Can Your Member’s Immigration Status Be Considered When They Apply for a Loan?

A married couple comes into your credit union to apply for a car loan.  The spouses, in their late 20s, have excellent credit but one of them is not a permanent U.S. resident.  Instead, one spouse is allowed to live and work legally in the U.S. under the Deferred Action for Childhood Arrivals (DACA) program, a program begun under the Obama Administration, under which children who came to this country illegally are allowed to remain indefinitely and obtain the documentation they need including obtaining valid Social Security numbers.  The credit union informs the couple that the citizen spouse must apply individually.  Since the DACA spouse is not a permanent resident of the U.S., she is not qualified to apply for a car loan under the credit union’s policy.

These facts are very similar to those in a lawsuit recently filed against Alliant Credit Union in federal district court in California alleging that the credit union engaged in illegal discrimination under federal law.  The case is by no means unique to this credit union.  There are currently several cases pending in the Ninth Circuit, which covers the West Coast, in which the rights of lenders must be squared with federal law, which generally bans discrimination, including Ruben Juarez, et al. v. Social Finance, Inc., et al.; Perez v. Wells Fargo Bank, N.A.; Garcia v. Harborstone Credit Union just to name a few.  These cases demonstrate that all credit unions should understand their policies related to loans to members whose immigration status may be in doubt. 

From a compliance standpoint, the credit union would seem to be on solid legal ground.  While Regulation B prohibits lenders from inquiring about a borrower’s race, creed or national origin, the same Regulation provides an exception for inquiries about an applicant’s immigration status.  Specifically, it provides that:  “[a] creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.” [12 CFR § 202.5(e)]

However, this authority is not unlimited.  For example, should lenders be allowed to make a distinction between unsecured loans for which they may not be able to locate an individual force to leave the country and a secured loan for which the credit union will have adequate collateral?  And, is it possible that Regulation B should be struck down as illegal since it is arguably inconsistent with the federal Civil Rights Act, which bans discrimination on the basis of alienage?  These are all open questions that underscore that your policy considerations in this area should go well beyond the plain language of the Regulation. 

This is also an example of how our increasingly divided political discourse is framing our compliance considerations.  The DACA regulation was one of the most fiercely legally contested government acts during the Trump Administration and then, effectively, reinstated by Executive Action when President Biden took office.  In the absence of legislation, it is up to businesses and the courts to grapple with policy issues that used to be dealt with by Legislators. 

From a Compliance standpoint however, DACA is extremely helpful in ensuring that persons covered under the program will have adequate documentation to comply with a lender’s obligations to know their members under Regulation B.

April 6, 2022 at 9:15 am Leave a comment

The One Thing All Credit Unions Have In Common

The one thing all credit unions have in common regardless of their size or where they are located is that they are struggling to hire and keep employees.  At least that seems to be the case anytime I’ve talked to a credit union or anyone in any business who is trying to find employees over the last several months.  The March unemployment statistics released on April 1st indicate that this trend is likely to continue for the foreseeable future and that inflation is likely to continue to impact your operations more than at any time since the early days of the Regan administration. 

The good news is that we are beginning to see the light at the end of the tunnel when it comes to covid’s impact on the economy.  According to the Department of Labor, while there are still 1.6 million fewer people employed than in February 2020, the employment rate for males is back to its pre-pandemic level, and there are some industries that are actually exceeding the 2020 employment.  Overall, the economy picked up 562,000 new jobs in the first quarter. 

But all this growth continues to come with pernicious consequences for employers.  Most importantly, “average hourly earnings of all employees on private nonfarm payrolls increased by 13 cents to $31.73 in March. Over the past 12 months, average hourly earnings have increased by 5.6 percent”.  In addition, the Wall Street Journal noted that the job market remains incredibly tight.  There are more job openings than unemployed people.  As a result, workers are quitting at record rates “leaving some companies short-staffed, at least temporarily”.  Sound familiar?

And of course inflation is continuing to impact your credit union, both operationally and as an employer.  While the 5.6% increase in wages is dramatic, it’s nowhere near the 8% inflation rate.  Which brings us back to the days of Paul Volcker who, as Chairman of the Federal Reserve in the late 70s and 80s, tamed inflation but only after high interest rates triggered a recession.  The latest numbers demonstrate that the Fed has no choice but to continue to raise interest rates.  Whether history is destined to repeat itself remains to be seen. 

April 4, 2022 at 9:51 am Leave a comment

Do All Financial Institutions Have A Role To Play In Combating Climate Change?

Of course they do, but that’s not the appropriate question that regulators should be asking themselves. The real question is, whether or not financial regulators should mandate if how and when credit unions choose to address these challenges? My answer to this question is that credit unions should be left to address climate change in a way which best reflects a given institutions resources, risk profile, and membership base.  

As luck would have it, I’m not the only one who feels this way. Earlier this week the FDIC released a draft of the principles it expects bankers to consider when addressing climate change issues. Crucially the proposed guidance only applies to institutions that have $100 billion or more in assets (yes, that’s billion with a B, Dr. Evil).

In a statement accompanying the proposal, FDIC chairman Martin J. Gruenberg explains that “all financial institutions, regardless of size, complexity, or business model, are subject to climate-related financial risks.  However, smaller financial institutions, especially community banks, may lack the financial resources and expertise necessary to effectively identify and measure climate-related financial risks.” 

What is true for community banks is certainly true for credit unions. After all, the small handful of institutions that will be subject to the FDIC’s framework, hold more assets then the entire credit union industry. This approach is similar to one taken by NCUA board members Hood and Hampton, who have stressed that at this point, individual credit unions are best positioned to respond to climate change without prodding by regulators. 

What I like so much about the FDIC’s statement is that it underscores that you don’t have to be a climate change denier to recognize that imposing specific requirements on many financial institutions at this time would impose clear burdens without resulting in any clear benefits. Simply put, we are still years away from cost effectively identifying the costs associated with climate change on a micro level and integrating these costs into specific financial products. For example, without access to the most sophisticated computer modeling, can anyone really predict how many thirty-year mortgages are not appropriately priced given the risks posed by climate change in specific geographical areas? Imagine how much Fiserv would charge for adding this on to your core processer?

And even if we had cost effective technology in place, there are some complicated legal and policy tradeoffs that have to be considered. Most importantly there is no shortage of research indicating that the effects of climate change disproportionality impacts low-income communities. What is the best way to address climate change while at the same time ensuring that low-income communities have access to cost effective housing and basic financial services and products?

April Fool’s Day Is No Joke for the Legislature

The legislature was scheduled to have next week off, but those plans were thrown into disarray yesterday.  First, the Governor and the Legislature were unable to agree on a budget before the start of the fiscal year.  Then, in a development with national implications, a state court has invalidated New York’s new congressional maps and state legislative districts on the grounds that they violate the state constitutional amendments passed in 2014 which were designed to prevent gerrymandering.  This case is going to be appealed but it means that efforts to collect petitions and start campaigning in all those newly configured districts are on hold. 

April 1, 2022 at 9:16 am 1 comment

Does New York’s Commercial Lending Law Apply To Your Credit Union?

Greetings folks, today I am the bearer of good news. 

Lately, it seems to me that a New York State law passed in 2020 has gotten a lot of attention; at least I’ve gotten a concerned phone call and have seen some recent analysis (Law360 subscription required) of this important new requirement.  I’m here to reassure you that it does not apply to either state or federal credit unions in New York. 

Take a look at State Financial Services Law starting at section 801. The article creates a comprehensive framework for the disclosure of commercial loans of $2.5M or less made by non-bank entities.  The law is called the New York Financial Services Law (the “Commercial Finance Disclosure Law” or “CDFL”).  Under this new framework, these commercial lenders will have to provide disclosures similar to those mandated by the Truth in Lending Act.  The law technically took effect in January but DFS issued this guidance explaining that the statute will be enforced once the accompanying regulations take effect later this year.  It’s enough to make anyone in charge of commercial lending break into a hives for fear that they’ve missed the boat on getting ready for these new requirements.

But breathe easy.  Section 802 of the law makes it clear that this article does not apply to financial institutions, a term that includes both state and federally chartered credit unions and banks.  Still, yours truly will be keeping a close eye on developments in this area of the law.  In recent years, consumer groups have expressed concern that existing federal law does not do enough to protect small businesses, particularly those that are women and minority owned.  New York’s law is based on a similar measure already in effect in the great state of California.    In short, I would look at this framework and ask yourself how difficult it would be for your credit union to meet similar requirements. 

On that concise note, I wish you all a happy and warm Tuesday… peace out!

March 29, 2022 at 9:09 am Leave a comment

What Compliance Folks Should Know About Interest Rates

As readers of this blog know, the Fed recently announced that it is raising the interest rate target on the federal funds rate by ¼ to ½ and that it expects to raise the rate even higher in the coming months.  But announcing that it is going to raise interest rates and actually accomplishing this goal is an increasingly complicated endeavor behind which lies some important changes in the incentives given to banks and credit unions with regard to holding on to reserves. 

The Fed now uses a radically different approach to implementing monetary policy.  In a nutshell, for those of you who still think that the Federal Reserve sets interest rates primarily by manipulating reserve requirements, it’s time to throw out those old textbooks.   

Regulation D establishes minimum reserve requirements for depository institutions, including banks and credit unions.  The goal of the Federal Reserve is to strike an appropriate balance between ensuring adequate reserves and encouraging financial institutions to make loans.  Up until 2006, the Federal Reserve did this in part by not offering interest on funds held in Federal Reserve accounts; since there was no interest paid to depository institutions that deposited their funds in a Federal Reserve Bank, there was no incentive for those institutions to keep any more money than necessary to meet reserve requirements in these accounts. 

The system worked fine when things were going well, but what about when there was a sudden shock to the financial system?  For example, as noted in this blog from 2012, in the weeks after 9/11, the Federal Reserve struggled to stabilize interest rates.

To address these concerns, in 2006 Congress amended the law to permit the Federal Reserve to pay interest on its accounts.  Originally, this authority was going to be phased in over a five year period, but in 2008, Congress sped up the timeline in response to the Great Recession.   

How do you nudge-up interest rates while encouraging institutions to keep reserves?  Under a so called “floor approach” to monetary policy, the Federal Reserve provides interest on reserves held at its banks at a rate slightly lower than its target funds rate.  Obviously, in most circumstances, a lending institution is not going to lend out money at a lower rate than it could get from depositing its money in a Federal Reserve account, at least not if it doesn’t have a huge amount of excess reserves that it wants to get rid of. 

This new approach to monetary policy has not gotten enough attention.  It is one of the key reason’s the Federal Reserve has been able to act more aggressively in response to the increasingly common shocks to the system, such as the COVID shutdown and the Great Recession.  All this is made possible because of subtle changes to law and regulation.  For instance, just last June, the Federal Reserve finalized regulations simplifying the calculation of interest on all Federal Reserve accounts.  We can debate whether or not it is ultimately healthy for the fed to play this big a role in the economy another time.  For today’s blog, it is enough to point out that subtle changes in policy and regulations over the last two decades have brought about fundamental changes in the way the financial system is protected. 

For those of you interested in finding out more, there is a great series of posts by the Liberty Street Economics blog available through this link which I relied on heavily for today’s post:

March 28, 2022 at 10:58 am Leave a comment

Why Member Expulsion Legislation Is a Big Win

Greetings Folks, with a special shout out to those of you who attended our State GAC.  It was nice to be roaming the halls of the Capitol once again! 

Speaking of GAC meetings, it’s been around three weeks now since CUNA held its annual GAC meeting and I wanted to talk about recently passed federal legislation, which credit unions lobbied for, to make it easier to expel abusive members.  It is called the Credit Union Governance Modernization Act of 2022.  I get the sense that the industry as a whole doesn’t appreciate how important the legislation is for federal credit unions. 

As I am sure most readers of this blog know, under 12 USC 1764, members can only be expelled from a federal credit union by a majority vote of the Board of Directors for non-participation.  Otherwise, for a member to be expelled from a federal CU, there must be a 2/3 vote of members present at a special meeting.  In some ways, this statute is a quaint anachronism since it reflects the importance that the founders of the credit union movement placed on membership.  The problem is that the statute makes it extremely difficult and impractical to get rid of members for abusive or fraudulent conduct.  As one of New York’s credit unions pointed out at a virtual meeting in DC, it is easier for airlines to ban someone from flying than it is for credit unions to ban an individual who is abusive toward staff. 

The good news is that legislation included in the recently passed consolidated budget act will change this situation when it takes full effect in approximately 18 months.  Among other things, a federal credit union’s board will now be allowed to expel a member with a 2/3 vote for, for example, substantial or repeated violation of the membership agreement, significantly disruptive or abusive behavior, and a conviction of fraud or illegal activity.  Members may request a hearing before the board and even petition for reinstatement.  But the key point is that once this law takes effect, you will be able to swiftly get rid of bad actors.

NCUA has 18 months to promulgate regulations further defining the statute’s terms.  In the meantime, remember that even in the absence of the statutory change, provided your credit union has a policy in place, it can severely restrict a member’s activities.  For example, I know of at least one FCU that mandates that disruptive members conduct all their banking by mail. 

On that note, enjoy your day!

March 23, 2022 at 9:05 am 2 comments

Five Things You Need to Know As You Start Your Credit Union Week

Here is a surprising long list of things you need to know that happened over the past few days.  Most of these would be worthy of a blog on their own, and may in fact expanded upon at a future date.  I am sure you can’t wait.

COVID Order Lifted by Department of Health

On Friday, the Department of Health announced that it was no longer designating COVID-19 as “an airborne infectious disease that presents a serious risk of harm to the public health under the HERO Act.”  This means that you may stop taking all those additional precautions outlined under your HERO Act workplace safety plan.  Let’s hope that we don’t have to reinstate these precautions in the near future, but remember that you have an ongoing obligation to ensure that your business is prepared to activate these plans.  As a matter of fact, you may want to see if there are any adjustments that should be made based on your experience implementing this mandate.

Service Facility Guidance Issued

On Friday, the NCUA issued this letter to credit unions providing additional guidance to multiple common-bond federal credit unions seeking to use shared service facilities, such as New York’s USNET, to satisfy field of membership and/or underserved area requirements. 

Prior to the regulation’s adoption, only multiple common-bond credit unions that had an ownership interest in a shared branch network could use network facilities to satisfy branch requirements when taking on a new membership group or moving into an underserved area.  The regulation extended this authority to any multiple common bond credit union that participates in a shared branching network.

The letter notes that:

For multiple common-bond federal credit unions adding occupational or associational groups, a service facility must allow a member to deposit shares, submit loan applications, or receive loan proceeds. For multiple common-bond federal credit unions adding an underserved area, a service facility in the underserved area must allow a member to deposit shares, submit loan applications, and receive loan proceeds.

New York State Strengthens Sexual Harassment Laws

On March 16, Governor Hochul signed legislation to further strengthen protections against individuals who claim they have been retaliated against by their employer for either reporting or assisting others in reporting harassment and anti-discrimination claims under state law.  Specifically, Chapter 140 of the Laws of 2022 explicitly makes it unlawful to disclose an individual’s personnel file in retaliation for testifying or bringing a harassment claim against an employer.  The law is already in effect and authorizes the Attorney General to take action she suspects of violating this provision.

Medical Bills to be Excluded from Credit Reports

In a classic example of claiming victory and conceding defeat the Wall Street Journal reported (subscription required) on Saturday that most disputed medical bills will be excluded from credit reports. 

Beginning in July, the companies will remove medical debt that was paid after it was sent to collections. These debts can stick around on a consumer’s credit report for up to seven years, even if they are paid off. New unpaid medical debts won’t get added to credit reports for a full year after being sent to collections.

The announcement comes at a time when the CFPB has repeatedly questioned the accuracy of credit reports and has a director who isn’t shy about highlighting examples of what he perceives as inappropriate conduct against consumers.

New York State to Hold Series of Cybersecurity Symposia

Last, but not least, New York State’s Department of Financial Services announced that it will be hosting a series of cybersecurity symposia to mark the five year anniversary of New York’s Cybersecurity regulations.  Happy Anniversary!  Something tells me this is more than an academic exercise.  The DFS is examining ways in which it may update these regulations and these virtual discussions could provide an early indication of where it is headed.  The first symposium is scheduled to take place March 29, 2022.

March 21, 2022 at 8:25 am Leave a comment

And The Most Important Regulatory Action of The Year Is…

Not even a close call, people: The most important regulatory action so far this year is the Security and Exchange Commission’s $100 million settlement announced February 14 with crypto lender BlockFi, in which the SEC alleged that the company was illegally refusing to register under federal securities law. 

The hundred million dollars given to the SEC and 32 states is chump change; but the fact that the SEC was willing to successfully and aggressively pursue litigation designed to signal crypto lenders that they are in fact, subject to laws and regulations is a key moment in the evolution of the crypto lending industry [Law360 subscription required]. It is also an important first step to helping credit unions and banks compete against these non-banks on a more level playing field. Let me explain.

According to the SEC order, starting in 2019 BlockFi has offered everyday investors BlockFi Interest Accounts (BIA) accounts. Members receive different interest rates on these accounts based on the type of currency being deposited by the member. In return BlockFi uses this pool of crypto currencies to make loans. Members are promised quick and easy access to their crypto funds. 

To me this sounds an awful lot like a depository institution. Maybe someday we will see the Federal Reserve or the OCC move to regulate crypto businesses such as these, or maybe Congress will update federal banking law, but I’m not holding my breath.

In contrast to the timidity of others in Washington, since taking over at the SEC, Chairman Gensler has described crypto finance as the Wild West.  In announcing this settlement, he explained that:

“This is the first case of its kind with respect to crypto lending platforms. Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940.”

With the SEC’s action against BlockFi, it signaled that there really is a new sheriff in town. Under the settlement, BlockFi’s quasi deposit accounts will have to register as securities and average consumers will be provided greater notice that they are making investments as opposed to depositing their hard-earned funds in federally insured accounts.

History is repeating itself and let’s hope regulators strike an appropriate balance between fostering innovation and maintaining a safe and secure financial system. In the early 1970’s, non-bank financial firms introduced the widespread use of money market mutual funds. At the time regulation Q placed caps on the interest that banks could give to account holders. 

In 1977 Merrill Lynch pushed the envelope even further when it began offering cash management accounts which allowed members to use money market funds as functional bank accounts against which they could write checks. In the mirror image of the debate playing out today, the banking industry pleaded with federal regulators to regulate these accounts and the businesses that offered them as banks. They argued that companies offering NOW accounts were acting as banks without being subject to bank regulation. The issue wasn’t definitively settled until the Supreme Court struck down regulations issued by the Federal Reserve Board intended to regulate money markets. 

In hindsight, this was one of the watershed moments in the demise of the Glass-Steagall inspired banking era. (see Taming the Mega Banks: Why We Need a New Glass-Steagall Act, pages 151-153)

On that note, I’m off to prepare for my fantasy baseball draft.  Enjoy your weekend.

March 11, 2022 at 9:20 am Leave a comment

How Sensitive Is Your Credit Union to Market Risk?

Yesterday the NCUA released a letter to credit unions providing more detail on what they can expect once the NCUA starts assessing “Sensitivity to Market Risk” as a separate category of examiner evaluations. To put it another way, starting in April, NCUA’s CAMEL is getting an “S”. This change applies to both federal and state chartered credit unions.

The material provided by the NCUA is intended to further clarify what impact, if any, this new change will have on your credit union operations.

 The good news is that, in an accompanying Q&A, the Board explains that “Implementing the “S” component will not create a burden or significant disruption to credit unions, examiners, or the examination process.” After all, NCUA has always evaluated a credit unions sensitivity to market place risks, it just never felt the need to join the other financial regulators in breaking it out as a separate category. In addition, at the same time it is breaking out market sensitivity, it is narrowing the parameters of its CAMEL Liquidity analysis.  This is a potentially positive development.  On paper this makes sense since Liquidity, which measures how much money a credit union has on hand to meet its member’s obligations, is different than measuring how sensitive a credit union’s products and investments are to sudden changes in the marketplace.

One potentially troubling aspect of this expanded framework is that the regulation does not formally define Market Risk, leaving open the possibility that Market Risk will be in the eye of the examiner. Consequently, you would be well advised to keep a copy of this letter in your files if only to explain to future examiners that:

The new Sensitivity to Market Risk component rating reflects the exposure of a credit union’s current and prospective earnings and economic capital arising from changes in market prices and interest rates. The Liquidity Risk component rating reflects a credit union’s ability to monitor and manage liquidity risk and the adequacy of liquidity levels.”

One final note. To its credit, NCUA has historically made a distinction between the level of interest rate risk posed by the balance sheets of the smallest credit unions and those over $50M in assets. This distinction is likely to remain. As explained in the Q&A:

Credit unions with relatively noncomplex balance sheet composition and activities and whose senior managers are actively involved in the daily operations may be able to rely on fairly basic and less formal risk management systems. If the risk exposure is low to moderate, procedures for managing and controlling market risks are adequate, and risk profiles are communicated clearly and well understood by all relevant parties, then basic processes may be sufficient to receive a favorable rating for the “S” component.”

So why is yours truly somewhat ambivalent about these changes?  Until now, NCUA has not felt the need to evaluate marketplace sensitivity as a separate category, even though it has been in place for banks since 1997.  NCUA concluded at the time that credit union balance sheets were not as sophisticated as other types of banking institutions.  In the intervening years, some credit unions have grown in sophistication and for the largest credit unions this change makes sense, but my concern is that this new category will result in increased confusion for both examiners and the vast majority of credit unions which have functioned just fine under the existing CAMEL system.  Very few credit unions fail because of marketplace upheaval.  If the system isn’t broke, why fix it?

March 9, 2022 at 9:37 am Leave a comment

Why Mandatory Vacation Time Makes No Sense

I’m back from D.C and firmly focused on the great state of New York. March 7th was the deadline for submitting letters to New York’s Department of Financial Services regarding changing the State’s existing guidance mandating fourteen continuous days of time off for employees holding “sensitive” positions. The 1996 guidance, which applies to all state regulated financial institutions, is not only an antiquated vestige of a bygone era, but it burdens financial institutions of all shapes and sizes while placing regulatory emphasis on the wrong issues. 

As I’ve pointed out in a previous blog, making key employees take a two-week vacation made sense when it took almost two weeks to negotiate checks, but makes no sense when money is transferred with a single click. Instead of emphasizing vacations, the emphasis should be on the internal protocols an institution has in place to prevent, detect, and mitigate insider abuse. For smaller institutions with basic products, this might be as simple as ensuring that one person doesn’t control the keys to the castle; for larger institutions, sophisticated technology with dedicated staff might be an entirely appropriate expectation. 

This is the approach taken by the NCUA. Chapter 4, page 6 of the Agency’s Examination Guide lays out several potential approaches for boards to prevent mismanagement of credit union resources and only encourages mandatory vacation time where such a policy is “practical” for a given credit union.  For example, this criterion makes more sense to me than New York’s existing guidance: “…an appropriate level of management should approve and authorize all transactions over a specified limit, and authorization should require dual signatures…”

Given the lack of complaints I have heard from federal credit unions over the years, it is clear that NCUA does not place anywhere near as much emphasis on vacation time as does New York. Unless there’s evidence that New York State charted credit unions are less susceptible to insider abuse then their federal counterparts, it’s time for DFS to take a more flexible approach. 

March 8, 2022 at 9:17 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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