Posts filed under ‘Regulatory’

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

Fed Proposes giving merchants more choices when processing online payments

Good morning folks, last week the Federal Reserve board proposed regulations that would interpret the Durbin amendment as mandating the type of technology your credit union uses to access debit card networks.

There are two basic types of technologies used to process debit card payments: Single-Message systems send a single message to facilitate a payment transaction while a Dual-Message system uses– you guessed it– two messages. When the Durbin amendment was passed more than ten years ago, either of these approaches could easily accommodate in-store transactions, but SMS technology was not able to accommodate card-not-present technology.  Fast forward to the present day and, according to merchants, some of the largest issuers still don’t accommodate online transactions even though technology now makes it possible to do so. This distinction has grown in importance as online transactions have grown on average 17 percent a year not including the dreaded 2020.

Not surprisingly, the merchants are complaining. They argue, and the Federal Reserve agrees, that since many issuers do not offer the use of SMS to process online transactions they often find themselves unable to choose a competing network. In response to these concerns, the Fed has proposed adding commentary to Regulation II specifying that card-not-present transactions are a specific type of transaction for which a merchant must have access to at least two unaffiliated networks.

After reading the preamble, I’m curious if this will have any impact, particularly on smaller credit unions, or if the Federal Reserve’s new mandate can be accomplished with a touch of a button. If it is the former situation, then get the word out to you association ASAP; if it is the latter, well it was only a matter of time before regulators caught up to the huge shift towards online shopping.

May 10, 2021 at 9:08 am Leave a comment

Get Ready For A Bigger Tax Collection Role

The White House is planning on financial institutions to play an important role in helping to pay for the $1.9 trillion spending plan the President will unveil tonight. 

As explained by the Wall Street Journal, the Biden Administration is proposing increasing the IRS’s budget with the hope of taking in more tax revenue.  An important part of the plan is to expand the reporting obligations of financial institutions.  As explained in this fact sheet released by the White House.  “It would require financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.”

Because I’m such a helpful fella, I provided this link to the IRS website just in case you are a little rusty about how backup withholding works.  Call me wacky, but if this plan goes through, it’s going to increase the incentives some people have to be less than truthful about their income. 

Of course this is just a proposal, but if history is any guide, a President’s initial budget proposals are among the most impactful and Congress will have to come up with ways of paying for all of this increased spending. 

Assembly To Hold Hearing On Remote Notarization

One of the initiatives being advocated for by the Association is to make remote notarization – the ability of notaries to certify documents in a virtual environment – a permanent part of New York State law.  An important step towards that goal will take place a week from Friday with the announcement that the Assembly Government Operations, Banks, Consumer Affairs and Protections and the Judiciary Committees will be holding a joint virtual hearing on the subject.  We will be following up with additional information in the coming days.

This Can’t Be Good…

According to a statement released by the CFPB yesterday, mortgage servicer Mr. Cooper made unauthorized withdrawals resulting in hundreds of thousands of consumer bank accounts being debited for multiples of their mortgage payments.  In a terse statement, the CFPB said it is taking immediate action to “understand and resolve the situation”.  This sounds like it is going to get worse before it gets better.  Brace yourself for the reactionary guidance that will undoubtedly be issued by financial regulators in the coming days.

On that note, enjoy your day.

April 28, 2021 at 9:35 am Leave a comment

Untangling the Mortgage Mess

In the immortal words of William Shakespeare “Oh, what a tangled web we weave when we try to mess up the regulatory agenda of the incoming administration”. 

Over the last few months yours truly has been hesitant to talk too much about changes to the Qualified Mortgage regulations since the rules are as likely to take effect as Joe Biden is to be endorsed by a coal miner union.  But, those of you who originate mortgages for sale to the GSEs are experiencing one of the most confusing periods of regulatory uncertainty in more than a decade.  It is beginning to have some real consequences.  Here is some background. 

Dodd-Frank mandated that the CFPB promulgate regulations defining a Qualified Mortgage. As readers of this blog also know, Dodd-Frank also stipulated that mortgages purchased by Fannie Mae and Freddie Mac would also qualify for Qualified Mortgage protections.  This exemption was only expected to last as long as Congress figured out what to do with the GSEs, or January 10, 2021.  The CFPB finalized regulations late last year eliminating the QM patch and amending the general QM regulations.  Under these new regulations qualified mortgage designation would be determined based on a mortgage’s APOR.  The Bureau issued a final rule to amend the General QM definition in December of 2020. This rule took effect on March 1, 2021 and has a mandatory compliance date of July 1, 2021. 

To the surprise of absolutely no one, the new leadership at the CFPB announced that it was considering making changes to the revised QM definition.  It has proposed extending the compliance deadline until 2022.  In the ensuing months it will undoubtedly be coming up with a new QM definition. 

But here is where the deal gets even more complicated.   Remember back in 2008 when the federal government had to bail out Fannie and Freddie for fear of triggering a Great Depression?  As part of that bailout, a conservatorship was created for the GSEs and since that time the Treasury has imposed contractual obligations on the GSEs in return for the hundreds of billions of dollars they received from the American tax payer.  (We don’t like using this term in America, but Fannie and Freddie have been nationalized.)  This agreement was recently amended.  Under this agreement, as things currently stand, the GSEs are obligated to begin implementing the new APOR standard on July 1st.  This means that even though the CFPB has already signaled its intention to reconsider the new QM definition, lenders that work with the GSEs have to start preparing new policies and procedures for the July 1st deadline.

Against this sordid backdrop, CUNA yesterday issued this letter urging the Treasury to promptly remedy this situation.  As CUNA noted, forcing the GSEs to implement these changes “would be unnecessary, wasteful, and ultimately harmful for consumers as the implementation cost may also increase the cost of credit.”

It is hard to underestimate the man hours involved in preparing for these types of major changes.   

Let’s hope this glitch gets resolved quickly before all of this confusion begins to have practical consequences. 

NCUA Meeting Recap

Here is NCUA’s recap of yesterday’s Board meeting.  Remember that the Board already approved the interim regulations giving credit unions greater PCA flexibility.

On that note, enjoy your weekend.  Let’s hope it gets warmer. 

April 23, 2021 at 10:28 am Leave a comment

SC Makes it Easier to Reach out and Touch Someone

It’s been more than a week now since a unanimous Supreme Court dramatically narrowed the reach of the Telephone Communication Protection Act (TCPA) and you can still hear the moans coming from class action attorneys everywhere who were feasting on alleged violations.

Since 1991, Congress has prohibited businesses from using auto-dialers to reach out to consumers without first getting their permission.  An auto-dialer is a device that has the capacity:

“(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and “(B) to dial such numbers.”

Violations of the Act start at $500 and go up to $1,500 for willful violations.  In recent years, the TCPA has been used against both banks and credit unions.  In Facebook, Inc., Petitioner v. Noah Duguid, et al, Facebook was sued by a disgruntled consumer who received text messages that someone was trying to access his account.  The problem was that he, like your faithful blogger, is one of the 10 people left in the universe who doesn’t have a Facebook account.  Since Facebook reached out to him without his permission using an automated system, he claimed that it violated the TCPA.

Had his argument been successful, every cell phone in America would come within the reach of the TCPA.  In contrast, the Supreme Court decided as a matter of statutory interpretation that Facebook had the better side of the argument.  The Supreme Court ruled that for the TCPA to apply, the automated system must use a random or sequential number generator to both store and produce numbers to call.  Facebook uses an automated system to call its members, but does not use a random or sequential number generator. 

The Court said that it was up to Congress to give Mr. Duguid the interpretation he was looking for.  Senator Markey indicated that he plans to do just that.  In the meantime, hundreds of suits are legal dead ends.

April 9, 2021 at 9:22 am Leave a comment

CFPB Proposes Nationwide Foreclosure Moratorium

In one of the most aggressive claims of regulatory authority in decades, the CFPB proposed regulations yesterday that would sharply limit the ability to begin foreclosure actions until the end of the year. 

To make sure borrowers aren’t rushed into foreclosure when a potentially unprecedented number of borrowers exit forbearance at around the same time this fall, the proposed rule would provide a special pre-foreclosure review period that would generally prohibit servicers from starting foreclosure until after December 31, 2021.”

To accomplish this goal regulations would create a new temporary COVID-19 pre-foreclosure emergency review period that wouldn’t expire until the end of the year.  The regulation would be coupled with enhanced loss mitigation options.  For example, current regulation already requires servicers to attempt to make live contact with delinquent borrowers.  The proposed rule would amend these regulations to mandate that borrowers be told about COVID-19 loss mitigation options.  The new time period for evaluating loss mitigation options would effectively prohibit foreclosures. 

Where does the CFPB have the authority to impose this de facto moratorium? It points out in the legal authority section of the regulations preamble that § 1032 of the Dodd-Frank Act mandates that the Bureau “shall consider available evidence about consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.” 12 U.S.C. 5532(c).  It argues that researchers have pointed to a link between financial stress and poor decision making that a longer pre-foreclosure period would help address. 

For those of us in New York, the regulations wouldn’t be all that different than statutory requirements which our elected representatives voted on and chose to put in place.  In contrast, I have half-jokingly referred to the CFPB Director as the benign dictator of consumer protection law.  If this regulation is allowed to take effect, I won’t be joking anymore.  No elected representative voting to create the CFPB thought they were giving an unelected bureaucrat overseeing an independent agency the right to preempt state property law in the absence of explicit Congressional authority. 

To be clear, I am proud of working for an industry that by and large does everything it can to avoid foreclosures.  But, for those of you in support of the Bureau’s action remember, that there will someday be a Director in charge appointed by a president with whom you disagree.  Do you want him or her to be able to exercise this much power?

April 6, 2021 at 10:04 am Leave a comment

Are You Ready for the COVID Regulatory Wave?

Recent announcements by the CFPB underscore that the next COVID regulatory wave is coming.  In addition to familiarizing yourself with the most recent guidance, now is the time to double check all your files and make sure you can explain to your examiner why you took the steps you took during this very unique time in banking history. 

The trigger for this somewhat paranoid opening paragraph is recent announcements by the CFPB.  On March 31st the Bureau announced that it was rescinding a previous guidance which relaxed various regulatory expectations and requirements during the pandemic.  In effectively announcing that it was putting the gloves back on, the Bureau explained in the accompanying press release that “Providing regulatory flexibility to companies should not come at the expense of consumers.” 

The funny thing about this comment is that the Bureau prides itself on being a fair, objective, data driven regulator.  I’m curious what evidence it has to suggest even indirectly that this regulatory flexibility has come at the expense of consumers? I would suggest that a relaxation of regulatory mandates provides a mechanism for small to medium size financial institutions to put their resources towards helping members on a case by case basis rather than checking off regulatory boxes.  But then again, I don’t have the resources to do that kind of analysis. 

Then yesterday, the Bureau issued this strongly worded admonishment warning mortgage servicers against being unprepared for an anticipated wave of troubled mortgages as forbearances come to an end.    In states like New York which already have imposed rigorous forbearance requirements, this warning comes across as somewhat duplicative, but you should still take the time to read it.  Again, I can’t help escape the feeling that financial institutions are being assumed guilty until proven innocent. 

Is there any way to prepare for the regulatory wave?  Document-document-document what you have done and why you have done it.  In addition, double check to make sure your policies and procedures are up to date; after all, between the GSEs, federal legislation, state legislation, the CFPB and state level regulators, there has been no shortage of regulatory mandates with which you must demonstrate familiarity even as you try to help out your member.      

While the vast majority of credit unions aren’t large enough to be directly subject to its supervisory oversight, as the ultimate interpreter of virtually every significant federal consumer protection law, the Bureau sets the tone for examiners throughout the country, particularly in states like New York which have developed state level consumer bureaus. 

What has me ticked-off this morning is that the Bureau has proclaimed that this avalanche of regulations is more important to enforce than allowing institutions to continue to work through the pandemic in good faith. 

Maybe the Bureau hasn’t read the news in the last couple of days, but the virus is still spreading.    

April 2, 2021 at 9:40 am Leave a comment

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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.

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