Amendments for Corporate Rules
My old boss in the Legislature used to say that there is no such thing as a technical amendment, only amendments that no one understands. I was thinking of this quote yesterday as I heard the board discuss amendments to corporate borrowing authority. These amendments didn’t go as far as the corporates would have liked; however, the final rule improves on the initial proposal by extending to 180 days the maximum term of a corporate’s secured borrowing authority. In listening to the board discuss the proposal, I was struck by how concerned NCUA still is about allowing the corporates to rely too heavily on perpetual capital.
In addition to finalizing this technical amendment, the NCUA proposed an interesting change allowing the corporates to provide bridge loans to credit unions awaiting funding from the Central Liquidity Facility (CLF). When a credit union borrows funds from the facility it can take up to ten days to get the money. Considering that the purpose of the CLF is to provide emergency liquidity for credit unions, this strikes me as a huge defect in the system. NCUA is proposing to allow the corporates to provide members with bridge loans to cover the gap between the request and availability of funds.
I wish the industry would be more concerned with the issue of how best to revitalize the CLF fund. The corporates capitalized the fund with credit unions having access so long as they were a corporate member. When the corporates crashed, so too did their ability to fund the CLF and the industry has been remarkably short-sighted, in my ever-so-humble opinion, when it comes to devising an industry based source of emergency liquidity. At least this is a step in the right direction.
Appraisal Management Companies
NCUA signed off on joint regulations mandated by Dodd-Frank strengthening regulations related to Appraisal Management companies. This regulation is a bit strange, as no one at NCUA seems to know for sure if any credit unions invest in appraisal management CUSOs. This means that even though NCUA approved the rule, it may have absolutely no impact on credit union operations.
On that note, enjoy your weekend.
RESPA has always prohibited kickback schemes. Specifically, RESPA explains that ”No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C.A. § 2607 (West). But figuring out where the line is between legitimate salesmanship and illegal kickbacks has always been a gray area and RESPA enforcement has always been a tad lax.
Yesterday provided examples of how RESPA says what it means and means what it says. The Bureau That Never Sleeps and the Maryland AG sued originators over an alleged referral kickback scheme (http://www.consumerfinance.gov/newsroom/cfpb-and-state-of-maryland-take-action-against-pay-to-play-mortgage-kickback-scheme/). Closer to home, Governor Cuomo and New York’s Department of Financial Services proposed tough new regulations that would, among other things, prohibit title insurance companies from providing meals and entertainment expenses to loan originators (http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf).
First, let’s talk about the RESPA violation. The CFPB and the Maryland AG are suing Genuine Title, a now defunct Maryland company that offered closing services. It’s alleged that the company provided loan officers with marketing services “including purchasing, analyzing, and providing data on consumers, and creating letters with the loan officers’ contact information” and that in return, the loan officers would refer homebuyers to Genuine Title.
RESPA stands for the simple proposition that you can’t get something for nothing. If an originator is getting a fee for doing nothing more than referring business, then something is wrong.
As for New York State, it is moving to clamp down hard on title insurance practices that it believes drive up the cost of title insurance and limit consumer choice. The Governor doesn’t always get quoted in DFS press releases. Here is an indication of how strongly the administration feels about the amount of gift giving going on in the title insurance industry.
“New Yorkers should not have to foot the bill for outrageous or improper expenses made by title companies just to refinance or close on their home,” Governor Cuomo said. “Our administration will not stand for that kind of abuse in the title insurance industry, and these new regulations will help ensure that New Yorkers are protected from unfair charges and get the most bang for their buck.”
The proposed regulations would prohibit title insurers from offering inducements to get business including: meals and beverages; entertainment, including tickets to sporting events, concerts, shows, or artistic performances; gifts, including cash, gift cards, gift certificates, or other items with a specific monetary face value; travel and outings, including vacations, holidays, golf, ski, fishing, and other sport outings; gambling trips, shopping trips, or trips to recreational areas, including country clubs; parties, including cocktail parties and holiday parties and open houses. THIS IS NOT THE COMPLETE LIST
Suffice it to say it’s about to get a lot less fun dealing with title insurers in NYS.
Here is a link to the proposal: http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf
NCUA Board meeting today
Here is a quick reminder that the NCUA is having a board meeting today. Among the issues on the agenda are a vote on a final rule amending common bond requirements for associations and proposed regulations for IOLTA accounts. Remember that federal law now authorizes credit unions to open up Interest on Lawyer Trust Accounts. The regulation will presumably describe what accounts are similar enough to IOLTAs that they can also be offered by credit unions.
It was nice seeing so many of you at the State GAC over the last couple of days. Great job!
Recently, a friend of mine attended a credit union conference in California. He told me that a panel discussion led by large credit union CEOs identified peer-to-peer lending as the biggest challenge facing the credit union industry. As a general rule, I believe that anyone who agrees with me is right, so these CEOs are on to something.
The good news is that peer-to-peer lending has the ability to make borrowing cheaper for the American Consumer; the bad news is that this misunderstood phenomenon is moving at the speed of the Internet. It’s time for regulators to start regulating peer-to-peer lending, and yes, that includes limiting its reach.
In its pristine form, peer-to-peer lending can evoke the banking equivalent of a barefoot child picking daisies in a meadow on a sunny day. Instead of Joe Hardworking Consumer and Sally Hardworking Mom having to go to the big bad bank for that debt consolidation loan, or to get financing to turn their great idea into a small business, they can turn to an online lending site that is only a click away on their smart phone. Their fellow consumers can get a decent return by fronting them money while Sally and Joe get a better rate than they ever would at a financial institution. In the utopian view, technology has done away with the need for a bank, or credit union for that matter, to connect lenders and savers.
Now, for reality. Believe it or not, your average consumer doesn’t have that much extra money to lend to a neighbor. Increasingly, behind most of these lending sites are some of the same personalities and investment banks that brought us the last financial mess. For instance, the latest high priest of financial innovation in the peer-to-peer lending market is Lawrence Summers. Yes, this is the same Larry Summers whose resume includes advocating for the innovation in the Clinton Administration that laid the groundwork for the “too big to fail” banks that now are too big to be effectively regulated and forcefully advocated for the Obama Administration not to be too tough on them once the consequences of these policies brought us the Great Recession.
In a recent speech, Summers, who sits on the Boards of two peer-to-peer lending companies, argued that while regulators need to ensure there are adequate disclosures put in place for peer-to-peer lending activities, regulators should not move too quickly to restrict lending activities lest they squelch this brilliant innovation.
To me, Summers and his ilk are the Blues Brothers of financial innovation: they constantly want to get the old band back together, even if it ends in disaster. Peer-to-peer lending has its place, but here are the questions regulators should already be asking.
- Should capital requirements be imposed on investment banks that specialize in holding peer-to-peer loans? This question is crucial since peer-to-peer lending isn’t being driven by Libertarian idealists, but by investment bankers who see the next great investment opportunity. These gurus argue that analytics now make it possible to predict repayment ability better than ever before. This is true, but I still don’t want trillion’s of dollars of unsecured loans floating around the economy next time things go bad as lenders have no collateral to absorb the losses.
- Should we make sure that peer-to-peer lenders have skin in the game? In other words, we don’t want to create another origination platform for banks more interested in securitizing packages of loans than they are in credit quality.
- Should the number of personal loans that can be taken out by any one consumer be capped?
Benjamin Lawsky, Superintendent of New York’s Department of Financial Services, said yesterday that he expects the State to unveil regulations mandating the licensing of virtual currency operators by the end of May, according to Banking Law 360. These regulations, which have been the subject of extensive analysis since they were proposed last July, are essentially the first draft of an attempt to regulate virtual currencies since neither the federal government nor any other state has moved to regulate them, the most prominent of which is the Bitcoin. It’s not surprising, then, that the Superintendent indicated that the regulations may be modified in response to coordinate enforcement with other states, including California.
As currently proposed, the regulations shouldn’t have a direct impact on established credit unions or banks. It exempts entities already licensed by the Banking Department provided they get permission from the Superintendent prior to engaging in the business of virtual currency. But the question of how best to regulate virtual currencies will have a profound impact on how finance is transacted in the coming years. Here is why.
Follow the money: although the Bitcoin has gained most of its notoriety in this country as a potential facilitator of illegal transactions — which is why the DFS is seeking to impose state level requirements on Bitcoin operators to report suspicious activities – investors are intrigued by the technological possibilities behind the currency. In March, the WSJ reported that “[a] Silicon Valley startup has persuaded some of the biggest names in venture capital to put $116 million behind its plan to turn the technology behind bitcoin into a mass-marketed phenomenon.”
Nor is the money coming exclusively from a bunch of wealthy libertarian California dreamers. The staid Swiss Banking Giant UBS also recently announced that it will be investing in virtual currency research in London and the British Government has coupled its own calls for increased regulation with the promise of an additional 10 million pounds ($15 million) for a research initiative that will look into the blockchain technology behind digital currencies.
Silicon Valley types are making these investments as the Federal Reserve is prodding the banking industry with increasing urgency to think about how the currency processing system should be updated for the 21st Century. One Fed researcher has even suggested the creation of a Fed Bitcoin. In addition, NATCHA is in the process of expediting its clearing processes, which brings us back to New York State’s regulations.
It wasn’t too long ago that the only thing most regulators and politicians knew about virtual currencies was that they were convenient tools for criminals. The discovery of a silk road website where visitors could buy and sell a laundry list of drug paraphernalia seemed to vindicate this concern.
But times are changing. Virtual currencies demonstrate just how antiquated the traditional negotiation of currency has become. Don’t get me wrong. I am not predicting that the Bitcoin is going to rival the dollar as a currency any time soon; but I am predicting that the dollar bill of tomorrow will look a heck of a lot like today’s Bitcoins. Those regulators that strike the proper balance between appropriate oversight of this technology and fostering an environment that allows for innovation will be positioning their states and their countries to reap untold riches in the coming years, not to mention enabling them to remain in the forefront of financial regulation.