MBL Regulation Finalized

In the first tangible sign of the impact that the passage of S. 2155 is having for both state and federal credit unions, the NCUA on Thursday finalized regulations clarifying that mortgage loans non-owner occupied 1-4 family homes are no longer considered Member Business Loans. This is good news for credit unions concerned about going up against the MBL lending cap and also good news for smaller credit unions that can now lend money for second homes without triggering MBL obligations.

As the explained in the preamble to the regulation: the MBL definition “now excludes all extensions of credit that are fully secured by a lien on a 1- to 4- family dwelling regardless of the borrower’s occupancy status. Because these kinds of loans are no longer considered MBLs, they do not count towards the aggregate MBL cap imposed on each federally insured credit union by the FCU Act.”

The regulation is also noteworthy because the NCUA used an exception to the traditional notice and comment period requirements to make the changes. I had no idea before I read this regulation that the Administrative Procedure Act permits agencies to skip notice and comment periods when proposing a regulation is “impracticable, unnecessary, or contrary to the public interest pursuant to the Administrative Procedure Act (APA). Who knew? Perhaps other agencies will use this power to quickly amend regulations which are now inconsistent with the law.

More Municipal Fallout

Also last week the NCUA issued a public notice prohibiting Municipal Credit Union CEO Kam Wong from working in the credit union industry following federal charges that he embezzled millions of dollars from the credit union.

June 4, 2018 at 7:59 am Leave a comment

What Do Effective Dates, National Anthems and Weddings Have In Common?

Image result for Nayah Damasen sings national anthem

Absolutely nothing but they all play a central part in today’s blog.

National Anthems

This has absolutely nothing to do with credit unions but as long time readers of the blog know, yours truly is an unabashed sports loving couch potato and as such is an aficionado of national anthems. So I’m here to tell you that if you get a chance, you should listen to Nayah Damasen’s rendition of the national anthem before the opening game of the NBA finals matchup between the Golden State Warriors and Lebron James – it’s an insult to basketball to say that his supporting cast actually constitutes a basketball team. Anyway, I have to say that Nayah Damasen’s rendition is the best pre-game big game rendition I’ve heard since Whitney Houston’s 1991 appearance prior to the Super Bowl. By the way, I expect last night’s national anthem to ultimately be the most compelling part of the finals.

Effective Dates

By this time I was hoping to be able to give you clear-cut decisive guidance on when the relevant provisions of S.2155 take effect. Alas, yours truly has to equivocate big time. As you can see from this chart prepared by our intern Chris Del Santo, several of the provisions most important to credit unions technically took effect on the day they were signed into law. The problem is that no matter what the law says, many of these same provisions are not self-executing. For example, §303 grants immunity for financial institutions that report suspected elder abuse. Although the provision technically took effect on May 24th, its protections are only afforded to individuals who have received the necessary training. We are going to need guidance from regulators as to when such material will be available.

In addition, some of the most important provisions necessitate changes to existing regulations such as §101 which deals with the definition of a qualified mortgage for smaller financial institutions and §104 which increases the threshold for HMDA compliance, contradict existing regulation which will have to be amended. By all means check with your attorney but I’m not comfortable suggesting that anyone should operate as if these changes are truly in effect until we get guidance from regulators and changes to the impacted regulations.

Incidentally, I checked with my friends at CUNA and here is a blog (password protected) they recently did on the subject.

Weddings

If all goes according to plan, by the end of the weekend the Association’s Vice President of Governmental Affairs will have taken the vows and entered the land of marital bliss. For the record, I have never seen such a calm Groom in my life. When you see Michael at Convention next week be sure to congratulate him. On that note, enjoy your weekend.

 

June 1, 2018 at 8:36 am 3 comments

Handle With Care: New Protections For Financial Institutions that Report Suspected Elder Abuse

One of the many provisions tucked away in S.2155, which was signed into law on May 24, was one providing protections to credit unions and other financial institutions when certain employees act in good faith and reasonable care to report suspected financial exploitations of a person at least 65 years old to law enforcement or selected agencies. While the statute is important, particularly in states like New York, which has among the narrowest of protections for financial institutions reporting suspected elder abuse, implementation is trickier than one might suspect. Read §303 carefully and make sure you put the proper procedures in place.

What has me a little nervous is that for an individual to be given immunity from a lawsuit after reporting a suspected abuse, such individual must serve as a supervisor, a compliance officer or in a “legal function” (which, by the way, includes a BSA officer). The person must make the disclosure in good faith and with reasonable care. This means that only specific individuals can report suspected elder abuse. In other words, if your credit union decides to implement this framework, it is absolutely crucial that frontline staff in particular understand that they cannot, no matter how well-intended they may be, report suspected elder abuse. Instead, they must know what individuals to report suspected abuse to.

Similarly, financial institutions shall only be protected against liability if the supervisor, compliance officer or persons serving in a legal function who make the report has received the necessary training.

And what is the necessary training? Interestingly, the training material shall be maintained and made available by the agency with examination authority over the institution. In plain English, that means NCUA has to get to work. This training has to be provided not later than one year after a person becomes employed by the credit union. The credit union would be responsible for maintaining records of training.

Is the law better than nothing? Absolutely. But there are plenty of potential loopholes and trip wires to deal with.

I’m cynical. I believe this is one area where a good deed will not go unpunished and your credit union will find itself on the opposite end of a lawsuit if it does the right thing and reports a suspected elder abuse enough times.

 

May 31, 2018 at 11:14 am Leave a comment

Time To Regulate Online Lenders?

The New York State Department of Financial Services has been seeking comments from industry stake holders on the implications of online lending for the purposes of submitting a report on its  Legislature. Reports typically end up collecting dust on the second floor of the legislative library only  to be pulled out by staffers anxious for filler to put into a memo after someone comes up with the idea of reissuing the same kind of report years later. This time I think the DFS is on to something.

Online lending is the latest example of an innovative financial development that has the potential to help consumers but which , without more  oversight,  could very well result in triggering the next financial crisis or close to it. Credit unions have a stake in advocating for the appropriate regulation of this industry not only to prevent consumer harm but to ensure that online lending isn’t allowed to develop in a way that makes it impossible for credit unions to compete against this type of banking.

First, what is online lending? There’s not a precise definition. What I am talking about for purposes of this blog are virtual platforms such as Kabbage and Lending Club. These entities are not banks. Instead, they make their money by providing a central place where borrowers meet “lenders”. I put lenders in quotes because what actually happens is that the borrower posts the loan she is looking to get and lenders actually compete auction style for the loan. The winning bid is actually originated by a bank affiliated with the platform. The lender holds the note and the platform makes its money through fees and servicing of the loan.

To its supporters this innovative use of technology updates banking. For one thing, the internet now makes it possible to aggregate huge numbers of lenders and borrowers to an extent not possible in the days of simple brick-and-mortar financial institutions. It results in more competition for more loans; combine this with the use of big data analytics to assess an individual’s credit worthiness and what you have is a means to increase the number of people eligible to get reasonably priced loans. Its  is a win/win right? Not really.

For one thing, the regulatory framework under which these institutions operate is lacking in clarity. For example, the platform itself is subject to SEC regulation but not oversight by the OCC for example. Conversely, the OCC and other banking regulators such as the CFPB do have oversight over any affiliate bank originating online loans but the SEC has no oversight, or expertise for that matter, to oversee the originating banks.

Then there’s the simple issue of liquidity risk. Online lending has developed in a period of solid if not spectacular economic growth. We still don’t know what’s going to happen to these platforms during an economic downturn. For instance, is it really healthy for the economy for entities making loans that don’t have to have baseline loan loss provisions? In fact, this industry has many of the attributes of the mortgage securitization industry before the crash.

How does all this tie in with credit unions? Most importantly, regulators shouldn’t be in the business of standing by and letting one segment of an industry attract new business by not imposing basic safety and soundness requirements. This not only puts consumers at risk but also creates an uneven playing field in which the more prudently regulated and run the institution, the more difficulty it is going to have competing for members.

New York State should take a look at online lending but ultimately the Federal government must step in and create a unified regulatory structure that has jurisdiction over both online platforms and associated originators.

 

May 29, 2018 at 8:40 am Leave a comment

Six Things To Know Before You Start Your Summer Vacation

You can tell everyone’s getting ready for a long summer hibernation with the amount of stuff that came out yesterday. Here is a list of the big news:

  1. The Association’s very own Michael Lieberman just informed me  that the President not only pulled out of the North Korean Summit today but he signed S.2155. This means that I have to start looking at all those effective dates. You’ll be hearing more about this in the days to come.
  2. I was beginning to think this day would never come. The NCUA yesterday filed a Notice of Appeal seeking to reverse the district court decision holding that the NCUA did not have authority to automatically qualify credit unions to expand communities comprised of combined statistical areas up to 2.5 million members. The ruling also changed the definition of rural community in a way that the court says was an abuse of discretion. There’s no sense understating the importance of this appeal. NCUA’s ability to define what constitutes a local community for purposes of permitting credit unions to expand to meet member needs.
  3. NCUA is proposing regulations that would give credit unions authority to offer new types of payday loan alternatives. These would be in addition to the PAL loans which credit unions can already offer. Among the new features in the proposed PAL II (that’s NCUA’s term) are: permitting loan amounts of up to $2,000 and loan terms as long as a year. The NCUA isn’t the only regulator looking to thread the needle by encouraging lenders to make short-term loans but discouraging them from making payday loans. Just two days ago the OCC created a minor stir when it “encouraged” banks to make responsible short-term loans. Let’s face it, short-term loans are the financial equivalent of needle exchange programs: In an ideal world, you wouldn’t need them but allowing mainstream lending institutions to provide short-term loans is a responsible alternative to the worst excesses of payday lending.
  4. NCUA clarifies vacation payouts for liquidating credit unions. Hopefully this is a bit of information that will never be relevant to you. At its Board meeting yesterday, the NCUA also harmonized two conflicting regulations to clarify when CEO’s of credit unions being involuntarily liquidated are entitled to a payout of their vacation time. The new regulation clarifies that such payments will not constitute a prohibited golden parachute so long as it is provided for in the credit union’s handbook and is consistent with payments provided to all employees who meet the eligibility requirements.
  5. As I’ve explained in previous blogs, Chairmen McWatters has never been a fan of the risk based capital rule which takes effect in January 2019. So it is not surprising that he wrote a letter in support of legislation that would push back the effective date until 2021. Hopefully McWatters can be joined by a board member who is also willing to acknowledge that NCUA’s risk based capital rules were and remain a solution in search of a problem.
  6. Finally, just how much does the Trump administration dislike New York and California? Remember that the tax legislation caps at $10,000, the amount of money that can be deducted for the payment of state and local taxes. Two days ago, the IRS released this memo explaining that: “some state legislatures are considering or have adopted legislative proposals” that attempt to circumvent the property cap limit by re-categorizing property tax payments as other types of payments. The stated aim of both New York and California is to minimize the impact that the new federal tax law will have in high property tax areas such as Westchester and Long Island. The IRS goes on to explain that “Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

On that note, enjoy your summer. If past readership trends are any indication, many of you will be taking a break from the nitty-gritty of reality for the next couple of months. I will be joining you on occasion.

 

May 25, 2018 at 7:53 am 2 comments

Victory!

Image result for victory kiss vedIt’s nice to actually be part of a win, isn’t it? Here are a few quick thoughts on the passage of S.2155:

First, it wasn’t just the victory but the size of the victory. Notwithstanding the demagogic nonsense being pedaled by certain unnamed Democrats who made the bill sound as if it was the worst piece of legislation since Smoot Hawley. 258 yes votes means that 33 Democrats quietly voted yes on the bill. A big shout out to Long Island Democrats, Kathleen Rice and Tom Suozzi as well as the Hudson Valley’s Sean Patrick Maloney for looking past the noise and recognizing that the bill was primarily a level-headed approach to helping out community banks and credit unions.

Second, the bill did not repeal HMDA. I repeat, the bill did not repeal HMDA. What the bill did was exempt institutions from the almost two dozen data points which the CFPB and Congress imposed on institutions as an outgrowth of Dodd-Frank. Keep in mind that the institutions which actually have the history and ability to engage in systemic lending abuses are still subject to enhanced HMDA scrutiny but I know that wouldn’t make a good Democratic talking point. Go to §104 of the bill and judge for yourself.

Third, speaking of the nonsense spewed by some of the bill’s opponents, if this bill really is a giveaway to the big banks, the ABA really isn’t as talented as I think it is. A few more victory’s like this and it will be out of business.

Fourth, remember the bill isn’t law yet. It still has to be signed off on by the President which we have every indication he will do.

Fifth, compliance people have had a relatively quiet time of it lately. That’s about to change. There are many good little nuggets in this bill ranging from the protection of financial institutions that report suspected financial abuse of the elderly to greater flexibility for mortgage bankers that employ originators who previously worked in banks and credit unions. This is obviously good news for those of you who have mortgage Cusos. We need to start finding out when these provisions take effect and if regulations will be promulgated along with them.

Finally, a big shout out to CUNA and NAFCU. This is a huge victory. In addition, to get the House of Representatives to agree to pass a Senate banking bill without amendment is a tactical accomplishment which speaks to the quality of our national leadership.

May 23, 2018 at 8:55 am Leave a comment

3 Things To Know On Tuesday Morning

If you’re a recent visitor from another planet, you could be forgiven for thinking that the world is dominated by misogynists and would be predators so I’ve decided to lead with news, while not directly related to credit union land, shows that progress is in fact being made.

Yesterday, the New York Stock Exchange, the Capitol home of what the late great Tom Wolf described for the Masters of the Universe announced that it would be naming Stacey Cunningham as its first female President of its 226 year history. What would Sherman McCoy say?

Just how big of a deal is this? I believe symbolism matters and even though the NYSE isn’t quite what it used to be, this is still a big deal. This morning’s WSJ points out that when Cunningham started working for the Exchange as an intern in the early 90’s, the woman’s bathroom was a converted phone booth on the 7th floor. And when she started trading she was only one of 1,365 traders. True, the NYSE only accounts for 22% of trades these days but just as we continue to look for ways to improve corporate culture, we should also take the time to put these efforts in their proper context. On balance things have gotten a heck of a lot better for everyone.

Must See TV

Today is one of those must see TV days or must hear days for those of you with satellite radio. If all goes according to plan, the House of Representatives will be voting on S.2155, the Regulatory Relief bill that you have heard so much about. I’ll be talking about the specifics of this bill until you get sick of reading about it but today keep an ear out for how many Congressmen take the opportunity to praise not just banks but credit unions. Also, keep an eye on how many Democrats ultimately vote for the bill. Since there is a strong possibility that the Democrats will take control of the House next year, their attitude towards this bill will be an early indicator of just how radical a regulatory agenda a Democratic majority will push.

What’s Next for Payday Lending Rule?

That is the headline in this morning’s Law360 email blog now that the Senate has failed to muster enough votes to repeal the Cordray era regulation. There is still much the CFPB can do to obstruct implementation of this controversial regulation.

May 22, 2018 at 8:22 am Leave a comment

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Authored By:

Henry Meier, Esq., 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.

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