A Few Quick Thoughts to Start Your Credit Union Day

CitiBank Settles CARD Act Violation 

My takeaway from the Tampa Bay Buccaneers destruction of the Kansas City Chiefs is that, for all of life’s complexities, we should never lose sight of the basics. With that as my big thought of the day, I want to bring your attention to a recent settlement reached between CitiBank and a group of states for violating the lookback provisions of the CARD Act. As you erstwhile veterans of compliance may recall, the CARD Act was the first major piece of legislation passed by Congress as it scrambled to punish banks as the effects of the mortgage meltdown were coming into focus.

Under the CARD Act, if a creditor increases the annual percentage rate applicable to a credit card account based on factors including the credit risk of the card holder, among others, the creditor should review whether such factors have changed at least every six months (15 U.S.C. section 1665c). In 2018, the CFPB reached a settlement with the bank for misapplying its lookback factors. The announcement of the state settlement resolves similar claims brought against the bank by attorneys general, but the bank refused to concede that it had violated state-level consumer protection laws. My takeaway? Given the complexities of Regulation Z, periodically reviewing your lookback procedures is something that should be on your to-do list if it isn’t already.

Is New York the Center of the Political Universe?

No. But it promises to be one of the most highly contested battlegrounds for 2022 as Republicans and Democrats fight for control of the House of Representatives. Yesterday, Democrat Anthony Brindisi conceded defeat, bringing an end to one of the closest congressional races in the state’s history. Incumbent Brindisi was defeated by Claudia Tenney, who previously lost the seat to Brindisi during the 2018 cycle. Tenney is a good friend to many of our credit unions, and she is certainly aware of the key issues having previously served on the House Financial Services Committee. Taking a look at the big picture, with Democrats in charge of both the Assembly and the State Senate, the House of Representatives within striking distance for Republicans, and New York consistently having multiple competitive congressional elections, get ready to see an awful lot of campaign ads in the run-up to 2022.

February 9, 2021 at 9:56 am Leave a comment

State Investigates Mortgage Lending Practices in Buffalo

Governor Cuomo and the New York State Department of Financial Services (DFS) issued a strongly worded report criticizing mortgage lending practices in the Buffalo area.  The DFS’ investigation was based on an analysis of HMDA data comprising the Buffalo Metropolitan Statistical Area (MSA), which includes the Counties of Erie, Niagara and Cattaraugus and the City of Buffalo. 

According to the Governor’s Press Release, “Buffalo remains one of the most racially segregated cities in the United States decades after the practice of redlining and other forms of housing discrimination were banned by law. DFS’ report found a distinct lack of lending by mortgage lenders, particularly non-depository lenders, continues today in Buffalo neighborhoods with majority-minority populations and to minority homebuyers in general.”

Although the report highlighted the Buffalo area, it reflects what is likely to be a strong push on the part of both federal and state regulators to use Fair Market Lending laws to tackle patterns of racial inequality.  For example, the Department begins the report by noting that much of the racial housing patterns in the area have their roots in government policies dating back to the Great Depression. Nevertheless, the Department concludes that mortgage lending practices should better address these disparities.

The report also highlights the fact that much of the lending in Buffalo is done by non-depository banking institutions, which are licensed by New York State.  It suggests that the State Community Reinvestment Act be amended to incorporate non-depository lending institutions such as mortgage banks.

My Good as Tier I Capital Super Bowl Prediction

On a much lighter note, yours truly is ready to make his good as gold Super Bowl prediction after having been half right in predicting that Tampa Bay would be meeting the Ravens this Sunday.  I apologize for underestimating the Buffalo Bills.  The Chiefs are favored by three points.  I say give the points, take the money:  Chiefs 38-Tampa Bay 20.  Enjoy your weekend, folks.

February 5, 2021 at 9:04 am Leave a comment

What’s Old is New Again – BSA Takes Center Stage

Let’s face it – these are heady days for cyber criminals. Crypto currencies provide an ideal means to facilitate illicit payments, an unprecedented number of people are working from home, the worldwide economic slowdown ensures a steady supply of potential fraudsters, particularly in countries that look the other way at this type of crime, and you have the US government throwing unprecedented amounts of money to consumers in as quick a way as possible. Put this all together and, in my ever so humble opinion, (at least in the short term) your credit union has to dedicate more of its compliance resources to ensure it is taking the steps necessary to detect and react to nefarious cyber activities, i.e. the “red flags” of criminal activity. 

Recently, there has been a sharp increase in the number of advisories of which your credit unions should be aware. With regard to PPP loans, FinCEN recently sent updated guidance reiterating your due diligence requirements and confirming what procedures can be used when assisting individuals applying for “second draw” PPP loans. This guidance is particularly useful for navigating your beneficial owner obligations. Remember that the PPP loan application requires you to identify any owner with a 20 percent stake in an applicant’s business, whereas FinCEN’s beneficial owner requirements kick in for individuals with a 25 percent stake. 

Just yesterday, FinCEN issued this guidance providing examples of how fraudsters are gaming the system to facilitate healthcare fraud. One of the examples it provided involved an individual who set up several shell pharmaceutical companies to get reimbursement for transactions that never took place. It looks like somebody better call Saul (for the uninformed, that is a Breaking Bad reference). 

The Anti-Money Laundering Act of 2020 contained in the National Defense Authorization Act ordered FinCEN to provide guidance to financial institutions that are asked by law enforcement to keep an account open, even though they suspect or know that it is being used to facilitate criminal activities. The statute provides that financial institutions honoring such “keep open requests” shall not be liable for maintaining the account. This guidance, which was issued jointly by all the federal financial regulators, including the NCUA, implements this language. Finally, I want to remind you all of the guidance issued in October related to financial institutions that facilitate ransomware payments. Statistically speaking, there is a very good chance that many of your credit unions will either facilitate a ransomware payment, or be victimized by a ransomware attack. As I explained in this blog from the fall, OFAC is reminding third parties like insurance companies, banks and credit unions that they could find themselves subject to strict liability penalties for facilitating these payments if they are going to individuals on the OFAC list. While yours truly continues to believe that this is a woefully misguided warning, you should all have contingency plans for dealing with a ransomware scenario, and be cognizant of its potential OFAC implications.

February 3, 2021 at 9:26 am Leave a comment

How Big a Difference Does “S” Make?

That’s the big question I’m pondering this morning after delving into the proposal by the NCUA Board to amend the erstwhile CAMEL examination system to include a separate category dedicated exclusively to sensitivity to market risk. Is this long overdue change little more than semantics, or somewhere in between? 

The current CAMEL framework stands for – how many of you know the answer before I tell you – Capital Adequacy, Asset quality, Management, Earnings and Liquidity. In contrast, for more than two decades now, the other national bank regulators in many states use CAMELS, which separately evaluates Sensitivity to market risk. The purpose of this S is to ensure examiners independently evaluate interest rate risk. In the preamble to its proposal, NCUA notes that credit unions have become more sophisticated since they decided not to expand the examination framework in 1997. For example, in those pre-millennial days, mortgages accounted for only 19 percent of the industry’s total assets, which has grown to 42 percent as of September 2020. In addition, the call for this extra category has been made over several years, with former board chairman Rick Metsger championing the idea. When NCUA was devising its initial risk-based capital framework for complex credit unions, one of the industry’s criticisms was that interest rate sensitivity is best accounted for by examiner evaluation as opposed to being baked into the asset ratings that were proposed by the NCUA. So on the one hand this proposal is, if anything, overdue.  

But, is it really necessary? For one thing, NCUA already accounts for a credit union’s sensitivity to interest rate fluctuations. As NCUA made clear in this 2000 letter to credit unions detailing the CAMEL rating system, the existing liquidity category includes an assessment of the credit union’s monitoring and control of interest rate sensitivity and exposure. In addition, credit unions with $50 million or more in assets are required to have an interest rate risk policy.

All of which leads me back to where I started. Of course a sophisticated industry of depository institutions needs to assess its exposure to interest rate changes. But if all goes according to plan, this update to the CAMEL system will not have much of an impact on your credit union. 

February 1, 2021 at 9:38 am Leave a comment

Data Privacy Emerges As Key Issue in NY’s Budget Debate

Among the highest-profile proposals in the Governor’s budget package this year is the New York Data Accountability and Transparency Act. It is the Governor’s first major foray into the issue of data protection, and it has already set off a debate among those who think the bill goes too far and those who think it doesn’t go far enough. Regardless of what side wins that debate, what’s clear is that this is a major legislative proposal which could have a major operational impact on your federal and state chartered credit unions that do business in New York.

The core part of the Governor’s proposal is to give consumers the right to opt out of information sharing. It also empowers the DFS to create a Consumer Data Privacy Bill of Rights. These rights would include:

  • The right to protection of their personal information by “covered entities;”
  • The right to exercise control over what personal information these entities collect from them and how it is used; and
  • The right to request that a covered entity “return, destroy, amend or otherwise alter” the personal information collected about them.

One of the main issues which we will be keeping an eye on is precisely what entities this proposal would apply to. Section 2 (b) (i) stipulates that this section shall not apply to personal information that is collected in accordance with the Gramm-Leach-Bliley Act. However, it is not entirely clear how wide a net this exemption casts, particularly since other aspects of the proposal, most notably the bill of rights, could be interpreted as giving consumers rights that goes beyond federal baselines. In addition, even if GLBA compliant entities are exempt from the statute, they would still need to make sure there was a structure in place to deal with data that doesn’t fall under the GLBA. The reach of the legislation is further restricted by the fact that it only applies to businesses that “(i) control or process the personal information of 100,000 consumers or more; or (ii) derives over fifty percent of its gross revenue from the sale, control or processing of personal information.” 

Without the possible carve outs mentioned above, this clearly would apply to large credit unions, but would also apply to credit unions of all sizes in New York, since all credit unions derive the majority of their income from processing personal information. It also would apply to many CUSOs. And for those of you breathing a sigh of relief that you aren’t headquartered in the Empire State, keep in mind that it would extend to any entity that “intentionally targets residents in New York State.”

We will keep you posted on developments. In the meantime, stay warm!

January 29, 2021 at 10:07 am Leave a comment

Like it or Not, CUs must Engage in the Climate Change Debate

Good morning, folks.

First, I want to assure you that the purpose of today’s blog is not to debate the science of climate change, or to suggest where I think it should be on the list of concerns considered by your executive team as it tries to position your credit union operations for the months and years ahead. The purpose of this blog is instead to inform you that, with yesterday’s announcement of executive orders calling for a government-wide approach to climate change, the industry at large as well as your individual credit union has become part of a discussion. It’s not if your credit union is going to take steps to mitigate the impact of climate change – but what those steps are going to be when regulators come knocking.

In reviewing yesterday’s executive order, the President didn’t specifically mention banking initiatives, but by including the Treasury Department and the HUD Secretary on the task force and emphasizing the relationship between economic justice and climate change initiatives, there’s little doubt that financial institutions will be asked to play a role in mitigating the effects of climate change. Plus, even though NCUA is an independent agency, there’s nothing to stop it from voluntarily working with the Biden administration on these issues and efforts. 

New York State’s Department of Financial Services has been at the forefront of this debate. In October, it issued this guidance making the argument for financial institutions to take an active role in integrating climate change considerations into their operations. It pointed out, for example, that extreme storms could have a disproportionately negative impact on regional and community banks which provided mortgages in impacted areas. On a more nebulous note, it argued that the transition away from a carbon-based economy will over time impact the underlying value of assets. DFS also issued specific expectations for the institutions it regulates. These include that they “start integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies,” as well as to “start developing their approach to climate-related financial risk disclosure.” New York’s Superintendent Lacewell has recently highlighted the importance of this initiative. 

I know how much work all of you already have on your plate, and I also know that this has become one of those issues that can end a dinner party quicker than one hurricane can put a significant portion of Long Island underwater. But the sooner we lay out how we’re going to do our part, the better positioned we will be to prevent overly cumbersome, one-size-fits-all mandates.

January 28, 2021 at 9:49 am Leave a comment

Is Your Electronic Transfer Policy Unfair and Deceptive?

A recent case provides important guidance to your credit union regarding the Electronic Funds Transfer Act and corresponding language contained in your account agreements. Here Goes. 

A member opens up an account at your credit union and the following day uses the ACH network to make a $100,000 deposit. Your member is now seeking to bring a class action against your credit union for not immediately accruing interest on the deposit the day the money was transferred. Do they have a case?

Those are the facts recently analyzed by the US Federal Court for the Eastern District of New York in Cheng v. HSBC. For those of you who could find yourself the subject of a lawsuit, this case is the latest example of how previously hum-drum account issues have become hotter for high-stakes and often expensive litigation. And to those of you for whom a class-action lawsuit is not a primary concern, the case provides important guidance on what you have to disclose to your members under the Electronic Funds Transfer Act. 

When our Plaintiff in this case discovered that interest was not accrued on the account the day of the ACH deposit, he brought three separate claims against the bank. First that it breached the terms of its account agreement by not immediately accruing interest, secondly that it violated the Electronic Funds Transfer Act by not disclosing when interest would begin to accrue on ACH deposits, and finally that the bank committed a deceptive act under Section 349 of New York’s General Business Law.

First the good news. In an issue of first impression in New York, the court ruled the bank was not obligated to disclose when it would begin accruing interest for ACH deposits under the Electronic Funds Transfer Act, which requires financial institutions to disclose fees or charges for electronic transactions. Why? Because the court concluded that a fee or charge is a debit for a specific amount that is withdrawn from an account. Delaying when interest will begin accruing may result in a member having less money, but the financial institution is not taking money that would otherwise be available to the account holder. This is good news for those of us within the second circuit, but for those of you with credit unions outside of this area, at least one federal court in Massachusetts has reached a contrary result. But then again, these are the same people who root for the Boston Red Sox. So can they really be trusted?

Now for the bad news. As readers of this blog are well aware, your account agreements are contracts between you and your members. When analyzing how to interpret contracts, courts must first determine if the language is clear or is instead susceptible to more than one interpretation. The relevant language in this case stated that “electronic bank transfers may take up to four business days before it is credited to your HSBC account,” and more general language in the basic account agreement that “interest begins to accrue on the business day you deposit non-cash items.” The bank argues that this language, read together, clearly puts an account holder on notice that while you can expect interest to accrue on your account the same day as the deposit is settled, there is no guarantee the transfer will be deposited the same day it’s executed. The court agreed that while this interpretation is reasonable, it also agreed that a reasonable consumer could have an alternative interpretation that once an ACH transfer is executed, interest should begin to accrue. The next time you’re reviewing updates to your account agreements, make sure you close this loophole. As a result of this ambiguity, the contract claims were not dismissed.

Finally the court ruled that, as drafted, a jury could find that the bank’s contractual language amounted to an unfair and deceptive practice. 349 is becoming a potent weapon used against banks and credit unions. Remember, it is no defense to this statute that your credit union is federally chartered.

January 27, 2021 at 9:50 am Leave a comment

Are CUSOs Friend or Foe?

Part of the deluge of regulations proposed by NCUA in recent weeks is, depending on your perspective, either a wolf in sheep’s clothing or a lamb in sheep’s clothing. Either way, it gets to a policy issue that all credit unions should have an opinion on.

What I am talking about is NCUA’s proposed rule that would permit CUSOs to originate any type of loan that a federal credit union may originate. It would also give NCUA the ability to expand the list of permissible CUSO activities without going through the notice and rulemaking procedure. On a practical level, the regulation would permit CUSOs to make car loans, purchase retail installment contracts and, in NCUA’s own words, “engage in payday lending.” A similar request was made in 2008 but rejected by the board.

So why does yours truly consider this such an important issue for the industry to debate? Because when I started learning the issues, I always thought of CUSOs as compliments to and not competitors against credit unions. As compliments to credit unions, they are a wonderful mechanism to pool resources and cost-effectively provide a broader range of services to their members that would not otherwise be available. Since my original indoctrination, I have grown increasingly perplexed and a little bit frustrated (albeit not anywhere near as frustrated as I am by my New York Giants) by the resistance of credit unions to engage in this type of activity. 

There’s a second, more practical reason for CUSOs which supporters of this proposal recognize: non-depository institutions are growing in significance and are only going to get larger. For example, if I predicted 15 years ago that non-depository institutions would originate the majority of mortgages in this country, you would have said I was nuts. Today, technology has fundamentally changed the way things are done. CUSOs provide the most practical mechanism for credit unions to at least try to compete in this new world. Not only can a CUSO invest in the resources necessary for smartphone lending, but they aren’t constrained by field of membership restrictions. 

I don’t know what side of the debate I come down on, but this is not an issue that the industry should decide without robust consideration of both the pros and the cons. 

Sorry, Bills fans!

I’m sorry the joyride came to an end, Bills mafia. On the bright side, you can look forward to years of high-level football with a great coach and one of the best young quarterbacks in football. Unfortunately for you folks, so can Kansas City Chiefs fans. 

January 25, 2021 at 9:39 am Leave a comment

New York to LIBOR’s Rescue!

The rulers of the financial world typically frown on the state getting involved with their business. But when it comes to LIBOR, you can hear a huge sigh of relief emanating from Wall Street this morning. As readers of this blog know, LIBOR is a discredited benchmark that has been the gold standard for contracts that use indexes. In the credit union world, LIBOR has been used by some for adjustable rate loans, and in the world of high finance, it has been used for complicated derivatives. 

Despite the fact that readers of this blog have known for years that LIBOR would come to an end, perhaps as early as this year, apparently some of the folks on Wall Street haven’t gotten around to adjusting to this new reality. But they’re in luck, because tucked away in the Governor’s Article VII budget language is a provision which will amend New York State law to ensure the continued validity of contracts that rely on LIBOR adjustments even after it is obsolete. Since so many financial contracts are executed in New York, this news benefits the financial industry at large. 

Has the CU Industry Been Impacted by the Russian Cyber Attacks?

Since at least last March, the Russian government has engaged in the most comprehensive series of cyber attacks in the internet era. The attacks, which may still be ongoing – the scope of which is still being determined – raised the very real prospect that a foreign government hostile to the United States has infiltrated the inner workings not only of corporations, but of financial institutions as well. Unfortunately, despite a letter from CUNA on the potential scale of the problem, the NCUA has done little to inform credit unions about the extent to which NCUA itself may have been victimized and the steps credit unions should take to protect member data.

As Michael Ogden succinctly put it in this CU Times piece

“We do not know if the NCUA has been impacted. We do not know if the NCUA is conducting its own investigation or audit of its network systems. We do know the Treasury Department, the Commerce Department, the State Department, the Pentagon and the Energy Department have all been compromised. We do know from reports that other federal regulatory agencies have also been compromised.”

This is one of those situations where what you don’t know can hurt you. It’s time for some clarification from our regulator.

January 21, 2021 at 9:34 am Leave a comment

Three Cheers for the 20th Amendment!

I’m exercising blogger privilege today, and in honor of the quadrennial transfer of power, I’m dedicating this blog to an issue that has absolutely nothing to do with credit unions. Regardless of where you fall on the political spectrum, what cable news channel you watch, or what radio station you tuned into this morning, I hope we can all agree that the interregnum, the period between election and today, has been one of the wackiest since 1876. Imagine if all this mayhem didn’t end until March 4th, and a lame duck Congress filled with members who had lost re-election were still in charge. This is where the 20th Amendment comes in.

1932 was a particularly momentous year. The Depression was raging on, President Hoover was historically unpopular but doubling down on his economic policies, and internationally, previously democratic countries were beginning to backslide. Fortunately, Congress agreed that it made no sense for the country to continue to suffer during the huge delay between election day and the new administration. By early 1933, 28 states had already ratified the amendment, although it did not take effect until Roosevelt’s second term. As a result of its passage, this year’s Congress was sworn in on January 3rd, and by March 4th, we will be well on our way to seeing how successful the new administration is going to be in charting a new course for the country.

January 20, 2021 at 9:36 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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