Greater Non-Member Deposit Flexibility Comes with a Catch

Greetings, folks.

Hope you enjoyed your Thanksgiving holiday. I spent part of the time taking a closer look at two regulations, one proposed and one finalized that could have interesting impacts on your credit union operations.

The first regulation, which takes effect 90 days after its publication in the Federal Register, follows both state and federal credit unions to take in more public unit and non-member shares. Specifically, under 12 CFR 701.32 (b), credit unions could have up to 20 percent of total shares, or $3 million, whichever is greater, comprised of public units and non-member shares. Public units refer to public deposits, such as municipal funds. Non-member funds refer to uninsured funds from third parties, more generally referred to as secondary capital.

Under the rule which NCUA finalized recently, the limit on non-member and public shares is increased to 50 percent of paid-in capital and surplus less any public unit and non-member shares. The change in terminology is important because, as explained by NCUA, the change from total shares provides credit unions with greater flexibility to accept these deposits while at the same time effectively placing a cap on the amount of such shares that can be taken in by credit unions. The importance of this change will vary depending on how much net worth your credit union has. Its importance was underscored to me by a credit union recently, which pointed out that as New York hopefully authorizes credit unions to participate in Banking Development Districts, participating credit unions will have to be mindful of this subtle change in calculation. It also means that the higher your credit union’s net worth, the greater flexibility it will have to utilize this expanded authority.

A second proposed regulation underscores just how much and how quickly the mortgage lending industry is changing. The NCUA has proposed increasing the threshold below which appraisals would not be required for residential real estate transactions from $250,000 to $400,000. Similar steps have already been taken by the banking regulators after receiving a green light from the CFPB.

I love this proposal. It recognizes that, given the amount of information that lenders now have at their fingertips, as well as the desire on part of consumers to speed up the mortgage lending process, there are often better ways of assessing the value of property than having somebody walk around a home and make subjective judgments about how much it is actually worth.

WSJ Slams CUs

As I’ve said before, whenever there is news about credit unions in the Wall Street Journal, you can bet it isn’t good news. This article is certainly no exception. Read it for what it’s worth, but the reality is that if you’ve read banking industry talking points before, you’ve already read this article. The Wall Street Journal is arguably the best paper in the country, but this is a lousy piece of journalism.

December 3, 2019 at 9:30 am Leave a comment

Happy Thanksgiving

Hello, folks.

Yours truly is going on a blog hiatus until next Tuesday. I just wanted to take this opportunity to thank you all for taking the time to read my rants and to wish you all a happy holiday.

Image result for thanksgiving 2019

November 26, 2019 at 9:08 am Leave a comment

Where NY Stands on Hemp Legalization

When I last talked about this subject, I promised you that I would seek additional information about the current state of the law regarding hemp production now that it has been removed as a schedule I drug. The bottom line is this: those of you who have relationships with authorized growers and processors as a result of 2014 changes to the law can continue with those relationships. However, for those of you who do not have those relationships, it will probably take several months before entities can begin legally growing hemp in New York State.

As I talked about in a previous blog, in 2014, the federal government authorized states such as New York to offer hemp growers the opportunity to work with academic institutions. In 2018, the federal government legalized hemp but mandated that the U.S. Department of Agriculture establish a legal framework for states wishing to authorize the industry. The USDA has now issued temporary regulations and is accepting comments. The Association will be commenting.

After these regulations are finalized, New York State will have to promulgate its own regulations, as well as get approval for its program from the USDA. This process will take several months to complete, and until the process is done, the broader hemp authorization is effectively blocked.

On a practical level, here are my takeaways given the state of affairs. Most importantly, for those of you operating under the 2014 authorization, the status quo remains in effect. For those of you seeking to work with producers authorized under the 2018 legislation, there is much you can start to do to prepare for the legalization, such as due diligence and establishing policies and procedures which you can finalize and adjust once the regulatory framework has been set. However, what you should not do is assume that hemp is legal for all purposes in New York State right now.

Second Chance Guidance Finalized by NCUA

Here’s an important one for your HR people.

At its board meeting yesterday, the NCUA finalized new guidance explaining steps you should take when you find out a job applicant or existing employee has been convicted of a crime which may disqualify them from employment in your credit union. As I explained in this blog, these changes are long overdue. On a more cautious note, more and more scrutiny is being placed on employment practices as they relate to people who have been convicted of crimes. Read this guidance and update your policies and procedures accordingly.

Do we really need all Christmas music all the time?

I freely admit to being a glass half empty kind of guy. That being said, I think my cynicism is fully justified when it comes to the onslaught of 24 hour Christmas music a month and a half before the big day. Don’t get me wrong, if you want to listen to 24 hours of Christmas, get some headphones and satellite radio, and go crazy. But for those of us who watch too many sports, we are already being inundated with a Christmas season that now begins the day after Halloween. Too much Christmas too early takes too much fun out of what should be an upbeat time of year.

On that happy note, happy holidays, and enjoy your weekend.

November 22, 2019 at 9:49 am Leave a comment

With USAA Patent Win, Mitek Litigation Takes Center Stage

With the recent victory by USAA in its patent infringement suit against Wells Fargo, a lawsuit filed in a California federal court by Mitek on November 1st takes on added significance. The lawsuit seeks a declaratory judgment that Mitek has not infringed on remote deposit capture patents, which are at the core of this dispute. The outcome is crucial if you are one of the credit unions that are relying on contractual language mandating that Mitek indemnify you against patent infringement claims stemming from RDC technology.

As explained in the complaint[1], starting in 2017, USAA has “launched an aggressive licensing and enforcement campaign” in which the Epicenter Law, PC has sent out over 1,000 patent licensing demand letters to financial institutions across the country, “most of which are Mitek customers.”

As you can see, Mitek faces substantial exposure as it has to financially protect financial institutions from these claims. I’ve said it before, and I will say it again; please review your RDC contracts to find out who is responsible for protecting you against patent infringement claims.

On that note, enjoy your day.

[1] Mitek Systems v. USAA 5:19-cv-07223-NC

November 20, 2019 at 8:53 am 1 comment

A Tuesday Morning Hodgepodge

Sorry I got this out a little late this morning, but there are a few things I wanted to give you a heads up on.

Implications of USAA Patent Suit Analyzed

A faithful blog reader sent me this article (subscription required) from American Banker analyzing the implications of USAA’s $200 million trial verdict against Wells Fargo for a violation of its remote deposit capture technology. The article points out that many institutions have to wait and see how this unfolds, but in the meantime, it is likely that once the judgment is finalized, banks and credit unions will be receiving not so friendly letters from USAA requesting licensing fees. The article also does a good job of outlining the history of this litigation which also has important implications for credit unions. Specifically, Mitek and USAA collaborated on developing RDC technology in the early 2000s, but when the relationship soured, the lawsuits started. In 2012, USAA and Mitek sued each other over their competing patent claims to RDC technology. This litigation was settled in 2014, but the parameters of that settlement are unclear at best, as USAA has sent licensing requests to credit unions and banks that thought they were covered under the settlement. We should all be gathering as much information about this case and its implications as we can. CUNA is hosting a free webinar to discuss the latest developments. By the way, I really appreciate the article my friend. But what are you doing texting out articles from American Banker at 11:00 PM?

Are Fair Lending Laws Going to be Scrutinized?

Steering, which refers to directing homebuyers to neighborhoods based on race and sex, is of course illegal for real estate agents. Unfortunately, Long Island Newsday has begun reporting on the results of an investigation into realtor steering practices, in which the paper employed testers of different races to see how they would be treated. The results raised the possibility of widespread steering, at least on the part of the agents tracked by Newsday. I’m bringing this article to your attention because it is the type of report that leads to hearings and legislation. As a result, even though Newsday’s reporting does not involve activities by lenders, you should all be prepared for scrutiny of your fair lending practices.

Will a Lack of Liquidity Trigger the Next Banking Crisis?

I like to say I am paid to be paranoid. I think that is also a good rule of thumb for those of you operating credit unions. After all, if history is any guide, the occasional financial shock is inevitable and we are just about due for one. So, this armchair economist wannabe is happy to report that, in its most recent financial stability report, the Federal Reserve paid special attention to signs that there is too little liquidity in the financial markets, a classic sign that investors sense that a tremor might be coming. Take a look at this graph produced by the Fed:

In addition, the Fed’s analysis is coming during a period of extraordinary intervention by the Fed in the short-term repossession or repo market, in which the Federal Reserve has had to step in and act as a buyer of short-term purchases which banks need for cash, and which private investors such as hedge funds typically view as a quick way of making some extra money off their bond holdings.

On that note, enjoy your day.

November 19, 2019 at 9:46 am Leave a comment

Secondary Capital and its Limits

At first, it surprised me that NCUA’s denial of credit union secondary capital plans was the issue most frequently being appealed under NCUA’s new regulatory appeals process. However, as I read these decisions and studied the history behind secondary capital, the increasing frustration on the part of credit unions stemmed from NCUA’s contradictory policy goals and legal interpretations.

Since 1996, 12 CFR 701.34(b) has permitted low income credit unions to accept uninsured secondary capital (61 FR 3788-01). As originally envisioned by NCUA, the regulation permitted these credit unions to raise secondary capital from “foundations and other philanthropic institutions.” NCUA hoped that this credit would help credit unions “make more loans and improve financial services” for low income communities. The original rule simply required credit unions to notify NCUA that they were going to accept this capital. Fast forward to 2006, and NCUA was already getting gun shy about this power. Under revisions to 701.34(b), credit unions were required to get pre-approval for the use of secondary capital. NCUA accomplished this goal by requiring credit unions to address five criteria in their secondary capital plans.

Against this backdrop, the legal issue with which NCUA and credit unions are grappling is the extent to which the five criteria outlined are simply the baseline of regulatory requirements for secondary capital plans, or if they are instead representative of the totality of what is required of a credit union seeking to take in secondary capital. There is also one other issue lurking right below the surface. Even assuming that NCUA can, for safety and soundness reasons, insist that credit unions provide more detailed information than required under a plain reading of the regulation, is there a point where its application of safety and soundness considerations becomes unreasonable?

In my ever so humble opinion, it’s no coincidence that NCUA released a detailed guidance to examiners explaining how to assess secondary capital requests. It’s exactly the type of document I would come out with if I wanted to show that secondary capital determinations were not arbitrary and capricious.

What really has me fired up, however, is that NCUA’s stringent legal interpretation of its examination powers is inconsistent with its stated policy goals. I have a pretty good memory, and I could swear it wasn’t too long ago that then-Chairman Debbie Matz was encouraging qualifying credit unions to get their low-income designations in part to make them eligible to take in secondary capital. I have made that suggestion to credit unions myself. It is no wonder, then, that credit unions are confused that NCUA is effectively discouraging the credit unions that could use secondary capital the most from getting it in the first place. Simply put, the requirements for secondary capital approval have become so arbitrary, expansive and time-consuming that many credit unions won’t have the resources to get the plan approved in the first place. If this is NCUA’s goal, then it should simply say so. If not, then it has to clarify its expectations both internally and for credit unions as a whole.


November 18, 2019 at 9:40 am Leave a comment

Updated Guidance Issued on Business Continuity Expectations

The FFIEC released an updated booklet for examiners, including those employed by the NCUA, to use when assessing a financial institution’s business continuity preparations. The key takeaway is that examiners expect financial institutions to treat business continuity planning as an ongoing management process that considers the needs of the credit union as a whole, as opposed to only protecting its IT functions.

Too many cooks in the kitchen will always result in an overcooked turkey, and I can’t stand parsing through FFIEC guidance because it inevitably reads like a document in which every regulator has to contribute just to show they did. The result is that the guidance is ultimately too general to be of much practical use beyond highlighting key issues that examiners expect financial institutions to address. I believe this guidance is subject to many of the same defects, but you should nevertheless read it and update your policies and procedures to reflect what I think many of you already know: that business continuity involves getting all stakeholders in the credit union committed to an ongoing process of assessing potential threats and developing contingencies for efficiently and quickly keeping your most important operations going. This is no easy task since your credit union has to guard against everything from a cyber-attack to those increasingly-common 100 year storms.

On the most practical level, I would comply with this guidance by demonstrating that the credit union has prioritized the functions and products that it is in most in need of protecting, and ensuring that your IT recovery plan reflects those priorities.

DFS Investigates Apple Card, but the Money Keeps Flowing In

Last weekend, Linda Lacewell, the Superintendent of New York’s Department of Financial Services, reacted swiftly to reports that the Apple-Goldman credit card may be using underwriting criteria that discriminates on the basis of sex. For example, none other than Steve Wozniak explains that his wife was denied a credit card. Suffice it to say that the issues raised by this situation are more complicated than anyone seems willing to acknowledge or grapple with at this point.

In the meantime, things seem to be going just fine for the Apple-Goldman partnership. CU Today reported this morning that Goldman issued $10 billion worth of credit lines under the card.

On that note, enjoy your weekend.


November 15, 2019 at 9:04 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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