Three Things You Need to Know about What’s Going on in D.C.

Yours truly overslept a little this morning, but having just visited the nation’s capital with a hearty group of New Yorkers, I wanted to get out some thoughts to you on what’s going on at the federal level while it is fresh in my mind.

First, the most practical news you need to know is that, if all goes according to plan, the House of Representatives will pass the SAFE Act later today. This is the bill that would essentially allow financial institutions to provide banking services to marijuana-related businesses in states where it is legal to do so. Of course, it remains to be seen whether the Senate will take up this legislation. For what it’s worth, however, I am cautiously optimistic. Even people opposed to the legalization of marijuana understand that it simply is not safe to make legal businesses carry around millions of dollars in cash because financial institutions cannot legally accept their money. Of course, if the SAFE Act does pass, it will put that much more pressure on the state to develop a framework for the legal sale and distribution of marijuana for recreational purposes.

Point number two, what is going on with data security? Despite the fact that virtually every single industry in this country is losing billions of dollars to cyber theft every year, that almost every financial institution has members who are victimized by hackers, and that the last few years have demonstrated that having a robust cyber infrastructure is a crucial national security issue, no one seems willing or able to come forward with a bill that addresses the issue on the national level. What is going on here? I honestly don’t get it. In the absence of federal action, we will see more action on the state level. This is far from ideal. This is a classic federal problem that needs a federal solution, but if Congress won’t act, someone will have to.

Finally, there is a generational and ideological shift taking place within the Democratic Party. On both the state and federal level, you are seeing established members being primaried, often by younger candidates whose views would have made them unelectable just five years ago. I’m concerned that credit unions aren’t adequately preparing for this decisive shift. Credit unions have for decades fought against the banks to keep their tax exemption, but I’ve said it before, and I’ll say it again. The greatest long-term threat to the credit union industry comes not from pro-bank legislators, but from younger progressives disillusioned by the entire financial system that are skeptical of whether credit unions do enough to help the average consumer.


September 25, 2019 at 9:24 am Leave a comment

NCUA Gets Tough on Secondary Capital

You can be forgiven for wondering if NCUA woke up on the wrong side of the bed when it decided to issue its 23 page guidance to its staff detailing the minimum standards they must use when evaluating the proposed uses of secondary capital by Low-Income Credit Unions (LICUs). Since 1996, secondary capital has been authorized for LICUs to enable them to better serve low-income communities where it may be difficult to raise funds by solely relying on membership growth. In contrast, it is clear after reading this guidance that NCUA has grown weary of how this capital has been used. The bottom line, get ready for some extensive work if you are hoping to incorporate secondary capital into your credit union plans.

Since it has been a while since I’ve blogged on this, let’s go over the basics. LICUs are credit unions, the majority of whose membership is comprised of members with a family income at or below 80% of the Federal Poverty Level. Secondary capital is a type of subordinated debt offered by a LICU to non-member organizations and businesses that can be used for capital. The key is that it is uninsured and must have a maturity of at least five years.

When the authority was originally granted to credit unions, they didn’t even have to get prior approval from the NCUA. My, how times have changed. Starting in 1996, NCUA had to grant approval of secondary capital plans and now this regulation, I mean guidance, imposes detailed planning requirements and underscores the broad power that regional examiners have to reject such plans or insist on modifications in the name of safety and soundness. For example, in addition to the already extensive list of criteria that credit unions must submit with their capital plans pursuant to Section 701.34, NCUA sites its “implicit” safety and soundness authority pursuant to put credit unions on notice that it can demand that they provide information over and above that which is mandated by the regulations. For example, “the NCUA expects LICUs to provide supporting due diligence documentation that adequately captures all aspects of the financial strategies associated with the deployment of secondary capital in the plan.”

Another striking part of the guidance is the tone it takes regarding the oversight of credit unions that are state charters. The guidance makes clear that NCUA feels it owes no deference to the determinations of State regulators regarding a state chartered credit unions’ secondary capital plan. That means that at least with regard to secondary capital, the common notion that state chartered regulators are the primary regulators of a state-chartered institution is farcical. One more thing, now that I am on a roll. This is the first example I’ve seen in a while that is so detailed and descriptive that it amounts to a de factor amendment of existing regulation. This is precisely the type of change that should be subject to a notice and comment period. The fact that it is not demonstrates that the Administrative Procedures Act needs to be amended.

September 23, 2019 at 8:15 am Leave a comment

NCUA Board Approves Important Changes

Okay, I know that headline does not exactly grab your attention, but I’ve only had one cup of coffee, and I wanted to convey that the NCUA had one of its most substantive get-togethers in months. What the Board did yesterday helps clarify the steps federal credit unions can take to deal with that disruptive member. It also gives you greater flexibility to provide payday alternative loans.

First, the PAL loans are getting all the attention, particularly since the proposal passed only after a dissenting vote by Board Member Todd Harper. But let’s not overreact here. Since 2010, NCUA has given credit unions authority to exceed the usury cap, provided they are offering members short-term loans as opposed to predatory payday loans. The problem is that the requirements are so restrictive that credit unions have been slow to embrace their authority. As of 2017, 518 FCUs reported offering PAL loans. With its actions yesterday, NCUA gave credit unions greater flexibility in offering these loans by, among other things, authorizing them to make loans up to $2,000 and doing away with a minimum loan amount requirement. I love this last change because it reflects the reality of what many credit unions do for their members: they give them what they need, not more. They have simply never classified it as a PAL loan before.

I know that there are blog readers out there who will be happy to know that NCUA has finalized the bylaw changes. Stylistically, I think creating a specific section of the bylaws dedicated to defining a “member in good standing” will make it easier for everyone to understand precisely what a member’s obligations are, and how he or she can lose some of the privileges of membership. In addition, codifying legal opinion letters explaining what steps credit unions can take against members behaving badly is long overdue. On the negative side, the new Section 5 definition of a member in “good standing” stipulates that you cannot limit services to a member “who is not significantly delinquent on any credit union loan…who has not caused a financial loss to this credit union.” This qualifier may create much angst for credit unions seeking to define what exactly constitutes a “significantly delinquent” member.

Incidentally, it seems that some credit union are a little gun shy when it comes to dealing decisively with members engaging in clearly inappropriate conduct. I love this summary in the preamble to yesterday’s bylaw amendments: “an FCU may take immediate action to address situations in which a member is violent, belligerent, disruptive, or poses a threat to the credit union, or other members, or its employees even if the FCU Act prohibits the FCU from immediately expelling the member.”

Finally, this regulation makes updates to audit requirements. There doesn’t seem to be any big changes here, but you should probably run this by whoever works with your supervisory committee.

On that note, enjoy your weekend.


September 20, 2019 at 9:41 am 1 comment

CFPB Gets Interesting Again

Following the ascension of Director Kraninger, the CFPB was in danger of becoming a typically low profile bureaucracy. Fortunately for those of us who need blog content, it’s getting interesting again.

First, it announced that it would not defend itself against charges that its leadership structure was unconstitutional. Second, it explained its plans for the continuing use of the dreaded consumer complaints database, about which I have long complained. I can’t believe she’s not taking my advice.

First, let’s get up to speed on the issue of the CFPB’s constitutionality. Starting with the D.C. Circuit’s short lived majority opinion by then-Judge Kavanaugh, opponents of the agency have argued that the director of the CFPB should serve at the will of the President. In contrast, the director can only be removed for cause, meaning that he or she can act independently of the President. I delve more into the constitutional issues in this blog.

Although the D.C. Circuit effectively decided to reverse Justice Kavanaugh’s initial ruling, the logic he laid out has inspired other litigants to make similar claims. There is currently a case pending before the Court of Appeals for the Second Circuit, which has jurisdiction over New York, but the case that has everyone’s attention is CFPB v. Seila Law LLC., in which the Ninth Circuit upheld the CFPB’s management structure. Earlier this week, the CFPB joined with the Justice Department in refusing to defend its existing structure. The Director is joining with some of the Bureau’s worst critics to argue that she has too much job protection.

In a speech in Illinois yesterday, she explained that it’s important to get the uncertainty about this issue resolved, and, in any event, if the Court does rule in favor of the Bureau’s critics, work will still go on as usual. She stated her “decision to no longer defend the removal provision does not mean that the Bureau will stop its work. Far from it. I remain fully committed to fulfilling the Bureau’s statutory responsibilities. We will continue to defend the actions that the Bureau takes now and has taken in the past.”

She also used this speech to announce that the Bureau’s publicly available consumer complain database is here to stay, although with a few tweaks. I’ve never been a big fan of this publicly available database. While it is of course crucial for the Bureau to collect information about and respond to consumers, as anyone who has spent any time at all in or around a financial institution knows, there should be a mechanism for separating legitimate complaints from the rantings of wackos. Furthermore, the database is by definition a self-selecting source of information in that the people most likely to use it are those dissatisfied with its services, and do not necessarily represent consumers as a whole. For example, I’m sure there are a lot of complaints about overdraft fees from dissatisfied customers; with few comments from consumers who consistently tell credit unions that they want and need overdraft protections.

In her speech yesterday, the Director said she was going to take steps to put the information in its database in better context. Specifically, the Bureau plans to enhance the system by using more graphics, and it also is going to encourage consumers to use other parts of its website where their gripes can be more constructively dealt with.

September 19, 2019 at 9:23 am Leave a comment

New State Law Provides Enhanced Account Benefits for Senior Citizens

State Increases Basic Banking Account Requirements

The laws keep on coming. On September 13th, the Governor approved legislation (Chapter 260 of the Laws of 2019) increasing the number of free withdrawals that consumers 65 years of age or older using certain types of basic banking accounts can make. The law only applies to state chartered credit unions.

Section 14f of New York’s Banking Law was originally passed in 1994. In return for several banking deregulation measures, the banking industry agreed to legislation mandating the creation of so-called basic banking accounts. Under the existing statute, members are entitled to, among other things, eight free withdrawals per month. The accompanying regulations fill in more of the details. The initial deposit amount must not exceed $25.00 or require the consumer to maintain a minimum balance.

The statute has never been applied to federally chartered institutions. This is consistent with its plain language, which refers to state chartered institutions and was confirmed in a statement issued by the Banking Department after the legislation was originally passed according to a 1995 analysis of the legislation conducted by the Consumer Finance Law Quarterly, which I was able to pull off of Westlaw this morning.

In the past, the basic banking account requirement hasn’t troubled many credit unions, which by definition offer share draft accounts with a minimum charge for membership, although the minimum transaction requirements can be problematic. Still, the Legislature should be mindful of the fact that every time it imposes a mandate, which it cannot also impose on federally chartered institutions, it is making the state charter that much less attractive to institutions considering converting. The law takes effect October 3rd.

It Could Be Worse

The article that came out in yesterday’s CU Times detailing the dramatic shift in the fortunes of Municipal Credit Union in New York City is yet another piece of bad news in what has frankly been a tough news cycle for NYC credit unions.

On the bright side, at least Municipal wasn’t involved with Medallion Loans. In fact, in most respects, the credit union is an ultra-conservative financial institution. It has no commercial loans on the books; a reasonably sized point of sale indirect lending program, and has no loan participations.

Still, the article spurred me to pull up the credit union’s financial performance report, and the bottom line numbers make for depressing reading, particularly its dramatic decrease in net worth. Let’s hope the situation can be stabilized. Municipal is one of the most venerable institutions in the industry.

Repo Madness?

I woke up this morning to analysts on Bloomberg Radio trying to explain the Federal Reserve’s need to dramatically intervene in the short-term lending market yesterday, with terms such as “idiosyncratic” and “technical.” The same comforting gobbledygook was provided in the Wall Street Journal. I feel much better now.

It has been my experience that when the captains of industry start throwing around terms like this, they really have no idea why the market is behaving the way it is, but are hopeful that things will go back to normal before anything really bad happens. So, maybe it is no big deal that the Federal Reserve had to aggressively intervene to provide liquidity for overnight loans for the first time since the Great Recession, but you might want to keep an eye on what’s going on anyway.


September 18, 2019 at 9:37 am Leave a comment

Rep. Maloney Unveils Bill to Cap Overdraft Charges

Prominent New York City Congresswoman Carolyn Maloney recently introduced the Overdraft Protection Act of 2019. As a long-serving member on the House Financial Services Committee, with a long history of engaging on important consumer protection issues, her proposal should of course be taken seriously. It would have a substantial impact on many credit unions.

The bill would generally cap the fees that can be charged on all forms of overdrafts and impose additional disclosure requirements on financial institutions. This is great news as I have always thought that what the Truth in Lending Act needs is more mandated disclosures.

The legislation would have quite the operational impact on your credit union if you charge overdraft fees. Specifically, you could not charge a member more than one “overdraft coverage fee” in any single calendar month and “not more than six overdraft coverage fees” in any single calendar year on any single transaction account. Furthermore, the amount of an overdraft fee would have to be “reasonable and proportional” to the amount of the overdraft. Presumably, deciding what is reasonable and proportional would be up to federal regulators.

To make sure your members have access to all this new information, your periodic statements would inform consumers of the dollar amount of all the overdraft coverage fees and insufficient fund charges for both the relevant period and for the year to date. And of course, the legislation makes it an unfair and deceptive practice to engage in deceptive marketing of these products. Plus, you would be mandated to give your members real time information about when an overdraft might be triggered. If a member is withdrawing money at a branch, the teller with whom they are dealing would have to inform them that their withdrawal would trigger an overdraft. Consumers would also be provided this information when making ATM transactions.

This is one of those classic issues where reasonable people ultimately have to agree to disagree. I’ve spoken to many credit union people over the years about this issue, and although there is some disagreement, many of them will tell you that the members who use overdraft protections most are not the victims of poorly drafted disclosures. More often, they are busy, disorganized consumers who willingly pay the fee to avoid bouncing checks.

Furthermore, caps don’t work. A bank product is like any other product, and to the extent that government tries to figure out what constitutes a reasonable fee, it is simply making it less likely that the service will be made available to consumers.


September 16, 2019 at 9:20 am 2 comments

Key Points to Remember About New York’s Student Loan Servicer Framework

Greetings, folks.

I’m taking some time off from filling out my application to be the fourth National Security Adviser – fourth time is a charm – to provide you an update on an issue that has been percolating in and around New York Credit Union Land for about a month now. As I previously explained, the New York State Department of Financial Services has issued proposed regulations setting up license requirements for student loan servicers. The regulations follow passage of legislation in last year’s budget making New York the first state in the nation to set up such a licensing scheme, or so it claims. Here are some of the key points to keep in mind.

As the state aggressively moves to fill in the perceived gaps in federal regulatory activity, there is always a basic question as to what laws apply to federal institutions. The statute and the proposed regulations set up a framework similar but not identical to that in place for exempt mortgage loan servicers. Neither State nor federal credit unions have to be licensed as loan servicers, but they do have to register with the State, and they do have to comply with a prescriptive list of mandates.

The statute and proposed regulations establish minimum servicing standards and outline prohibited practices. Any entity servicing student loans in New York State would be subject to these requirements, unless a court or administrative agency rules that they are preempted by federal law. For example, they are prohibited from engaging in fraudulent schemes or deceptive practices. In addition, they must ask the borrower how to apply nonconforming payments. The regulation also creates a tricky regulatory drag net in which servicing does not include collecting on a defaulted student loan that is delinquent for 270 days or more. This means that any entity trying to collect on a student loan that is delinquent for less than 270 days would have to be licensed as a servicer or be exempt from licensing requirements.

As for reporting requirements, the regulations stipulate that only licensed entities would have to make reports to the state, but all loan servicers would have to keep books and records. The State reserves for itself the right to examine all loan servicers for compliance. Given the severity of potential penalties outlined in the statute, this is no small matter. One of the key unanswered questions is whether the State can exercise supervisory powers to monitor compliance with this requirement. I strongly suspect the answer is no, but that will ultimately be for a court to decide.

But even if you are not concerned about State oversight, remember that there is a second way you will be held accountable under this framework. The Legislature made plain in the statute that violations of these provisions are grounds for suing the loan servicer.

So, how much will this impact your credit union? If you are a credit union that does its own servicing, then these new requirements could be burdensome. For instance, the regulations presuppose the ability to provide online access to the entire history of a student loan, and seem to assume that all institutions have the ability to offer multiple loan mitigation options. In other words, in a worse-case scenario, this is another example of regulations being imposed on institutions with no regard for the fact that not every financial institution has the staff of Wells Fargo. But for other credit unions, my personal opinion is that the risk posed by the regulations and statute does not come primarily from overzealous regulators, but from increasingly aggressive plaintiff lawyers who have been given a new statute around which to craft class action lawsuits.

In the meantime, I await my call from the President.

September 11, 2019 at 9:07 am 2 comments

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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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