Posts tagged ‘New York State DFS’

Key Points to Remember About New York’s Student Loan Servicer Framework

Greetings, folks.

I’m taking some time off from filling out my application to be the fourth National Security Adviser – fourth time is a charm – to provide you an update on an issue that has been percolating in and around New York Credit Union Land for about a month now. As I previously explained, the New York State Department of Financial Services has issued proposed regulations setting up license requirements for student loan servicers. The regulations follow passage of legislation in last year’s budget making New York the first state in the nation to set up such a licensing scheme, or so it claims. Here are some of the key points to keep in mind.

As the state aggressively moves to fill in the perceived gaps in federal regulatory activity, there is always a basic question as to what laws apply to federal institutions. The statute and the proposed regulations set up a framework similar but not identical to that in place for exempt mortgage loan servicers. Neither State nor federal credit unions have to be licensed as loan servicers, but they do have to register with the State, and they do have to comply with a prescriptive list of mandates.

The statute and proposed regulations establish minimum servicing standards and outline prohibited practices. Any entity servicing student loans in New York State would be subject to these requirements, unless a court or administrative agency rules that they are preempted by federal law. For example, they are prohibited from engaging in fraudulent schemes or deceptive practices. In addition, they must ask the borrower how to apply nonconforming payments. The regulation also creates a tricky regulatory drag net in which servicing does not include collecting on a defaulted student loan that is delinquent for 270 days or more. This means that any entity trying to collect on a student loan that is delinquent for less than 270 days would have to be licensed as a servicer or be exempt from licensing requirements.

As for reporting requirements, the regulations stipulate that only licensed entities would have to make reports to the state, but all loan servicers would have to keep books and records. The State reserves for itself the right to examine all loan servicers for compliance. Given the severity of potential penalties outlined in the statute, this is no small matter. One of the key unanswered questions is whether the State can exercise supervisory powers to monitor compliance with this requirement. I strongly suspect the answer is no, but that will ultimately be for a court to decide.

But even if you are not concerned about State oversight, remember that there is a second way you will be held accountable under this framework. The Legislature made plain in the statute that violations of these provisions are grounds for suing the loan servicer.

So, how much will this impact your credit union? If you are a credit union that does its own servicing, then these new requirements could be burdensome. For instance, the regulations presuppose the ability to provide online access to the entire history of a student loan, and seem to assume that all institutions have the ability to offer multiple loan mitigation options. In other words, in a worse-case scenario, this is another example of regulations being imposed on institutions with no regard for the fact that not every financial institution has the staff of Wells Fargo. But for other credit unions, my personal opinion is that the risk posed by the regulations and statute does not come primarily from overzealous regulators, but from increasingly aggressive plaintiff lawyers who have been given a new statute around which to craft class action lawsuits.

In the meantime, I await my call from the President.

September 11, 2019 at 9:07 am 2 comments

Seven Questions About FinTech Charters

Image result for fintechYesterday’s announcement by the OCC that it will begin accepting FinTech Bank charter applications is as big a development for banking as passage of the Riegle-Neal Act in 1994 which lead to the rapid consolidation of community banks and credit unions that we are still seeing today and the enactment of the Gramm Leach Bliley Act which broke down depression barriers between commercial and investment banking leading to the behemoths that we live with today. FinTechs will over time have a profound effect on the way credit unions and all financial institutions go about their business. Here are some questions I’ve been asking myself and some preliminary answers:

What is a FinTech Charter anyway? In 2003, the OCC amended §12 CFR 5.26 (e)(1). The new regulation authorized the creation of special purpose banks that do not engage in fiduciary activities but conduct at least one of the following core banking functions: receiving deposits, paying checks, or lending money. At the time the provision received little attention but it is this regulation that the OCC argues allows it to authorize special charters for companies that use computer platforms to process payments or lend money for example.

Why would companies be interested in a FinTech Bank Charter? As the New York Times explained this morning, tech companies have been advocating for just such a charter because they believe it will allow “online lenders and payment companies to more easily and directly compete with traditional banks, a change that one regulator said would allow innovative businesses to expand nationwide.” With a national charter, these companies will have one set of national rules. This has always been the appeal of a national charter.

Why should credit unions care? Now for the potentially more troubling reason, at least from a competition standpoint. Maybe not today, maybe not tomorrow, but someday and someday fairly soon, bigger FinTech companies will not be as dependent as they are now on establishing banking relationships. For example, many credit unions now have contracts with Apple’s iPay. The new charter will make it much easier for Apple to not only facilitate payments but ultimately to facilitate payments using its own bank. Think of how many vendors you have and then think of each one as a potential competitor.

Are there safety and soundness risks? That’s a great question Henry. The major concern that I have with this new charter is that it will further degrade the firewall between commercial business and banking. This approach worked great for the American economy in the 1920’s but not so much in the 1930’s. In its FinTech Chartering Manual released yesterday, the OCC acknowledged that FinTech’s will be unique. They will not accept deposits and therefore not be subject to FDIC oversight. But they will have to meet capital requirements. But even these capital requirements will be unconventional as much of the money for these businesses is raised by venture capitalists.

What are the appropriate capital requirements for FinTech charters? No one will really know precisely what an appropriate capital buffer will be for these financial entities. Here is my worst case scenario: Facebook creates a FinTech subsidiary that specializes in processing payments and making consumer and mortgage loans. How would the general public react the next time they find out that the parent company loses 20% of its value in one day? Even assuming that there is an adequate firewall between Facebook and its affiliated bank, I think your average consumer will react very nervously to this news.

How will this affect credit unions? To me the charter underscores why credit unions face an existential threat. Limiting the growth of any financial institution, let alone one that is dependent on deposits, is an antiquated regulatory straightjacket in an age of internet banking. If the industry does not get greater flexibility to grow, all but the largest credit unions are going to suffocate.

What Happens Next? The OCC is now accepting FinTech applications and the way it is talking, you can bet there are a few already in the hopper. Part of the application process is a public comment period which will allow interested stake holders to weigh in with any concerns that they have. There will also be lawsuits. In May 2017, in response to a white paper, New York State’s Department of Financial Services filed a lawsuit claiming, among other things, that the OCC did not have the authority to create FinTech charters. That case was dismissed late last year because the court concluded it was premature to bring such a lawsuit but with the OCC now open for business, the lawsuit making the same basic arguments is sure to come.

But I said it before and I will say it again. These companies are an inevitable outgrowth of changes in the economy. While it’s fun to grouse about competitive inequities, it’s much more beneficial to recognize the new reality and to start positioning your credit union to compete in this evolving ecosystem.

In an ideal world Congress would get involved in such an important issue. There are too many important legal and policy issues to be left exclusively to unelected regulators and federal judges but Congress hasn’t exactly demonstrated that it has the ability any longer to deal with complicated important issues.

 

August 1, 2018 at 11:00 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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