Posts filed under ‘Regulatory’

Did The CFPB Just Do a Power Grab?

Today the CFPB will be publishing in the Federal Register an interpretive ruling explaining why it has the authority to examine the institutions it directly supervises for compliance with the Military Lending Act. Since most of you work for credit unions that have less than $10 billion in assets this document won’t have an impact on your operations, but here’s why you should care:

The Military Lending Act was passed in 2006 as a narrowly focused piece of legislation to protect our service men and women from some of the most egregious predatory lending in existence at the time. After all, there should be a special place in hell for people who specialize in ripping off the underpaid men and women who protect us. Unfortunately, the MLA has been transformed via the rulemaking process from a reasonable piece of legislation into a regulatory monstrosity replete with its own Military APR and its own interest rate cap. But that is water under the bridge.

Another unique aspect of the MLA is that it is not included in the expansive list of federal consumer financial protection laws which congress explicitly listed when it passed the Dodd-Frank Act. Nevertheless, this did not become an issue until 2018 when the CFPB announced that it would no longer conduct MLA examinations as part of its oversight over the institutions it directly supervised because it lacked the legislative authority to do so.

Let’s be honest, to his critics, Mick Mulvaney’s oversight of the CFPB is remembered about as fondly as Voldemort’s rule over Hogwarts.  In our polarized political world the idea that an agency would unilaterally limit its own power was of course met with howls of outrage even though Congress could have and should have easily amended existing law to give the CFPB examination authority. Besides, the CFPB still had the authority to bring enforcement actions against lenders who violated the MLA. 

The language is pretty clear, or so I thought.  §125 provides in part (1) IN GENERAL —The Bureau shall have exclusive authority to require reports and conduct examinations on a periodic basis of persons described in subsection (a) for purposes of— (A) assessing compliance with the requirements of Federal consumer financial laws; (B) obtaining information about the activities subject to such laws and the associated compliance systems or procedures of such persons…

Congress took the time to list precisely what laws were to be considered Federal consumer financial laws and the MLA wasn’t put on the list.

It ends up that we didn’t need to change a law, we simply needed to change administrations. In its interpretive ruling the CFPB explains how, notwithstanding the fact that Congress drafted a definitive list of statutes over which the CFPB would have examination authority, the MLA is also within the CFPB’s scope of authority.

This is the latest example of the CFPB stretching its already enormous powers. The problem is that we live in a nation of laws, not regulations. The same people who complement the CFPB today will be the same people criticizing the CFPB for ignoring the role of Congress next time a Republican administration takes over the CFPB.  It’s time for everyone to remember that in a republic, the ends don’t justify the means.  We simply don’t get to ignore the laws we don’t like or the processes we have in place to change them. 

June 23, 2021 at 9:24 am Leave a comment

When Does Your Credit Union Make ACH Credits Available?

The repeated rounds of stimulus checks and the practices of many FinTechs have underscored the fact (subscription required) that there is often a time lapse between the time a credit union receives ACH credits and the settlement date that the originator (ODFI) stipulates those funds be made available.  Does your credit union make these funds available immediately?  If so, is it increasing its own risk?

These are the questions NACHA is asking financial institutions to consider as it analyzes the existing payment framework and considers placing more responsibility on financial institutions that choose to credit accounts prior to the specified settlement date. 

Here is a very basic example of what I am talking about.  The federal government sends out a high volume of ACH credits reflecting payments on tax refunds, social security payments and those stimulus checks.  According to NATCHA, the settlement date can often be three or four business days after these funds are received by your credit union.  My sense is that many credit unions make these funds immediately available.  Technically, however, the credit union is actually advancing its own money assuming that it can simply reclaim its advances when the credits actually become effective.  Legally, this assumption is a safe one to make.  While there are exceptions to every rule, a bedrock principle of the NATCHA system is that the originator of an ACH is warranting that the money will be available on the settlement date.  (See NATCHA rules Subsection 2.4.1) 

Crucially, these warrantees are made at the time that a file is transmitted, not at the specified settlement date.  This means that if a receiving depository financial institution advances its own funds to make funds such as directly deposited paychecks available sooner than the settlement date, it has recourse against the originating institution in the event there are insufficient funds at settlement. 

In its request for comment, NATCHA is asking if the existing rules do not adequately allocate the risk of loss.  It points out, for example, that files are occasionally sent in error and creating lag time between when a file is transmitted and when it becomes available for use gives the originating institution time to request that its payment be reversed.  But this is a classic example of a seemingly arcane compliance debate that has big implications for consumers and customer service.  It seems to me that there are now millions of consumers out there who expect payments to be made available to them immediately.  The existing framework creates a black and white rule putting the originating financial institution on notice of its responsibilities the second it hits the send button. 

But this is just the opinion of one middle aged attorney who is distracted by dreams of watching his Islanders beat the Boston Bruins tonight.  The Association will be sending out a request for comments on this proposal to gauge credit union sentiment.  We’re curious to learn your thoughts.

June 9, 2021 at 9:50 am Leave a comment

Court: NY Jumps Gun on FinTech litigation

For the second time in less than four years, a federal court ruled yesterday that New York committed the legal equivalent of a false start when it filed a lawsuit against the Office of the Comptroller of the Currency (OCC) after it announced that it would begin accepting charter applications from non-depository FinTechs interested in obtaining federal bank charters. If you think you’re suffering from deja vu, you’re not. In 2017, a district court dismissed an earlier lawsuit New York’s Department of Financial Services filed against the OCC on the same grounds.

One of the key legal issues in banking is whether or not the OCC has the authority to grant federal bank charters to FinTechs even if they do not accept deposits. In the early 2000s, the OCC promulgated regulations permitting companies to apply for bank charters provided they engage in activities such as executing payment transactions. If the OCC has this power, it will enable many FinTechs to provide services traditionally regulated by the states, such as payday lending and perhaps even mortgage banking.

In Lacewell v. Office of Comptroller of Currency NYS is arguing that the OCC is acting beyond its authority by considering granting charters to non-depositories. It claims to be harmed by the revenue it would lose from licensing non-depositories and that New York consumers will be harmed by banking products which aren’t subject to New York’s consumer protection laws, such as its cap on interest rates.

But in yesterday’s ruling the court held that in the absence of a charter actually being granted, New York could not demonstrate it had been harmed enough to give it access to the federal courts.

Enjoy your weekend, folks!

June 4, 2021 at 10:03 am Leave a comment

Are Overdrafts Fees An Endangered Species?

Overdraft fees have recently been put under the microscope once again and it does feel like the pieces are falling into place to see new restrictions placed on this product.

First, there is the news that overdraft fees dropped dramatically during the pandemic. The Wall Street Journal reported yesterday that overdraft revenue fell in 2020 for the first time in six years. The paper reports that banks and credit unions brought in $31.3B in overdraft revenue in 2020, a drop of almost 10 percent from the previous year. This is hardly surprising since the huge influx of savings has given many consumers a bigger financial cushion.

An even more intriguing development is highlighted in today’s American Banker which notes the growing numbers of banks that are offering overdraft fee alternatives. On Wednesday, Ally Financial announced that it will permanently stop charging overdraft fees. According to the AB “these firms are reducing or eliminating their reliance on overdraft fees at a time when regulatory scrutiny seems likely to increase, and as competition from lower-cost alternatives is on the rise.”

These changes are taking place in a political environment focused on issues of economic equality like never before. In 2017 the CFPB issued a report concluding that overdraft services are disproportionately used by individuals with lower credit scores who have less access to credit. The report didn’t have much of an impact but in 2021 this is precisely the type of factoid that is galvanizing individuals to push for changes to the banking system.

Finally, there is the ubiquitous class action litigation involving the accuracy of overdraft disclosures. While I think much of this litigation can be preempted with appropriate changes to account agreement language, judges are scrutinizing overdraft practices like never before. 

What does all this mean? It means that your credit union should begin preparing for the day when the revenue it receives from overdraft fees is dramatically reduced. Unfortunately, this is easier said than done. A report released in May by the Brookings Institution highlighted anecdotal evidence that small lenders and credit unions have grown increasingly dependent on overdraft fee income.

On that happy note, enjoy your day.

June 3, 2021 at 9:06 am Leave a comment

Important Updates on EEOC guidance and NYS Infectious Disease Standards

Memorial Day may mark the unofficial start of summer but last week added several things to your HR person’s to-do list before she goes on vacation.

First, amendments have been proposed to a recently passed NYS law – the HERO Act – imposing state level infectious disease work place safety standards on all employers and mandating that those with ten or more employees authorize the creation of worksite health committees. The changes will narrow employer obligations but even with the anticipated changes there is still work to be done.

Under the original legislation, the state was going to be responsible for developing infectious disease standards by industry. This chapter amendment clarifies that standards will only vary for the largest industries in the state and those determined by the Commissioner Of Health to have unique requirements. This means that many employers will be able to comply with this law by adopting a general model policy standard to be issued by the state.

You’ll also have more time to prepare for these changes.   Under the existing legislation, parts of the law were going to take effect in less than 30 days. In contrast, you are now required to implement these policies within 30 days after they are published by the Commissioner of Health.

Another area of concern addressed by these changes involves an employer’s scope of liability.  Most importantly, only employees who can demonstrate they are harmed by violations of the new standards will be able to sue employers.  The changes also eliminate liquidated damages and require employers to be given notice of violations before being sued.

Under the law, employers with 10 or more employees will have to give employees the option of creating workplace safety committees. The proposed changes slightly narrows the scope of these committees by clarifying they have no jurisdiction to analyze Workers Compensation policies. In addition, committee meetings can now be limited to two hours per quarter.

                                                                EEOC Issues Vaccination Guidance

On Friday the Equal Employment Opportunity Commission issued important guidance clarifying that employers can require employees to be vaccinated provided they are mindful of the need to reasonably accommodate employees with disabilities and those who hold genuine and sincere religious beliefs that may keep them from wanting to get vaccinated. It also gives a green light to employee vaccination incentives.

Since the roll-out of vaccinations, employers have grappled with how best to get their workplaces vaccinated. The guidance closely tracks advice that many lawyers have already given employers. There are several qualifications to the EEOC’s guidance and you would be well advised to closely read the guidance before making any policy changes.

June 1, 2021 at 9:40 am Leave a comment

Are You Prepared for the New POA requirements?

This is not the most exciting question in the world but the sense I get is that for many of you the answer to this question is at best “not quite” and at worst “what changes?” This is concerning because big changes are coming.  For purposes of this blog, I am assuming that your credit union is being presented with a POA where there are no issues regarding potential financial elder abuse.

On a daily basis every credit union in NYS has to decide whether or not to accept and act on a power of attorney document. In today’s blog I am going to discuss the most basic consequences for your credit unions when confronted with a Power Of Attorney starting June 13th. In subsequent blogs, I will discuss other aspects of these changes. If I panic you into taking further action the Association has a webinar on the subject and you can always give our trusty compliance gurus a call on our compliance hotline.

What exactly am I talking about? Late last year the legislature passed and the governor signed into law legislation and a chapter amendment championed by the bar association designed to make it easier to draft POAs. For our purposes it’s important to remember that one of the primary reasons for these changes was frustration on the part of lawyers that banks and credit unions often refused to accept POAs because of what they contend were immaterial drafting defects.    

Specifically, under existing law to be valid a POA must contain “the exact wording” contained in the general obligation law. This gave credit unions and banks a tremendous amount of flexibility in determining whether or not to accept POAs and over the years many went so far as to mandate their own forms.

Starting on June 13th this standard is changing. Specifically, POAs are now valid provided they “substantially conform” to New York law. In other words minor discrepancies between the exact language of NY law and the POA your front line staff is reviewing no longer provides a basis for refusing to honor the POA. 

Furthermore, there are now financial consequences if your credit union refuses to honor a valid POA. Under existing law, all an attorney can do is commence a summary proceeding to order your credit union to honor the POA. When this new law kicks in, if a judge finds that your credit union refused to honor a valid POA, it could be on the hook for damages and attorney costs.

There are also important changes made to the actual form.  Most importantly, Statutory Gift Riders are no longer required and instead certain powers must be noted in a modification section on the POA itself.

Here’s where it gets a little complicated.  For POAs drafted before June 13th to be valid they still must comply with the exact wording standard as well as the existing Gift Rider requirements. But, starting June 13th, you can still face litigation for refusing to honor valid POAs drafted before June 13th.

The bottom line is that your credit union should be updating its procedures to make sure that frontline staff is aware of these new changes and has clear guidance, such as a checklist, detailing the circumstances under which it will and will not accept a POA.

May 28, 2021 at 10:04 am Leave a comment

Time For the Climate Change Talk

There are three ways in which the industry can react to climate change: (1) It can pretend that the issue does not really exist; (2) It can so embrace the issue that it refuses to acknowledge the tradeoffs involved in integrating climate change considerations into its core operations, such as underwriting, or (3) it can go through the hard work of developing a consensus on an issue that will be with us for decades to come. With the caveat that this is one of those blogs when I remind you that this is my opinion and only my opinion, it’s time to decide what approach to take. 

On Thursday, President Biden issued this executive order on Climate Related Financial Risk. As part of the order, the Financial Services Oversight Council, comprised of federal banking agencies, including the NCUA, will prepare a report detailing the approaches that the agencies are taking to address Climate Related Financial Risk in their respective areas. The report will include recommendations on how identified climate-related financial risk can be mitigated, including through new or revised regulatory standards as appropriate. Federal housing regulators have already been tasked with examining climate change risks and the housing market. 

In other words, we are moving past the platitudes. Within the next year we can expect to see regulators, including the NCUA, propose specific regulatory mandates. It’s one thing to discuss the impact of climate change, it’s quite another to see the direct impact that policies designed to mitigate its effects will have on your bottom line. 

As always, the purpose of this blog is not to give you my opinion on climate change but to get you thinking and preparing about future regulatory developments. The problem is that the feelings one has on the appropriate regulatory framework are inexplicably intertwined with one’s political perspective. For instance, there are individuals who believe that climate change is an unproven piece of scientific speculation which is causing policy makers to put the present-day jobs of Americans at risk. 

On the other end of the spectrum, are those who believe that climate change is a current existential threat to humanity’s existence and that it can be addressed in some way that not only makes the world safer, but reconfigures the economy in a way that creates present-day jobs for Americans. Personally, I believe that there is a huge middle ground out there which both recognizes the threats but also recognizes the reality that addressing climate change will involve tradeoffs.

Where does this leave the credit union industry when it comes to formulating responses to propose regulations in the coming months? Yours truly would love to see the industry develop and publish a set of guiding principles which it will use when analyzing regulatory and legislative proposals in this area. Industries are increasingly being pressured to take public stances on a wide range of hot-button topics. A thoughtful debate over the next six months could serve every credit union by demonstrating how credit unions don’t shy away from the tough issues that impact their membership and giving them a response when they are asked what approach they are taking to climate change.  

May 24, 2021 at 10:07 am Leave a comment

Is the Fed Squeezing Small Lenders Out of Existence?

Good Morning, folks.

In the 1930’s the Federal Government responded to the collapse of the farming industry by putting in place a government back framework meant to stabilize the farming industry and stem the impact it was having on everyday Americans. Today, the family farm is largely a relic of a bygone era but the government subsidies designed to keep it alive are still alive and well and disproportionately benefiting larger corporations that don’t need the money.

Many of the same trends are taking hold in the banking industry to the detriment of credit unions.

I’m not going out on much of a limb here to say that you should expect your credit union to have to pay more into the Share Insurance Fund in approximately six months. That’s my takeaway from NCUA’s report on the Share Insurance Fund provided at yesterday’s monthly board meeting. It is also the assessment of one Todd Harper who put credit unions on notice that “absent some unknown external event, these forces seem likely to eventually” push the equity ratio below the 1.20 level at which point NCUA must pass around the Share Insurance Hat.

This unfortunate development isn’t all that surprising. This past week many New York credit unions have had the opportunity to listen to Steve Ricks pithy overview of current credit unions economic trends. Members are stocking away savings at unprecedented levels thanks to all of that government stimulus spending. The bad news is that loan demand isn’t keeping pace and investment returns are non-existent. Put this all together and you have the profits of many credit unions, particularly smaller ones, being squeezed even more than they have been in the past. Perhaps as the economy picks up even more, so will loan demand. We will have to wait and see.

But let’s take a look at the big picture. The trend we are seeing is nothing more than the continuation of forces put in place by the Federal Reserve more than a decade ago. When the mortgage meltdown looked as if it might trigger a depression, even Janet Yellen explained that, while she was empathetic to the difficulties faced by community banks, the economy as a whole benefitted from the stimulus resulting from historically low interest rates.

At the time this argument made sense. But by continuing to take extraordinary steps to suppress interest rates, the Fed’s intervention is feeling more like a permanent lifeline to large banks then a short-term necessity. As someone who believes in the free market this doesn’t feel like a fair competition.

May 21, 2021 at 12:48 pm Leave a comment

Resisting The DarkSide

The successful dark side ransomware attack in which hackers were able to disrupt a major pipeline providing gas to states throughout the east coast has once again brought the issue of cyber security to the forefront.  Here are some of the lessons your credit union can learn from this event:

Don’t forget the basics. These are highly sophisticated attacks that start with very basic mistakes. On Wednesday, the FBI and the CISA issued a joint memorandum. The first three steps it suggested companies take to mitigate the threat of ransomware are to require multi-factor authentication, enable strong spam filters, and implement a user training program and simulated attacks for spear phishing.

Expect insurance costs to spike. The attack comes as regulators and stakeholders debate the best way to deal with ransomware attacks and the role that the insurance should play. This past fall, FINCEN issued guidance warning financial institutions and insurance companies that they might be violating federal law if they help a company facilitate a ransomware payment. In addition, New York State’s Department of Financial Services recently reached a multi-million dollar settlement with an insurance company for violating the state’s cyber security regulations. The settlement has gotten the attention of the legal community since it included a stipulation that insurance proceeds would not be used to pay the settlement. 

The DarkSide may bring congress to its senses. Call me a cock-eyed optimist but if the ability of hackers to shut down a major energy pipeline affecting states throughout the country doesn’t jolt congress into passing comprehensive cyber security regulations then nothing will. This would seem like an issue that can overcome the great ideological divide but only time will tell. 

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

Post COVID Recovery Poses a Test for CECL Compliance

There are two ways to prepare for your credit union’s transition to the Current Expected Credit Loss accounting standard, lovingly referred to as CECL, with which your credit union must comply starting in 2023: you can either be using this time to research your credit unions lending history and extrapolating lessons from the larger financial institutions that are already complying with a standard or you can continue to put CECL on the back burner in the hope that it will once again be delayed or eliminated completely for smaller financial institutions. If you choose the former approach then this blog is for you.

This morning, yours truly wants to highlight this article in the WSJ discussing the challenges faced by the banking behemoths as they determine how much to reduce their reserves. As the article explains CECL is complicating bank decisions on how much to reduce the reserves: “jumping the gun could be dangerous: Lowering reserves too quickly and then needing to rebuild them could hurt companies’ credibility and reduce income, accountants and advisers say.”

Even taking the historic nature of the economic shutdown into account, it is hard to believe that a huge spike in reserves wasn’t in part a reflection of uncertainty over the proper treatment of loans under CECL. According to the WSJ, in the second quarter of last year, banks had stashed away almost $70B compared to the $12B they had put aside at the same time in 2019.

Now they are reducing the reserves.  But the question of just how dramatically and quickly they should assume that the economy is recovering remains anyone’s—dare I say it— guess. Take for instance the most recent jobs report which was so underwhelming that even the U.S. Department of Labor acknowledged that the economy still has a steep hill to climb. Conversely, consumer credit is increasing and there is plenty of evidence out there that jobs are available for people who want them.

Put all these factors into your CECL blender and ask yourself if any of these macro-trends impact your credit union and if so how much? In many ways implementing CECL is trickier for medium-sized and smaller institutions than it is for the larger guys who know that their institutions will be shaped by larger economic trends that may not even touch your credit unions field of membership.

Those of you hoping for more CECL relief should mark your calendar for May 20th. The Federal Accounting Standings Board (FASB) will be holding a round table discussion on CECL implementation, a clear signal that it is open to making further changes. For those of you hoping that CECL never comes, keep your fingers crossed.

As for your faithful blogger, I remain a CECL contrarian who believes that properly implemented, it makes sense to adopt an accounting standard that recognizes that a certain number of your performing loans will end up being delinquent. That being said, however, CECL has emerged as a potentially significant counter-cyclical drag on economic growth. I wouldn’t be surprised to see pressure grow on the FASB to modify its requirements.

May 11, 2021 at 10:30 am Leave a comment

Older Posts


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.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 720 other followers

Archives