Posts tagged ‘disaster preparedness’

Time to Clamp Down on Mortgage Lending Standards?

The Federal Housing Authority (FHA) certainly thinks so. On March 14th it issued an updated guidance in response to increasing “risk trends” in its single family mortgage portfolio. Under the new approach announced by the FHA, it is flagging more loans for manual underwriting and imposing tougher minimum loan criteria. According to the WSJ, roughly 40,000-50,000 loans a year will be impacted by the new standards.

While the announcement is likely to be criticized by some housing advocates, concerns have been raised for years about the solvency of the FHA. In the letter announcing the move, FHA Commissioner Montgomery argued that the FHA “must seek the right balance between managing risk and fulfilling its mission of supporting sustainable homeownership.” In contrast, according to the FHA in January, 28% of its mortgages had a debt to income ratio greater than 50%.

Are You Ready For The Day After Tomorrow?

I really do have to come up with a different movie reference when I’m writing about natural disasters but I really can’t get that dumb movie, The Day After Tomorrow, out of my head.

In any event, in response to flooding in the mid-west, regulators, including the NCUA, issued the obligatory statement imploring financial institutions to be flexible when dealing with consumers in the affected areas. The statement includes a link to a 2017 guidance to examiners which I would suggest including in your materials preparing for your credit union’s own natural disaster. I’m no meteorologist but I would work on the assumption that the question is no longer if but when Mother Nature will wallop your operations.

Anyway, the guidance is an interesting read. For example, it stipulates that when evaluating an institution’s natural disaster preparedness, examiners should access a financial institutions “effectiveness in responding to changes in the institution’s, markets as a result of the disaster. And of course, they should expect management to conduct annual risk assessments and update their disaster preparation plans where appropriate.

Enjoy the spring weather. See you tomorrow.

March 26, 2019 at 8:42 am Leave a comment

Are You Ready To Be A Loss Payee?

September is national disaster preparedness month and for good reason. The storms that have hit many parts of the country over the last decade have made us all experts in areas of lending law that we would much rather not have to deal with.

Against this backdrop, a recent case out of the Court of Appeals for the Seventh Circuit provides a great explanation of exactly what a lender’s obligation is with regard to damaged property. See Avila v. CitiMortgage, Inc. (7th Circ, 2015). It’s worth a read. The case involved an Illinois homeowner who bought a home in Chicago in 2005 with $105,000 mortgage from CitiMortgage. Five years later, a fire made the house uninhabitable. The homeowner filed a claim with his insurance carrier and received $150,000.

As is common practice, CitiMortgage was a loss payee on the insurance proceeds and refused to disperse any funds until it reviewed the restoration work. By the way, this is a smart practice but it created much confusion in New York in the aftermath of Hurricane Sandy when elected officials criticized banks, in many cases unfairly, for holding back proceeds. In this case, Citi reviewed the work and found that it was done poorly. The case get tricky because by this point our homeowner had missed several payments and Citi interpreted its mortgage contract as allowing it to put the insurance proceeds toward paying off the now delinquent loan. The home was never repaired.

At issue in the subsequent litigation was a section of the mortgage contract dealing with the proper use of insurance proceeds. Your mortgage agreements undoubtedly have similar language. The contract provided two distinct obligations on the lender. First, insurance proceeds should go toward the restoration of the mortgaged home. However, it also provides that if such a repair is not economically feasible, the insurance proceeds shall be applied to the mortgage loan.

In this case, our homeowner filed a suit in Cook County, Illinois claiming that the bank breached its fiduciary obligation and the insurance contract. The case was dismissed by the district court, but on appeal the Seventh Circuit revived part of the case. First, it rejected the homeowner’s argument that the bank had a fiduciary or special obligation towards the homeowner as the holder of the insurance proceeds. However, it still allowed the case to go forward. At issue was whether the homeowner’s default constituted a breach that allowed the insurance proceeds to be applied to the mortgage and whether Citibank was first obligated to demonstrate that fixing the damaged house was not economically feasible.

We have to assume that property will be damaged and how efficiently your credit union handles these claims will either save or cost you a lot of money.   I’m giving you this case as a gentle reminder to make sure you have proper policies and procedures in place to handle property damage claims before the next disaster strikes.

September 15, 2015 at 7:28 am Leave a comment

Preparing for the Worst, Hoping for the Best

Maybe it’s because the desolate Albany landscape with its frozen mounds of exhaust-tinged snow and sub-zero temperatures makes me feel like I’m inhabiting a post-apocalyptic world, but a couple of days ago I got around to reading the FFEIC’s new appendix to its examination handbook dedicated to disaster preparedness entitled Strengthening the Resilience of Outsourced Technology Services. In all seriousness, it is a must-read for any credit union that has to have a business continuity plan (BCP) and contracts with third parties for services that should be integrated into this business plan. I bet that is almost every credit union.

Regulators have long emphasized the need for appropriate due diligence when entering into third-party relationships. In addition, Business Continuity Planning has been a major point of regulator emphasis  since 9-11; not to mention that “once in a century storms” seem to be coming every other year. This new appendix zeros in on the importance to financial institutions of insuring that appropriate vendor services are integrated into BCP plans and testing. As the regulators commented in releasing the appendix, “a financial institution should ensure that its third-party service providers do not negatively affect its ability to appropriately recover IT systems and return critical functions to normal operations in a timely manner.“

The appendix highlights four key points of emphasis for examiners assessing third-party relationships.

(1) Third-party management addresses a financial institution management’s responsibility to control the business continuity risks associated with its third-party service providers (TSPs) and their subcontractors.

(2) Third-party capacity addresses the potential impact of a significant disruption on a third-party servicer’s ability to restore services to multiple clients.

(3) Testing with third-party TSPs addresses the importance of validating business continuity plans with TSPs and considerations for a robust third-party testing program.

(4) Cyber resilience covers aspects of BCP unique to disruptions caused by cyber events.

I don’t want anyone to break into a cold sweat thinking that a new compliance requirement is necessarily being imposed on them. If you don’t outsource core operational functions to third parties this appendix shouldn’t concern you much. But if your credit union can’t operate effectively unless a vendor is also on the job, then you have an obligation to work with that vendor and make sure that it has a Business Continuity Plan that is compatible with your own.

Think about it: if your vendor backs up all your account information at a facility down the block from your credit union, your BCP plan has some serious holes.

Don’t Fire Until You See the Whites of Their Eyes

Yesterday, the CU Times reported that Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking, House and Urban Affairs Committee, would not rule out doing away with the credit union tax exemption as part of an overhaul of the tax code.

Shelby’s equivocation on the tax exemption underscores that tax reform poses dangers for credit unions, but his stance should hardly surprise anyone, nor should it send us scrambling to the ramparts as if the industry is in imminent danger. The fact is that in any push to overhaul the tax code a prominent veteran lawmaker like Shelby isn’t going to take anything off the table. There is a lot of negotiating to be done, if and when we ever get to a tax reform end game.

Should the industry be vigilant? Absolutely. But, in my ever so humble opinion (and I stress only my opinion), in recent years the industry has overreacted to the threat of tax reform with the result that it has not pushed aggressively enough for other parts of its agenda. There may come a time when we need to activate the grassroots in a major push to save the exemption, but that time is not here yet. In the meantime, let’s not let the bankers sideline our agenda every time they advocate for ending the exemption or draw too many conclusions every time a legislator gives less than 100 percent support for the industry.

February 12, 2015 at 9:16 am 2 comments

Are You Prepared For The Next Disaster?

Hurricanes be damned, the IRS still expects to be paid. So, recently the IRS released this handy little tip sheet outlining steps that individuals and businesses can take to make sure that their vital tax information is protected if and when a storm or other disaster strikes.

With so many businesses outsourcing their payroll processing now, one tip that caught my eye was the suggestion that businesses check to see that their payroll provider has a fiduciary bond in place.  And, of course, the IRS reminds us that emergency plans should be updated.

One of the really big challenges facing credit unions, and all businesses for that matter, is that there are so many regulations being thrown at them that it is easy to forget the ongoing obligations that were imposed just a few years ago.  I’m sure many of you know that Appendix B to Part 749 of NCUA’s regulation requires credit unions to prepare for a catastrophic act.

I’m also sure many of you can pull out a policy or program adopted by your credit union in response to this requirement.  But how many of you have done annual testing or updated the plan?  I know you are all busy, but if you can find the time, you might save some much needed money and prevent operational headaches the next time the storm of the century hits.

On that note, your faithful blogger is headed to North Carolina to watch a few rounds of the U.S. Open in Pinehurst courtesy of a good friend’s tickets and his own sister’s hospitality.  Look for another post a week from Monday.  In the meantime, in the immortal words of George Costanza, I’m sure you could use the break.

June 6, 2014 at 8:08 am Leave a comment

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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