Posts tagged ‘NCUA’

A Thursday Morning Hodgepodge

Believe it or not, Christmas is only a week and a half away. Today’s news has me thinking that a lot of policymakers want to clean off their desks before they take their long winter naps.

NCUA to Consider RBC Compliance Extension

The NCUA Board holds its last meeting of the year today. Among the issues to be discussed is a final rule on risk-based capital. In July, NCUA proposed a second extension of its risk-based capital rule to January 2022. During this time, the NCUA Board will be further analyzing additional changes to the RBC rule, as well as considering the extent to which supplemental capital could be used to satisfy RBC requirements. This further delay is an addition to the NCUA’s earlier decision to raise the threshold level for RBC compliance from $100 million to $500 million. Why doesn’t NCUA just admit that the whole RBC idea was fatally flawed and scrap the whole thing?

CFPB Director Looks Back on First Year in Office

CFPB’s Director Kathy Kraninger used an opportunity before the National Association of Attorneys General to reflect on her first year and comment on some pending big-ticket items. She indicated that while her mind is still open to suggestions, the CFPB is taking a serious look at changing the payday lender regulations finalized in the closing days of the Cordray reign by scrapping the requirement that payday loans be subject to underwriting requirements. Keeping in mind that this is one man’s opinion, for you fans of the Cordray administration, you have to admit that Kraninger has been a refreshing change from the interim oversight of her former boss Mick Mulvaney. Let’s face it; it was always strange to have someone vehemently opposed to a Bureau to be in charge of it. As for us more moderate types, Kraninger has struck the appropriate balance between enforcement, regulation and common sense, which means that she hasn’t ignored the potentially negative impacts of well-intended regulations. I’m sure she is ecstatic to know that I have given her my stamp of approval.

NY Senate Republicans Dropping Like Flies

It was Watergate that condemned New York’s Assembly Republicans to permanent minority status, and it increasingly appears as if the election of Donald Trump will be dagger in the heart of the New York State Senate Republicans, at least if they ever thought they would have a chance of once again being in the majority. As of my last count, we are now up to as many as eight Republicans who have announced they either will not run for reelection or seek other seats. This is an amazing turnaround for an institution which not long ago was the best place for a Republican to be, short of statewide office.

The latest longtime senator to announce his departure is none other than Joe Robach of Rochester. He joins North Country’s Betty Little, Western New York Senator Michael Razenhofer and the Capital Region’s Joe Amedore. In addition, freshman Central New York Senator Bob Antonacci jumped ship and secured a judgeship. Further, Senators Chris Jacobs and Rob Ortt are both running for Congress. Remember folks, this is on top of the fact that the GOP is already down to 23 senators. The recent wave of retirements raises the real possibility that the Senate democrats will join the Assembly democrats in having supermajority control in both chambers. This may not seem like a big deal, but it gives the legislative leaders that much more leverage in negotiating against governors when they know they can override vetoes in a worst-case scenario.

December 12, 2019 at 8:55 am Leave a comment

Credit Unions to Get More Relief From Remittance Transfer Rule

Good morning, folks.

Busy day today but I am in a particularly good mood because I got to watch the Patriots lose again. Do you realize this entire generation of New England football fans has never had to watch bad football?

Anyway, I wanted to give you a quick heads up on two issues involving the CFPB. First, on December 3rd, the Bureau proposed important amendments to the Remittance Rule. Many of you may recall that among the mandates contained in the Dodd-Frank Act was an amendment to the Electronic Funds Transfer Act creating a new section 919. The statute and resulting regulations created mandated disclosures for institutions that electronically transfer funds overseas. At the time these regulations were promulgated, I for one underestimated the impact that these changes would have on affected credit unions. Ultimately, the CFPB exempted credit unions and other financial institutions from the remittance transfer regulations if they provided 100 or fewer remittance transfers each of the previous two years.

So I have some good news. The Bureau is proposing raising the compliance threshold from 100 transfers to 500 transfers. In addition, for those credit unions that do have to comply, the Bureau is also increasing the number of institutions that can provide estimates of mandated disclosures. The Bureau is proposing to adopt a permanent exception that would “permit institutions to estimate the exchange rate for a remittance transfer to a particular country if, among other things, the designated recipient will receive funds in the country’s local currency and the insured institution made 1,000 or fewer remittance transfers in the prior calendar year to that country.”

One thing that hasn’t changed is the incredible suspicion that the new Bureau leadership engenders among democrats. On Thursday, Senators Elizabeth Warren and Sherrod Brown sent a letter to the CFPB questioning its intentions regarding publishing legal opinion letters at the request of individual companies. The senators expressed concern that even though the use of opinion letters may be appropriate in some instances, they should not be used to shield companies from complying with consumer protection laws. Frankly, the senator’s concerns are, at the very least, a tad premature.

First, even agencies have an obligation to follow the law. While we can all think of examples where this obligation has arguably been stretched to the breaking point, let’s wait to see what the Bureau says and does before assuming it will abuse its authority to interpret regulations. Secondly, agency opinion letters can provide a useful mechanism to address arcane and legalistic regulations and, in so doing, provide much needed guidance to industry participants. Frankly, I think it is unfortunate that both the NCUA and New York’s Department of Financial Services have greatly reduced the number of opinion letters they produce.

 

December 9, 2019 at 8:53 am Leave a comment

Important Guidance on Issues Ranging from Data Underwriting to Hemp

It may be December, but yesterday was one of the busiest days in months for those of us who specialize in tracking regulatory issues. Here are some of the most important developments.

 

Joint “Statement” on the Use of Alternative Data Released

The federal financial banking regulators, including the NCUA and CFPB, issued an important guidance yesterday detailing baseline expectations for the use of alternative data in underwriting decisions. The statement is not important so much for what it says, but simply because it says anything at all. It represents the first attempt by regulators to establish regulatory expectations for the use of alternative data as computer algorithms make it possible for financial institutions to consider a huge volume of seemingly unrelated data points in making underwriting decisions.

Not surprisingly, the regulators stressed that while the use of alternative data provides new opportunities for both borrowers and lenders alike, “as with prior developments in the evolution of underwriting … data and analytical methods also raises questions regarding how to effectively leverage new technological developments” that are consistent with applicable consumer protection and fair lending laws.

Interestingly, the regulators highlight the increasing use of cash flow analysis, which they state “may be particularly beneficial for consumers who demonstrate reliable income patterns over time from a variety of sources rather than from a single job.”

Readers of this blog should not be surprised to know that regulators expect financial institutions using data analytics to undertake a “thorough analysis” of the data being used and the potential risks of not complying with relevant consumer protection laws. Whether or not it is actually possible to strike that balance remains to be seen, but that is a blog topic for another day.

By the way, I put “statement” in quotes because it is not entirely clear to me whether a statement is to be given even less deference than a guidance, and if so, whether or not it is prudent for any of you to even worry about this distinction.

Another Day, Another CU-Bank Merger

Here is another log for credit union opponents to throw on the fire. The American Banker is reporting this morning that Suncoast Credit Union in Tampa, FL has agreed to a purchase and assumption of the assets of $747 million Apollo Bank in Miami. The American Banker points out that this relatively large transaction marks the 16th credit union acquisition of bank assets this year. Predictions suggest that even larger banks will be purchased by credit unions next year. Although this trend reflects the individual decisions of credit unions and their boards, the consequences will affect the industry as a whole. It is time for all of us to better refine those talking points when it comes to explaining why these mergers are occurring, and why they are consistent with the credit union charter.

Guidance Issued on Hemp Banking

The NCUA was not among a group of regulators who issued a joint guidance with FinCEN yesterday detailing BSA obligations for financial institutions that provide services to hemp-related businesses. Most importantly, the guidance emphasizes that hemp banking is now subject to the same SAR reporting requirements as any other type of business. That being said, a well-run compliance program involving hemp growers is much more complicated than your average business.

New York State’s SAFE Act Guidance

Last but not least, on November 24th, an important provision of S2155 took effect. Specifically, section 12 U.S.C. 5117 grants federally registered mortgage loan originators who are seeking state-level licenses or seeking to be qualified in another state temporary authority to act as loan originators. Currently, someone who originates for a federally chartered bank or credit union must be registered with New York State, but does not have to be licensed as a mortgage loan originator. The problem is that when these individuals become employed by mortgage bankers, there can often be a delay of several months before their state-level licensing takes effect. The law now permits individuals licensed in other states and individuals previously employed in federally chartered institutions to obtain a temporary license. New York State has not promulgated formal regulations, but here is a link to a very concise guidance the state has issued on the subject.

December 4, 2019 at 9:18 am Leave a comment

Greater Non-Member Deposit Flexibility Comes with a Catch

Greetings, folks.

Hope you enjoyed your Thanksgiving holiday. I spent part of the time taking a closer look at two regulations, one proposed and one finalized that could have interesting impacts on your credit union operations.

The first regulation, which takes effect 90 days after its publication in the Federal Register, follows both state and federal credit unions to take in more public unit and non-member shares. Specifically, under 12 CFR 701.32 (b), credit unions could have up to 20 percent of total shares, or $3 million, whichever is greater, comprised of public units and non-member shares. Public units refer to public deposits, such as municipal funds. Non-member funds refer to uninsured funds from third parties, more generally referred to as secondary capital.

Under the rule which NCUA finalized recently, the limit on non-member and public shares is increased to 50 percent of paid-in capital and surplus less any public unit and non-member shares. The change in terminology is important because, as explained by NCUA, the change from total shares provides credit unions with greater flexibility to accept these deposits while at the same time effectively placing a cap on the amount of such shares that can be taken in by credit unions. The importance of this change will vary depending on how much net worth your credit union has. Its importance was underscored to me by a credit union recently, which pointed out that as New York hopefully authorizes credit unions to participate in Banking Development Districts, participating credit unions will have to be mindful of this subtle change in calculation. It also means that the higher your credit union’s net worth, the greater flexibility it will have to utilize this expanded authority.

A second proposed regulation underscores just how much and how quickly the mortgage lending industry is changing. The NCUA has proposed increasing the threshold below which appraisals would not be required for residential real estate transactions from $250,000 to $400,000. Similar steps have already been taken by the banking regulators after receiving a green light from the CFPB.

I love this proposal. It recognizes that, given the amount of information that lenders now have at their fingertips, as well as the desire on part of consumers to speed up the mortgage lending process, there are often better ways of assessing the value of property than having somebody walk around a home and make subjective judgments about how much it is actually worth.

WSJ Slams CUs

As I’ve said before, whenever there is news about credit unions in the Wall Street Journal, you can bet it isn’t good news. This article is certainly no exception. Read it for what it’s worth, but the reality is that if you’ve read banking industry talking points before, you’ve already read this article. The Wall Street Journal is arguably the best paper in the country, but this is a lousy piece of journalism.

December 3, 2019 at 9:30 am Leave a comment

Where NY Stands on Hemp Legalization

When I last talked about this subject, I promised you that I would seek additional information about the current state of the law regarding hemp production now that it has been removed as a schedule I drug. The bottom line is this: those of you who have relationships with authorized growers and processors as a result of 2014 changes to the law can continue with those relationships. However, for those of you who do not have those relationships, it will probably take several months before entities can begin legally growing hemp in New York State.

As I talked about in a previous blog, in 2014, the federal government authorized states such as New York to offer hemp growers the opportunity to work with academic institutions. In 2018, the federal government legalized hemp but mandated that the U.S. Department of Agriculture establish a legal framework for states wishing to authorize the industry. The USDA has now issued temporary regulations and is accepting comments. The Association will be commenting.

After these regulations are finalized, New York State will have to promulgate its own regulations, as well as get approval for its program from the USDA. This process will take several months to complete, and until the process is done, the broader hemp authorization is effectively blocked.

On a practical level, here are my takeaways given the state of affairs. Most importantly, for those of you operating under the 2014 authorization, the status quo remains in effect. For those of you seeking to work with producers authorized under the 2018 legislation, there is much you can start to do to prepare for the legalization, such as due diligence and establishing policies and procedures which you can finalize and adjust once the regulatory framework has been set. However, what you should not do is assume that hemp is legal for all purposes in New York State right now.

Second Chance Guidance Finalized by NCUA

Here’s an important one for your HR people.

At its board meeting yesterday, the NCUA finalized new guidance explaining steps you should take when you find out a job applicant or existing employee has been convicted of a crime which may disqualify them from employment in your credit union. As I explained in this blog, these changes are long overdue. On a more cautious note, more and more scrutiny is being placed on employment practices as they relate to people who have been convicted of crimes. Read this guidance and update your policies and procedures accordingly.

Do we really need all Christmas music all the time?

I freely admit to being a glass half empty kind of guy. That being said, I think my cynicism is fully justified when it comes to the onslaught of 24 hour Christmas music a month and a half before the big day. Don’t get me wrong, if you want to listen to 24 hours of Christmas, get some headphones and satellite radio, and go crazy. But for those of us who watch too many sports, we are already being inundated with a Christmas season that now begins the day after Halloween. Too much Christmas too early takes too much fun out of what should be an upbeat time of year.

On that happy note, happy holidays, and enjoy your weekend.

November 22, 2019 at 9:49 am Leave a comment

Secondary Capital and its Limits

At first, it surprised me that NCUA’s denial of credit union secondary capital plans was the issue most frequently being appealed under NCUA’s new regulatory appeals process. However, as I read these decisions and studied the history behind secondary capital, the increasing frustration on the part of credit unions stemmed from NCUA’s contradictory policy goals and legal interpretations.

Since 1996, 12 CFR 701.34(b) has permitted low income credit unions to accept uninsured secondary capital (61 FR 3788-01). As originally envisioned by NCUA, the regulation permitted these credit unions to raise secondary capital from “foundations and other philanthropic institutions.” NCUA hoped that this credit would help credit unions “make more loans and improve financial services” for low income communities. The original rule simply required credit unions to notify NCUA that they were going to accept this capital. Fast forward to 2006, and NCUA was already getting gun shy about this power. Under revisions to 701.34(b), credit unions were required to get pre-approval for the use of secondary capital. NCUA accomplished this goal by requiring credit unions to address five criteria in their secondary capital plans.

Against this backdrop, the legal issue with which NCUA and credit unions are grappling is the extent to which the five criteria outlined are simply the baseline of regulatory requirements for secondary capital plans, or if they are instead representative of the totality of what is required of a credit union seeking to take in secondary capital. There is also one other issue lurking right below the surface. Even assuming that NCUA can, for safety and soundness reasons, insist that credit unions provide more detailed information than required under a plain reading of the regulation, is there a point where its application of safety and soundness considerations becomes unreasonable?

In my ever so humble opinion, it’s no coincidence that NCUA released a detailed guidance to examiners explaining how to assess secondary capital requests. It’s exactly the type of document I would come out with if I wanted to show that secondary capital determinations were not arbitrary and capricious.

What really has me fired up, however, is that NCUA’s stringent legal interpretation of its examination powers is inconsistent with its stated policy goals. I have a pretty good memory, and I could swear it wasn’t too long ago that then-Chairman Debbie Matz was encouraging qualifying credit unions to get their low-income designations in part to make them eligible to take in secondary capital. I have made that suggestion to credit unions myself. It is no wonder, then, that credit unions are confused that NCUA is effectively discouraging the credit unions that could use secondary capital the most from getting it in the first place. Simply put, the requirements for secondary capital approval have become so arbitrary, expansive and time-consuming that many credit unions won’t have the resources to get the plan approved in the first place. If this is NCUA’s goal, then it should simply say so. If not, then it has to clarify its expectations both internally and for credit unions as a whole.

 

November 18, 2019 at 9:40 am Leave a comment

Hemp Regulations Bring Banking Issues to the Forefront

On October 29th, the USDA issued interim final rules providing a framework for the legal protection and distribution of hemp in states that choose to legalize it. The long awaited regulations bring about a new stage in what promises to be a phonetic period for compliance innovation as financial institutions begin to provide banking services for products related to marijuana.

What exactly is being legalized?

Up until recently, the distinction between hemp and marijuana did not matter. Both were classified as Schedule I drugs under the Controlled Substances Act. In the 2018 Farm Bill, Congress declassified hemp and allowed it to be produced in states choosing to legalize it. The key difference between hemp and cannabis sativa is the level of THC contained in the leaves of these closely related plants. A THC level in excess of .03 is considered marijuana, while anything below that is considered hemp.

Last week’s regulations provide the framework that states like New York need to start developing the industry consistent with the federal guidelines. Many of us who have followed the issue closely have been surprised that the USDA did not move more quickly to promulgate the proposed regulations. The USDA got the message because it took the unusual step of issuing interim proposed final regulations. This means that there is now a legal framework for states to begin submitting their hemp regulation plans, even as the USDA accepts comments on these proposed regulations. Remember, we are dealing with a crop, and farmers need time to plan in advance of the growing season.

We should also expect a flood of additional guidance from banking regulators now that the USDA has taken this important step. The NCUA issued this initial guidance in August 2019, in which it promised to “issue additional guidance” once the USDA’s regulations are finalized. NCUA should start issuing that additional guidance even though it can still be modified.

On the state level, New York has advocated for financial institutions to provide financing for hemp farming since 2014. The next step is for the state to issue a proposed plan to the USDA. One issue which I am researching and will update you on in a future blog is whether the state has to pass legislation legalizing hemp production beyond the 2014 pilot program.

For those of you who might be interested in providing banking services for hemp producers and hemp related businesses, now is the time to finalize your compliance plans. These plans will be more difficult to implement on an ongoing basis than they will be to put down on paper. For example, since the distinction between hemp and marijuana comes down to the THC level, it is absolutely crucial that any business you are dealing with have appropriate procedures in place to monitor its plants and dispose of marijuana.

Finally, even if you have no desire to get involved with this business, it will impact your credit union. I expect your typical community farmers market to become a hotbed of local producers using hemp as a key ingredient in their products. When these local businesses come to open an account, what procedures are you going to have in place to ensure that their products are legal? These and other questions promise to make this a subject of legal and compliance debate for years to come.

November 5, 2019 at 9:13 am 4 comments

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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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