New York State’s budget typically does not have a major impact on credit unions. This year is an exception. Among the Governor’s proposals is one authorizing financial institutions to impose transaction holds when they believe that individuals are being victimized by financial exploitation? The bill would have major operational implications for credit unions by giving them substantial new power and responsibility when dealing with suspected financial abuse.
Under the proposal financial institutions would be empowered to impose a transaction hold based on a good faith belief that exploitation of a vulnerable adult; may have occurred, may have been attempted or is being attempted. Interestingly the transaction holds can be placed not only on the vulnerable adults account, but also to accounts of which such person is a beneficiary, including trust and guardian accounts. Within a day of placing a transaction hold, institutions would have to report the transaction hold to Adult Protective Services and to “a law enforcement agency.” A vulnerable adult means an individual who, because of mental and/or physical impairment is potentially unable to manage his or her own resources or protect himself from financial exploitation. The Department of Financial Services would be authorized to develop a certification program, but it does not appear that training would be mandatory.
One of the key questions that I always have when analyzing a proposal like this one is how much protection financial institutions will have? After all a poorly drafted statute, no matter how well intended, could make a credit union subject to litigation for every bad financial decision made by an elderly or disabled individual. The only opinion I will offer about the draft proposal so far is that the liability protections should be strengthened.
The good news is the governor is proposing to shield institutions that impose transaction holds from criminal, civil and administrative liability for all good faith actions, including determinations not to apply a transaction hold on an account. The bad news is this protection only applies where there is a reasonable basis for such a determination. It also does not apply where an employee or financial institution acts recklessly or engages in intentional misconduct in making the determination, or the determination results from a conflict of interest.
As I have explained in previous blogs, the most unequivocal protection from liability that I have seen for credit unions is for the filing of suspicious activity reports. Comparing these protections to what NYS is proposing shows why more work has to be done if the ultimate goal is to create an environment in which institutions are confident that they can protect their vulnerable members without exposing themselves to liability.
This year’s Super Bowl pick
My Bet the Mortgage, Super Bowl pick, which is already recognized as acceptable supplemental capital for complex credit unions is…. Falcons 31 – New England 24. The Falcons use a ball control offense to keep the ball out of Brady’s hands and ultimately score a couple of late touchdowns.
There will be no blog on Monday as I am a celebrant of the new DASB, Day After Super Bowl holiday!
Is it a violation of federal law to deny someone a student loan based on their status as a Dreamer? That is the central question posed by a class action lawsuit brought byCalifornia college students who claim that Wells Fargo denied them student loans in violation of both, Federal and California Law. The lawsuit has the potential of putting financial institutions front- and- center in the debate over the protections the country affords to immigrants.
In June 2012, President Obama’s Department of Homeland Security announced that it would no longer deport young immigrants who had lived in this country for most of their lives, but whose parents were here illegally, and who themselves had never obtained legal status. Under the Deferred Action for Childhood Arrivals (DACA), eligible individuals receive a renewable two year authorization granted by the federal government to stay in the country. Eligible individuals receive a work permit and obtain employment authorization documentation, which entitles them to legally look for work.
The lawsuit was brought by Mitzie Perez, she claims that in August of 2016 she applied for a student loan online. While completing the application she indicated that she was neither a US citizen or a permanent resident. She was immediately denied the loan. Curious as to why she was denied, when she completed the same application a second time, she indicated she was a permanent resident, she was told that “based on the citizenship status you provided, a US Citizen Co-signer will be required for this application”. Should would be able to obtain a co-signer.
She claims the bank violated 42USCA Section 1981. This law provides that “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens…” She also argues that because of the documentation she is able to provide the bank under DACA, Wells Fargo can provide her a loan without violating the Customer Identification Procedure requirements of the Bank Secrecy Act.
Leaving aside the emotional pull of the argument, the responsibility of financial institutions towards persons who are not permanent legal aliens is ambiguous. Regulation B, which implements the Equal Credit Opportunity Act, makes it illegal to discriminate against an applicant on a prohibited bases, including the applicants’ national origin. Here is where it gets tricky; the commentary accompanying this prohibition explains that while “A creditor may not refuse to grant credit because an applicant comes from a particular country.” A financial institution “may take the applicant’s immigration status into account. A creditor may also take into account any applicable law, regulation, or executive order restricting dealings with citizens (or the government) of a particular country or imposing limitations regarding credit extended for their use.” (12 C.F.R. § Pt. 1002, Supp. I).
Wells Fargo is in a tough spot. On the one hand, I agree with those who argue that there is something distinctly un-American about throwing DACA individuals out of the country. Many of them have spent almost their entire lives growing up as Americans. That being said, the law is the law and just as President Obama extended legal protections with an Executive order in 2012, President Trump could eliminate their legal status with the stroke of a pen. Financial institutions not only have the right but the legal obligation to consider this possibility when deciding whether or not to extend loans to students like Ms. Perez. What decisions they should make based on this information is a much tougher call. This case underscores why congress needs to craft common sense immigration reform.
If you believe that regulators have been given more power than is allowed under the Constitution – and as a member of the credit union industry you should – you have reason to be optimistic about President Trump’s Supreme Court nominee. Neil Gorsuch of the Court of Appeals for the Tenth Circuit is a kindred spirit who will work to refocus the locus of legislative power back to Congress and away from unelected bureaucrats.
First, a quick primer. The most basic job of agencies is to translate federal legislation into operational mandates. When Congress’ intent is clear, agencies are to do what Congress tells them; but, what happens when a Congressional mandate is unclear? Under so called Chevron deference, courts are to defer to an agency’s interpretation even if an agency’s reading differs from what the court believes is the best statutory interpretation. A second line of cases extends this deference to reinterpretations of regulations by agencies even when they t effectively overturns court decisions. (Nat’l Cable & Telecommunications Ass’n v. Brand X Internet Servs., 545 U.S. 967, 125 S. Ct. 2688, 162 L. Ed. 2d 820 (2005). These are judicially created doctrines which the Court could reconsider.
Financial institutions saw the impact of this deference when the Department of Labor decided that mortgage originators were nonexempt employees who must be given overtime pay and the Federal Reserve was given broad discretion to devise the interchange fee cap imposed on the debit card transactions by larger financial institutions. The CFPB had broad discretion in its reinterpretation of RESPA.
No wonder, then, that Congress is increasingly willing to draft broadly written measures secure in the knowledge that regulators will fill in the blanks and get blamed for the negative consequences of tough decisions.
In an April 2016 decision called Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1143 (10th Cir. 2016), Judge Gorsuch wrote a separate concurring decision to underscore his unease with the direction of the regulatory state.
“There’s an elephant in the room with us today.” He argued. Judicial precedents such as Chevron and Brand “permit executive bureaucracies to swallow huge amounts of core judicial and legislative power and concentrate federal power in a way that seems more than a little difficult to square with the Constitution of the framers’ design. Maybe the time has come to face the behemoth.”
He argued that “When the political branches disagree with a judicial interpretation of existing law, the Constitution prescribes the appropriate remedial process. It’s called legislation. Admittedly, the legislative process can be an arduous one. But that’s no bug in the constitutional design: it is the very point of the design. The framers sought to ensure that the people may rely on judicial precedent about the meaning of existing law until and unless that precedent is overruled or the purposefully painful process of bicameralism and presentment can be cleared… “ Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1151 (10th Cir. 2016)
When he gets on the Court, and unless there are skeletons in his closet that would make the Kardashians blush, he will get on the Court; he will have ample opportunity to nudge his fellow justices to reconsider the contours of regulatory power. In fact, it’s possible that one of his first major cases will deal with the constitutionality of the CFPB.
I have some good news and some bad news that you may have missed in the ongoing coverage of a certain executive order signed by President Trump last Friday.
The good news is that the President issued an executive order yesterday mandating that executive branch agencies couple any new proposed regulation with two existing regulations it is repealing. In addition, the cost of any new regulation must be offset by elimination of the costs associated with prior regulations.
Now for the bad news; as an independent agency overseen by a three member board, NCUA is not required to follow this order. In addition, whether or not the CFPB is subject to the order depends on the outcome of an ongoing legal challenge claiming that the Bureau cannot be an independent agency if it is overseen by a single director. There is, however, nothing to stop NCUA from voluntarily complying with this mandate relief mandate. Stay tuned.
Taxi Medallion Prices Are Plummeting, Endangering Loans
This uplifting headline is taken from an article posted yesterday by Bloomberg News.
Just how bad are things getting for medallion loans? According to Capital One Financial Bank, some 81 percent of its medallion loans are in default according to Bloomberg. Capital One is warning investors that it now believes more than half of its borrowers won’t be able to repay their medallion loans and that another 29 percent of borrowers are “stressed.”
It isn’t clear how many of Capital One’s loans are for NYC medallions. But, another bank, BankUnited, told its investors in November that nearly 59 percent of its loans secured by taxi medallions were under water. Close to 95 percent of BankUnited’s loans were for NYC Medallions.
The Bloomberg report comes on top of an article in the New York Times a couple of weeks ago openly speculating that ridesharing services have made yellow cabs a vestige of a bygone era. Furthermore, if the legislature legalizes ridesharing outside of New York City, even more downward pressure will be exerted on medallion values. As the bad news migrates from obscure blogs and trade publications to mainstream media outlets, I wonder if prices will fall even quicker. Here is where prices stood in December.
This article in today’s American Banker tipped me off to an announcement by Facebook that it is offering members the ability to use and register physical tokens as an added feature to guard against account hacking. Although I am proudly not one of the estimated 1 billion users out there who delude themselves into thinking that they have scores of friends who want updates on little Johnny’s latest achievements and a picture of the gourmet meal that they are making for dinner, I have to concede that the American Banker has a point, when it quotes banking officials who suggest that Facebook’s announcement will probably have members asking their financial institutions to offer them the same type of protection.
A press release posted on Facebook yesterday explains that “Starting today, you can register a physical security key to your account so that the next time you log in after enabling login approvals, you’ll simply tap a small hardware device that goes in the USB drive of your computer. Security keys can be purchased through companies like Yubico, and the keys support the open Universal 2nd Factor (U2F) standard hosted by the FIDO Alliance.”
What confuses me a tad about the announcement is that it is only going to be beneficial for us old-timers who still do our banking online with a laptop or desktop that has a USB port. Even though Facebook started as a means for kids at Harvard to know where the next party was going to be, fifty percent of Facebook users are over the age of 40, which explains why I know so much more about my friends and neighbors than I really need to. My wife is a Facebook fan.
McWatters Named Acting NCUA Chairman
The inimitable J. Mark McWatters completed his unlikely lies from board gadfly to leader of the NCUA yesterday when he was named Acting Chairman of the NCUA Board, by President Donald Trump. Here are a few quick thoughts.
This is good news for credit unions, leaving aside his seemingly compulsive need to reference the fact that he is a lawyer at least once every five minutes, McWatters’ legal acumen has been a welcomed change for the industry.
- He has advocated for taking a fresh look at issues ranging from MBL’s to Field of Membership flexibility.
- It may have been totally by accident, but NCUA has actually positioned itself well ahead of the Trump wave by already having McWatters on the Board. McWatters joined by Metzger, have been advocating for substantial regulatory relief for almost two years now. As a spokesman for the Board McWatters can only help build bridges to Congressional Republicans.
- Under NCUA’s enabling statue lets the President pick the Chairman of the NCUA Board: What a concept. This commonsense measure provides another example of why CFPB supporters are so wrong in their dogmatic instance that the bureau can only function with a single benign dictator.
On that note, enjoy your weekend without football. I will have to remember what I used to do on Sunday afternoons.
On Tuesday, a Federal District Court in Virginia dismissed a lawsuit brought with much righteous indignation and fanfare by the Independent Bankers Association. (Indep. Cmty. Bankers of Am. v. Nat’l Credit Union Admin., No. 1:16CV1141 (JCC/TCB), 2017 WL 346136, (E.D. Va. Jan. 24, 2017). They worked themselves into a foam-mouthed frenzy following the promulgation of regulations by NCUA, giving credit unions greater flexibility to make MBL loans without first seeking waivers from the agency. Although the case was dismissed on technical grounds, make no mistake about it, if this was a boxing match it would have been a TKO. This was about as complete a victory as the NCUA could have gotten in the first round of what could be extensive litigation ultimately involving not only NCUA’s authority to promulgate changes to its MBL regulations, but also its authority to promulgate changes to field of membership requirements.
In 2003, NCUA amended its regulations. It allowed credit unions to purchase nonmember loan participations without counting such participations against the MBL cap, provided that they get NCUA’s approval to do so. In its 2016 revisions to the MBL rules, NCUA decided that credit unions no longer have to seek prior approval before acquiring nonmember participation interests. The clux of the IBA’s complaint was that credit unions never should have been given the authority with or without NCUA’s approval. The court ruled that the bankers could have brought their complaint more than a decade ago, and their decision not to do so meant that the six year statute of limitations to bring such action had expired long ago.
But wait there is more! In a typical lawsuit it is fairly easy to show that a plaintiff has suffered an injury. For example, if I was hit by a car this morning on my way to work no one would question my right to sue the driver if he was speeding. But in the land of Association litigation standing is a crucial issue. Too broad a view of what constitutes harm makes it easier for Associations like the IBA to sue over credit union laws and regulations. So, I was pleasantly surprised that the judge also concluded that the bankers had not shown that they were in fact harmed by NCUA’s MBL changes. This passage is worth quoting at length because it could be useful in challenging banker’s standings in subsequent lawsuits.
It is not clear at this point that Defendant’s 2016 regulation will result in increased competition against Plaintiff’s member banks. Credit unions were able to compete with banks in the commercial loan arena before the 2016 Rule. Indeed, Plaintiff represents that they have done so vigorously. The 2016 Rule on its face does not permit additional competition. All it does is dispense with the requirement that, after taking on a certain amount of member business loans, a credit union obtain permission to purchase an additional interest in a nonmember business loan.
Finally, the court noted that even if it was to rule on the merits of the case, the bankers would still loose. NCUA did not abuse its discretion in amending its MBL regulations but was instead acting within its authority to interoperate an ambiguous statue.
In yesterday’s blog, I provided an overview of NCUA’s Supplemental Capital ANPR addressing a potential Supplemental Capital framework. I know requests for feedback are white noise to many of you, who actually have more immediate concerns to worry about, like running a credit union. But there are some big issues tied in with this proposal that affect the industry as a whole and you should take the time to weigh in.
Just how big are the issues? Well, this is the first ANPR I have ever seen that raises the prospect of credit unions putting their tax exempt status at risk. The ANPR notes that “With respect to federal credit unions, the Board is aware that part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise Capital.” It further points out in a footnote that Mutual Savings Banks and Savings and Loan Associations were stripped of their tax exempt status in part because they “had evolved from mutual organizations to ones that operated in a similar matter to banks.”
To me, the core issue is how much credit unions with $100 million or more in assets need Supplemental Capital both to comply with their enhanced risk based capital obligations and continue to grow to meet member needs. The simple truth is that the Basel iii framework, for which NCUA’s Risk Based Capital was the inspiration, was designed with large banks in mind. These institutions can satisfy capital requirements by issuing stock. Credit Unions have no such option. Supplemental Capital would give them greater flexibility to meet these new demands.
And let’s not forget that the credit unions that are most likely to directly benefit from Supplemental Capital are the same ones large enough to bring down the entire industry. Supplemental Capital could provide an added buffer against future financial meltdowns.
Ultimately, I believe that the industry needs to have Broad Based Supplemental Capital as an option available for all credit unions that choose to use it. But seeing legislation like this pass any time soon is about as likely as seeing President Trump’s spokesman, Sean Spicer leading the Washington Press Corp. in a yoga class. (That man really has to take a chill pill.) Supplemental Capital regulations could show Congress how additional capital flexibility helps credit unions grow to meet member needs and enhances the safety and soundness of the industry.
On that note, Namaste