NCUA notched another important legal victory in its quest to have the investment banks which sold residential mortgage backed securities to the corporates prior to the Mortgage Meltdown pay up for allegedly not adequately warning of the risks involved in buying these securities. The NCUA announced in April that it had recovered more than $3 billion in settlements. But remember that the lawyers have to be paid and the litigation could still drag on for many years.
To understand yesterday’s decision it’s necessary to take a not so pleasant trip down memory lane. In 2009 NCUA took over Wescorp, then the second largest corporate credit union, after the RMBS’s it had purchased tumbled in value. Remember that these bonds are pools of packaged mortgages and investors are paid off from the stream of mortgage payments. When homeowners stopped paying their mortgages these securities became almost worthless, necessitating a lifeline from the Treasury Department and the creation of the Stabilization Fund that all credit unions had to pay into.
NCUA became the first federal agency to sue the investment banks. Its basic argument is that they failed to properly disclose the risks of buying the securities to the corporates because they knew that many of the packaged mortgages were destined to tumble faster than Donald Trump’s poll numbers.
A central issue in this litigation has been whether or not federal law gives NCUA six years to bring these lawsuits under what’s called the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) or at most three years under the Securities Act of 1933. If the Securities Act applies NCUA’s claims are time barred.
Yesterday, the Court of Appeals for the Ninth Circuit reversed a lower court ruling and ruled that the longer period applied. NCUA can continue its suit against Wachovia Trust and Nomura Home Equity. (NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of W. Corp. Fed. Credit Union, Plaintiff-Appellant, v. RBS SECURITIES, INC., FKA RBS Greenwich Capital Markets, Inc., Defendant, & NOMURA HOME EQUITY LOAN, INC., Defendant-Appellee., No. 13-56620, 2016 WL 4269897, (9th Cir. Aug. 15, 2016) The decision means that two federal circuits have now upheld the right of NCUA to bring these suits which translates into more money for credit unions. The Tenth Circuit reached a similar conclusion in Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th Cir. 2013).
Of course, everyone wants to know how this is going to impact their bottom line but the truth is no knows yet. This litigation could drag on for years. For instance, the investment firms could appeal yesterday’s decision to the Supreme Court and the core allegations still haven’t been litigated. But give NCUA credit. It’s already had more success than many people, including this blogger, thought it would when it decided to call in the lawyers.
Wake up kids, the purpose of this blog is to remind you that summer is almost over and there is a ticking regulatory time bomb right around the corner. The good news is that we expect further guidance on this regulation in the near future.
I am referring to regulations expanding the scope of the Military Lending Act. When Congress first passed this Act, regulators decided to clamp down on payday loans, refund anticipation loans and vehicle title loans provided to active-duty military personnel and their dependents. In 2015, regulators decided it was too easy to evade the restrictions placed on these loans, so the MLA now extends to most consumer credit transactions. Compliance becomes mandatory in October, but restrictions on credit card accounts become mandatory in October 2017.
Even if you don’t lend to many military members, this regulation will have an operational impact on your credit union. First, when you do make a covered loan to a member of the military, such loans are subject to a military APR of 36%. This APR is calculated differently than the traditional APR under Regulation Z. Most notably, it includes application fees.
You already have an obligation under the MLA to identify military personnel. But since many of you do not offer vehicle title loans, for example, this requirement wasn’t of great concern. But now, with the expanded number of loans covered under the Act, you should know what procedures you are going to use to identify covered persons. Two options provide you with a safe harbor to demonstrate compliance. One option is to access an MLA database maintained by the Department of Defense. A second option is to obtain a consumer credit report.
On that note, I hope you had a nice weekend. Now get to work!
I’ve written extensively about the hazy state of pot regulation in this country and how it has virtually paralyzed credit unions and banks that might otherwise be willing to provide services to pot businesses. So I think it is worth noting that sometime today, the DEA will reportedly be rejecting a high-profile petition seeking to remove Cannabis from the Government’s most restrictive drug classification.
New York is one of approximately half the states in the Nation and the District of Columbia that has voted to legalize marijuana to one extent or another. But banks and credit unions have been justifiably reluctant to provide financial services to pot businesses. This is because marijuana remains unequivocally illegal under the federal Controlled Substances Act. In fact, pursuant to the Act, the DEA classifies marijuana as a Schedule I drug, its most restrictive classification. Critics have argued for decades that this restriction makes it almost impossible to perform the type of scientific research that would determine what medical benefit, if any, pot has.
As explained in this analysis by the Brookings Institute, rescheduling would “not suddenly legalize marijuana” or “solve the policy disjunction that exists between states and the federal government on the question of marijuana legality.” Those same researchers noted, however, that a successful rescheduling petition would have effects on drug policy since it would be interpreted as recognition by the federal government of accepted medical uses for marijuana. This is why advocates ranging from U.S. Senators to the National Conference of State Legislatures have endorsed rescheduling.
On a practical level, such a shift may have allayed the fears of regulators who are reluctant to allow financial institutions to enable pot businesses to access the Federal Reserve Banking system. The decision leaves the status quo intact. The next big event in the pot wars will come when the Court of Appeals 10th Circuit rules on an appeal from a state-chartered credit union in Colorado that was denied access to the Federal Reserve System and Share Insurance by the NCUA.
America’s Uneven Housing Recovery
Another issue which I have obsessed about in this blog is the state of America’s housing market and the causes that may lie behind its relatively sluggish rebound during this so-called recovery. Lest you think these are just the concerns of a curmudgeonly blogger with a glass half-empty perspective, you should read the lead story in today’s Wall Street Journal, which explains that the recovery that began in 2012 has “left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans.” This is not an op-ed penned by Bernie Sanders, but a front page article that is worth a read.
Hanging with the kids tomorrow. See you Monday.
In Monday’s blog, I talked about new regulations clarifying your responsibility to send out federally mandated notices to Successors-in-Interest in real property – people who have a right to property by operation of law but who may or may not decide to assume responsibility for the property. The CFPB adopted an expansive definition of successors-in-Interest and wants you to continue to provide them necessary notices – such as loss mitigation options, if their property is delinquent.
The CFPB’s regulations got me thinking about a recent case my colleagues at OwnersChoice Funding, the Association’s mortgage arm, gave me a heads-up on. It underscores that for those of you responsible for mortgage compliance, you need two separate charts: one detailing your federal requirements and a second outlining your NYS obligations.
As many of you know, New York Law requires the following: Notwithstanding any other provision of law, with regard to a home loan, at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the borrower, including mortgage foreclosure, such lender, assignee or mortgage loan servicer shall give notice to the borrower in at least fourteen-point type. See N.Y. Real Prop. Acts. Law § 1304 (McKinney). The statute mandates that the notice is to be sent to the borrower by registered or certified mail and by first class mail to the last known address of the borrower. Proper notice is a condition precedent to a foreclosure.
Incidentally this notice requirement was imposed long before the general public had any idea who Elizabeth Warren was, let alone her wacky idea of creating a federal consumer watchdog agency. As a matter of fact, New York was one of the states that informed the CFPB’s loss mitigation regulations.
The problem is that the statute doesn’t define who a borrower is and this has created the opportunity for mischief-making as more lawyers get involved in foreclosure defense, which not too many years ago was an oxymoron, as farfetched as a Trump Presidency. For example, what happens if a parent dies with an outstanding mortgage? The property is willed to the kids, who become successors-in-Interest, but they don’t assume the mortgage or take out a new one. A few years later the bank decides it’s time to foreclose on the property. Do they have to send out a pre-foreclosure notice to the kids? This is exactly what happened in US Bank N.A. v. Levine, No. 54232/2015, 2016 WL 3677195, at *2 (N.Y. Sup. Ct. July 11, 2016). The court said the answer is no. The judge adopted the logic of a similar earlier ruling, which explained that “While the statute does not define that term, logic dictates that a ‘borrower’ is someone who, at a minimum, either received something and/or is responsible to return it.”
Chalk one up for common sense. But all this comes with a huge caveat. No appellate court – the ones that set most binding precedents – has addressed the issue, so if you find yourself foreclosing on an estate, you may find yourself having to deal with similar arguments for years to come.
Just joking. But there really is some interesting news today.
Oracle Breach Shows We Are Even More vulnerable Than We Think
Word is trickling out of a data breach which is potentially more troubling than most. Krebs on Security, the Uber reliable blog of former Washington Post reporter Brian Krebs, reported yesterday that Russian cybercriminals have hacked into hundreds of computers at Oracle and may well have compromised a customer support terminal for Oracle’s MICROS point-of-sale credit card payment systems.
Judging by Oracle’s website, the MICROS system is used by a wide range of industries ranging from Cruise ships and hotels to restaurants and retailers . Avivah Litan, a leading cyber security expert at Gartner, believes that the breach may explain why so many shops, hotels, and retail outlets have suffered breaches at their point of sale systems in the past months.
As the internet becomes more deeply embedded into not only commerce but everyday machines and appliances expect more breaches that impact a wider array of products. The breach is already following familiar patterns indicating it will be even bigger then it now appears. For one thing, Oracle only confirmed the breach after being confronted by Krebs, who does more to alert the public to cyber threats than any of those laws requiring companies to notify government and the public of data breaches. Oracle is involved in so many different parts of the cyber infrastructure that we will be lucky if only its POS operations were compromised.
NY AG announces $100 million Libor settlement
New York Attorney General Eric T. Schneiderman announced that Barclays had reached a $100 million settlement with 44 states to resolve claims that it manipulated the London Interbank Offered Rate and other benchmark interest rates. According to the AG Barclays is the first bank under investigation by AG’s to settle LIBOR claims. It won’t be the last.
The LIBOR scandal hasn’t gotten the attention it deserves. LIBOR was set on a daily basis by banks reporting what they were being charged by other banks to borrow money. Since so many financial products were tied to the LIBOR it became too tempting for banks to submit false prices. In addition, as the financial crisis kicked in, Barclays ordered its employees to submit false information about how much they were being charged to borrow money. I didn’t see how big a piece of the settlement NY is getting but it’s safe to say that banker malfeasance has been a boom to the state’s coffers.
Olympian Gag Orders
This has absolutely nothing to do with your credit union or the financial industry but it’s one of my pet peeves. As really erstwhile readers of this blog l know I’m not a big fan of the Olympics. The athletes are great but a wonderful sporting festival has evolved into a made–for- TV reality show produced to entice the non-sports fan into watching sports they otherwise wouldn’t care about in the slightest but for the fact that America is going for the Gold. It’s like the NCAA basketball tournament on steroids. If you harbor any doubts about just how commercial this celebration of amateur athletics is read this article on trademark restrictions.
“Participating athletes themselves may not tweet or post about a sponsor in an advertising context that implies their association with the games, unless they’ve gained prior approval, according to U.S. Olympic Committee guidelines. Athletes found to violate these rules could be forced to withdraw from competition or be stripped of their medals, according to the Olympic charter. “
Enjoy you day.
Your faithful blogger goes away for a couple of days to have a great time in Cape Cod and all Hell breaks loose: Two overpaid underperforming relics of the Yankees announce they will “retire” and the CFPB promulgates yet more regulations.
I exaggerate slightly, but the CFPB did release final regulations late last week that will require the adoption of new procedures when dealing with successors in interest. The regulations also provide some guidance on disclosure requirements and bankruptcy.
Generally speaking a successor in interest is someone who obtains the right to real property automatically through the operation of law. For example, your mom and dad might provide in their will that their son gets the family home when they die. But just because someone is a successor in interest doesn’t mean they will necessary assume responsibility for the property. For example, let’s say mom and dad died with a mortgage on the property which comes with hefty property taxes. Consequently, a successor in interest isn’t responsible for the mortgage unless he legally assumes responsibility for the home.
Lenders have been understandably reluctant to treat a successor in interest the same as they did the deceased owner. As a result consumer groups have complained that heirs haven’t received adequate information about loss mitigation options.
The new regulations address this problem. Lenders are responsible for clarifying how a person can identify themselves as successors and to provide them with the same notices the previous owners were receiving As explained in the preamble “the Bureau believes that successors in interest will benefit from other protections of the Mortgage Servicing Rules even if they do not occupy or intend to occupy the property, just as non-occupant borrowers currently do. For example, successors in interest, whether occupants or non-occupants, often encounter difficulties accessing information about the mortgage account and making payments and will benefit from the ability to submit requests for information and request payoff statements once they are confirmed.”
This is important stuff. It means more procedures and more trip wires for lenders even with a partial exemption for smaller mortgage servicers.
This is just one example in a wide-ranging regulation that your compliance person or people should be delving into. It also further complicates the interplay between New York and federal law, something I will be talking about as the week goes on.
By the way, the volume and complexity of mortgage regulations-remember the CFPB released additional mortgage proposals last week-underscores that it is becoming impossible for all but the largest institutions to be cognizant of and implement new regulations. This is what I do for a living. Where Is the person for whom compliance is just one of several responsibilities supposed to find the time to understand implement another round nuanced requirements packages in nine hundred pages of nuanced explanations?
Perhaps Mark Teixeira, who graciously announced that he would be retiring at the end of the season when his eight year, $180 million contract comes to an end, even though the Yankees had no intention of resigning him or Álex Rodríguez who is “retiring” on Friday to spare himself the embarrassment of being release by the Yankees, who still owe him another $25 million on his guaranteed contract are looking for something to do with their free time.
According to Ted Turner, you can either lead, follow or get the hell out of the way. I guess Ted never worked in the Credit Union Industry. It somehow manages to do a little bit of all three and sometimes none of them particularly well.
The latest example of how the industry is a day late and a dollar short when it comes to positioning itself with the American public is its reaction, or lack thereof, to the burgeoning #BankBlack initiative. The movement, started by Rapper Killer Mike, encourages African Americans to move their money to banks and credit unions as a way of underscoring the economic leverage of the Black community. In Monday’s Miami Herald, it was reported that 1,000 people turned out at a Miami branch of One United Bank, which, according to the paper, at $622 million in assets is the largest Black-owned bank in the country. Similar events have been held in Los Angeles and Atlanta.
Here’s what gets me so frustrated. Credit unions have a pretty good story to tell when it comes to minority owned credit unions, but, for whatever reason, are gun-shy about getting the word out. For instance, according to NCUA’s most recent report to Congress on its efforts to encourage and preserve minority credit unions, as of June 30, 2014 there were 688 minority credit unions, half of which were run by Black Americans. These institutions had more than 871,000 members. Of course, not all is well. The percentage of Black institutions is declining, which is hardly surprising given that the average asset size of these institutions is slightly more than $17 million.
Still, the historical impetus for credit unions was a recognition on the part of working class Americans, many of whom were first generation immigrants and Black Americans, that they needed to pool their resources to maximize their chances of living the American Dream. This is a story that can resonate as loudly today as it did 100 years ago. It should be clear to any group of people who want to combine resources to maximize their economic freedom that the credit union model is ready, willing and able to help.
The need to trumpet credit union values has bottom line implications. When someone walks into a bank, they know exactly what they are doing and have a pretty good idea of what to expect. In contrast, before someone opens an account with your credit union, they have to understand what a credit union is, how and why they are eligible to join, and what separates credit unions from banks.
This is a heavy lift. The industry, writ large, cannot help your credit union offer the best financial products, but it can and should make sure that every potential new customer who goes online or walks into your branch knows what a credit union is. This can only be done effectively when we demonstrate that many of the reasons that fostered the creation of credit unions in the first place still exist today.
On that note, your faithful blogger is headed to Cape Cod to meet up with my sister, reclaim my kids, and get some Four Seas Ice Cream. See you Monday.