Posts tagged ‘IOLTA’

New York CU Authorized To Offer Lease Escrow Accounts

The other day, one of my most helpful readers forwarded to me a copy of a NCUA legal opinion which provides good news to New York based credit unions and may provide a road map for credit unions in other states to follow.

First, some background. Interest on lawyer trust accounts (IOLTA) are escrow accounts that many states mandate attorneys establish in order to place a client’s funds in escrow. Prior to 2015, credit unions were extremely limited in their ability to offer such accounts because membership eligibility was based on the qualifications of each individual person who’s funds were being escrowed rather than the membership eligibility of the attorney opening the account. This meant that most credit unions could not provide the share insurance necessary to house such accounts.

Many readers may recall that all this changed in 2015 when Congress passed the Credit Union Share Insurance Parity Act permitting credit unions to offer IOLTA accounts so long as the attorney qualified for membership. If he or she did, then share insurance coverage would be passed through to the clients whose funds were being aggregated. Crucially, for purposes of this fascinating post, this statute not only permits credit unions to offer IOLTA’s but “other similar escrow accounts.”

Which brings us to the present day. On February 1st, NCUA sent this letter to ESL Federal Credit Union in New York, authorizing to offer escrow services for “lease security accounts.” Under New York law, landlords holding security deposits are required to place such deposits in escrow. See NY General Obligation Law §7-103 et. seq. The NCUA agreed with ESL Federal Credit Union that such accounts are similar to traditional IOLTA’s. At the same time it stressed that it’s “analysis does not apply to other similarly named accounts where the factual and legal circumstances differ, even slightly, from those presented in the subject instance. Rather, the conclusions reached in this opinion are expressly limited to the specific facts and circumstances surrounding the subject account.” Still, it’s a nice victory for New York Credit Unions and is clearly beneficial to other credit unions seeking to offer a similar product in other states.

CFPB Releases Servicing Reg Q&A

As a follow-up to my blog from the other day, I’m happy to report that the CFPB has released a helpful Q&A further explaining how financial institutions are to implement the successor in interest/bankruptcy regulations which take effect on April 19, 2018. I’m glad to see I’m not the only one more than a little confused about the seemingly straightforward requirements.

The Q&A is extremely helpful but it underscores that credit unions are not out of the woods when it comes to complying with both these regulations and the bankruptcy law. Here’s what I’m talking about. One of the questions asked is, “Does a servicer receive a safe harbor under the Bankruptcy Code by sending periodic statements in compliance with the Bureau’s rules?” The answer won’t exactly fill you with confidence: “A servicer does not receive a safe harbor under the Bankruptcy Code by sending periodic statements to a borrower in bankruptcy in compliance with Regulation Z, § 1026.41(e) and (f)” the Bureau explains because it does not have authority over the bankruptcy law. But it goes on to explain that, “Based on this research and outreach, the Bureau does not believe that a servicer is likely to violate the automatic stay by providing a periodic statement in circumstances required by § 1026.41(a) and (e) that contains the information required by § 1026.41(c) and (d) as modified for bankruptcy by § 1026.41(f).”

Translation: Get ready to push back against the attorney who accuses you of violating his client’s automatic stay.

March 21, 2018 at 9:07 am Leave a comment

Do You Know Who Your Beneficial Owner Is?

We all know that when you open an account, you have an obligation to identify the account holder and understand enough about that person so that you can identify suspicious activity.  For several years now, FinCEN has expressed concern that financial institutions don’t do enough to identify who really owns and benefits from accounts for businesses and certain kinds of trusts.  So, earlier this week it published final regulations that will require financial institutions to identify the beneficial owners of certain types of accounts, as well as the individuals who control them.

The general idea of the regulation is that when a financial institution opens an account for a corporation or LLC, as part of its customer identification procedures it must identify the beneficial owner(s) of the business – those who own at least a 25% stake – as well as a single individual who exercises legal control of the entity, such as an executive officer or senior manager.

Don’t panic.  The regulation comes with a form that can be used to gather the information from the person opening the account and you can generally rely on that person to provide the information.  In other words FInCen’s goal is not to require that every financial institution have a staff responsible for verifying a company’s structure.  Plus these requirements only apply to accounts for so-called “legal entities.”  Legal entity customers are defined as “a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account.”

In addition, there are numerous exceptions to this definition outlined in the regulation and its preamble.  For instance, the preamble explained that accounts opened for unincorporated associations do not qualify as legal entities.  Generally, most trusts do not have to be filed with the state and therefore are also not covered by this regulation.  As for those of you with Interest On Lawyer Trust Accounts (IOLTA), which you only recently were authorized to offer, the preamble explains that your requirements under this regulation are satisfied so long as you perform customer due diligence on the intermediary (i.e. the lawyer opening the account).

None of this is to minimize the importance of this new requirement.  This new regulation will require new policies and procedures.  In addition, there may well be scenarios under which the amount of cash being funneled between a beneficial owner and a corporation necessitate the filing of a Suspicious Activity Report (SAR).  The rule takes effect in July, but compliance is not required until 2018.

Some Good News

In a speech yesterday, newly installed NCUA Board Chairman Rick Metsger committed to thoroughly reviewing the agency’s current exam cycle.  As a first step, he announced that NCUA would be eliminating the requirement that credit unions with $250 million or more in assets be examined each calendar year.  In a press release, he described this mandate as neither effective nor efficient.

In the finest tradition of newscasters everywhere, who always end Friday newscasts on a happy note, I’m signing off.  Have a great weekend.

May 13, 2016 at 9:02 am Leave a comment

Iconic NY Credit Union Goes Under

This Year Has Had Its Share Of Sad Moments For New York Credit Unions.

Yesterday, NCUA announced that it had liquidated Bethex Federal Credit Union of Bronx, New York, bringing to an end an iconic low-income credit union chartered in 1970. Its assets were assumed by U.S. Alliance of Rye, New York.

When I joined credit union land, I quickly learned about Bethex and its scrappy CEO, Joy Cousminer. As a biography on the credit union’s website announcing her induction into the Cooperative Hall of Fame explains:

“First as a teacher and then as a founder and President/CEO of Bethex Federal Credit Union, she helped bring banking to an area that had no banking facilities and no access to credit.  The many innovative programs and partnerships offered by Bethex reflect her recognition of the financial, educational, and business needs of the people of the South Bronx and her efforts to meet them.  Her work embodies the ideals of community spirit, determination, vision, and cooperation.  She is a leader with a quintessentially cooperative spirit.”

I got to know Joy in passing because she wasn’t hesitant about calling the Association and making sure it knew when she thought a proposed regulation was harmful to small credit unions.

This past June Bethex was one of the credit unions highlighted in a WSJ article reporting that fifty credit unions have been identified in a “confidential” FinCEN Report citing “their increased vulnerability to potential money laundering” because of their relationships with Money Service Businesses (MSB), in general, and check cashers, in particular. Crucially, the report was based on data analysis and didn’t accuse credit unions of wrong doing.  MSB is a catch-all definition referring to businesses that engage in check cashing, wire transfers, travelers checks and pre-paid cards, among other services.

We can disagree about just how important asset size is to the credit union mission, but to me it is indisputable that the ethos personified by people like Joy has to survive if credit unions are to remain truly unique financial institutions.

IOLTA Regs Finalized

I’m guilty of being behind on my reading of the most recent regulations — don’t tell my boss – but with my Christmas hiatus coming up soon I wanted to remind everyone that NCUA finalized its regulations on Interest on Lawyer Trust Accounts.

IOLTA accounts are accounts in which lawyers hold client money in trust as part of a business relationship, for example the refundable portion of a retainer. Last year, Congress passed a bill authorizing credit unions to offer IOLTA and similar accounts to their members by extending Share Insurance coverage to IOLTAs and “similar” accounts.  The final regulation explains what accounts are sufficiently similar to IOLTAs to be insurable.  It authorizes NCUA to extend Share Insurance coverage to accounts where a professional or other individual serving in a fiduciary capacity holds a client’s funds as part of a transaction or business relationship including real estate escrow accounts and prepaid funeral expenses.  The definition is expansive enough to allow credit unions to offer coverage for additional fiduciary accounts that may develop in the future.  Here is the regulation:


December 22, 2015 at 9:37 am 2 comments

Four Thought on Yesterday’s NCUA Board Meeting

When I tell people that a good chunk of my professional life is spent reading and responding to regulations, they smile and their eyes glazed over as they try to suppress a yawn. But, believe it or not, an infusion of new members on the NCUA Board means that regulators are really looking to make some meaningful changes. Here are my thoughts on yesterday’s board meeting. All of these regulations and proposals were influenced by industry comments.

Associational Common Bonds Rule

This was the most controversial rule of the day. Responding to concerns that some credit unions were creating sham associations simply for the purpose of increasing membership eligibility, NCUA finalized regulations strengthening its oversight of associational membership requirements. On the bright side, the proposal increases to 12 the types of associational groups that receive automatic pre-approval, including “organizations promoting social interaction or educational initiatives among persons sharing common occupational professions.”

If I wanted to be a glass half-full kind of guy I would say that the final regulation is much improved from the initial draft thanks to industry suggestions. If I wanted to be a glass half-empty kind of guy, I would continue to question why NCUA felt the need to go forward with this regulation in the first place. The only organization that really thought associational membership was being abused was the American Bankers Association.

IOLTA Accounts

When Congress expanded the ability of credit unions to offer Interest-On-Lawyer Trust Accounts (IOLTA) late last year, it also empowered them to offer “similar” escrow accounts. Yesterday, the NCUA proposed regulations defining those similar accounts. Under the proposed rule, they would include accounts for pre-paid funeral expenses, for example. At yesterday’s board meeting, NCUA officials stressed that they are more than willing to consider expanding the types of accounts eligible for insurance coverage under this law. This is one area where a well-written comment letter could clearly benefit the entire industry.

“Technical” Amendments for Corporate Rules

My old boss in the Legislature used to say that there is no such thing as a technical amendment, only amendments that no one understands. I was thinking of this quote yesterday as I heard the board discuss amendments to corporate borrowing authority. These amendments didn’t go as far as the corporates would have liked; however, the final rule improves on the initial proposal by extending to 180 days the maximum term of a corporate’s secured borrowing authority. In listening to the board discuss the proposal, I was struck by how concerned NCUA still is about allowing the corporates to rely too heavily on perpetual capital.

In addition to finalizing this technical amendment, the NCUA proposed an interesting change allowing the corporates to provide bridge loans to credit unions awaiting funding from the Central Liquidity Facility (CLF). When a credit union borrows funds from the facility it can take up to ten days to get the money. Considering that the purpose of the CLF is to provide emergency liquidity for credit unions, this strikes me as a huge defect in the system. NCUA is proposing to allow the corporates to provide members with bridge loans to cover the gap between the request and availability of funds.

I wish the industry would be more concerned with the issue of how best to revitalize the CLF fund. The corporates capitalized the fund with credit unions having access so long as they were a corporate member. When the corporates crashed, so too did their ability to fund the CLF and the industry has been remarkably short-sighted, in my ever-so-humble opinion, when it comes to devising an industry based source of emergency liquidity. At least this is a step in the right direction.

Appraisal Management Companies

NCUA signed off on joint regulations mandated by Dodd-Frank strengthening regulations related to Appraisal Management companies. This regulation is a bit strange, as no one at NCUA seems to know for sure if any credit unions invest in appraisal management CUSOs. This means that even though NCUA approved the rule, it may have absolutely no impact on credit union operations.

On that note, enjoy your weekend.

May 1, 2015 at 8:09 am Leave a comment

Dysfunctional Congress Throws Credit Unions a Bone

It is with gritted teeth that I congratulate Congress this morning for passing legislation (HR 3468) providing Share Insurance Coverage to credit unions holding Interest on Lawyer Trust Accounts (IOLTA). Passage of the bills means that credit unions in New York will be able to accept these accounts provided membership requirements are satisfied.

For those of you responsible for implementing these kinds of changes, take a look at section 497 of New York’s Judiciary Law. IOLTA are accounts opened by attorneys holding funds received from members, typically as part of a retainer agreement. Under New York’s law, which is similar to the requirements of other states, when an attorney receives funds from a client in a fiduciary capacity that are too small an amount or are expected to be held for too short a time to generate sufficient interest income, the attorney places these funds in a single joint account.

The catch is that NCUA has refused to extend Share Insurance Coverage to IOLTAs. NCUA has opined for years that Share Insurance protection can only be extended to such funds if all of a lawyer’s clients are qualified members of a credit union. This is because membership eligibility is determined not by the attorney but by his clients.  The federal law would now stipulate that “if the attorney administering the IOLTA or the escrow agent administering the escrow account is a member of the insured credit union in which the funds are held” then insurance coverage must be extended provided that doing so in consistent with state law. Under Section 497 of New York’s Judiciary Law, it would be.  For those of you designated as low-income, you could already accept these funds as explained in this opinion letter.

Great job by the trades. Getting anything done in this Congress is quite an accomplishment, which brings me to the “gritted teeth” part of the blog. Congress did a great job of reminding the American public just how dangerously dysfunctional our political system has become. The House of Representatives waited until the last minute to pass a bill extending spending through September. I suppose you can call this progress since everyone is expecting that the Senate will soon follow suit and a government shutdown will be averted.

Still, I expect a little more of my government than being able to agree on a spending plan. We’re going on 12 years now of increasingly moribund governing. No one seems to be getting the point that the ultimate job of legislators is to pass legislation and not simply to position themselves for talk radio or a run at the Office of President. Maybe this will change in the next Congress. I doubt it. Politicians love to call this country the greatest one on earth. It surely won’t stay that way if they keep on governing this way.

My rant is over, have a nice weekend.

December 12, 2014 at 8:51 am Leave a comment

Does Congress Give One Iolta About Credit Unions?

Former Staten Island Congressman turned lobbyist Vito Fosella gave a great presentation to our Governmental Affairs Conference a couple weeks ago about how, when trying to get things done in the Legislature and Congress, it is important to recognize the value of singles and doubles. Translated into non-sports speak this means that when dealing with Congress or legislatures no one gets everything they want; it’s important to take smaller victories when they are there for the  taking while continuing to push for your top priorities.

Why am I waxing philosophical this morning? Because our national trades hit a double the other day when the House of Representatives approved reforms that would allow credit unions to open Interest on Lawyer Trust Accounts. This is not as big a deal as announcing agreement on MBL or secondary capital, but as anyone who has dealt with compliance knows, there isn’t a credit union out there that has not been asked by a local attorney to set up one of these accounts and almost always has to turn them down. Keep in mind that only the House of Representatives has passed this bill, meaning we are a long way from opening these accounts. But even without further action this year, getting the House of Representatives on the record supporting this proposal is a big step in the right direction.

By the way, low-income credit unions can already open these accounts, providing yet another reason why your credit union is nuts not to get a low-income credit union designation is it qualifies.  Generally speaking, IOLTA accounts are established by lawyers to hold client payments for expenses related to legal services. As explained in this 2008 opinion letter by NCUA, client funds are insured in IOLTA accounts only to the extent that the clients are members of the credit union where the account has been opened. In other words, simply because an attorney has been a member of your credit union for years doesn’t mean he can open up one of these accounts in your credit union. The bill passed by the House would change all that by clarifying that “IOLTAs and other similar escrow accounts are considered member accounts …, if the attorney administering the IOLTA or the escrow agent administering the escrow account is a member of the insured credit union in which the funds are held.”

For New Yorkers, there is more good news. Section 497 of the Judiciary Law already permits credit unions to accept IOLTA funds so we can avoid the trap New York credit unions find themselves in with municipal deposits, which are authorized on the federal level for credit unions, but State law prohibits municipalities from depositing their funds with us.


Now back to reality. If the Wall Street Journal is correct “talks between top lawmakers on the Senate banking committee and the group of Democrats seen as its key swing votes to advance the bipartisan overhaul of {Fannie Mae and Freddie Mac} broke down on Thursday,” making it highly unlikely that the Senate will pass housing reform legislation this year. I am beginning to think that housing reform is just too big an issue given our current political divide and that the GSE’s will remain wards of the state for years to come, even as the amount of money they generate for the U.S. Treasury starts to decrease.



May 9, 2014 at 8:57 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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