Posts tagged ‘OCC’

Bitcoin is Dead.  Long Live the Bitcoin!

With an impeccable sense of timing, last Tuesday I gave a presentation on the future of virtual currency at a chapter event in which I proclaimed that the technology is going to fundamentally change the way banking is carried out only to read headlines the next morning detailing how investors are running for the exit when it comes to virtual currency. 

A colleague of mine who was at the event even emailed me to ask me if I wanted to change my opinion: my answer is a resounding No.  To be clear, many virtual currencies will go the way of the tulip in 17th century Holland, but the technology makes so much sense that in the coming years, financial institutions will either have to adopt it as their own or be left behind. 

When we talk about virtual currency, it’s important that we all agree on the terms to be used, particularly in the absence of regulatory definitions.  When I’m referring to virtual currency, I am talking about an electronic store of value which is traded electronically using Distributed Ledger Technology (DLT).  By DLT, I am referring to a system of network computers which validates transactions involving virtual currencies using advanced cryptography without the use of a third-party intermediary.

I have no idea what the bitcoin is going to be worth a week from now; but I do know that, as we speak, companies large and small are thinking of ways to apply DLT.  For example, imagine a world in which the job of the county clerk to record home purchases and liens is usurped by DLT which creates a chain, which everyone can access, recording every single transaction involving that piece of property. Imagine a world in which overdraft transactions are a vestige of a bygone era because transactions are executed immediately. 

This is also a world in which there is less and less need for third party intermediaries such as credit unions.  Remember, a DLT network validates and records transactions. 

But this is not one of those “credit unions are obsolete” blogs.  Instead, for those of you who understand the technology, there are many things you can do to integrate your institution into this new technology and benefit your members along the way.  For example, the OCC has already authorized banks to act as electronic wallets– effectively, safety deposit boxes – for consumers who want a central place to store those passwords and electronic keys they need to access all those transactions recorded on those distributed ledger chains.  In addition, this technology will make the NACHA network about as antiquated as rabbit ears on a black and white television. 

The bottom line is: even as you chuckle at that crazy cousin who just lost all that money investing in a virtual currency which exists only in cyberspace, keep on planning for a world in which the technology that powers that, currency changes the way virtually all important financial mediation is done. 

May 17, 2022 at 9:32 am 1 comment

When Do State Interest Rate Caps Apply To A Bank’s Loans?

Expect to hear increased grumbling and calls for reform in response to a ruling yesterday by a federal district court in California upholding a regulation promulgated by the FDIC and OCC clarifying that interest rates that exceed state usury caps remain valid even after the loan is sold by a bank to a non-bank.  To be abundantly clear here, nothing I am going to talk about deals directly with credit unions but the issue of interest rates and more generally what happens to loans that are sold to third parties is one that is likely to receive increased scrutiny.  It behooves anyone in banking to have at least a basic understanding of how the law operates for banks.

Under federal law, federally chartered banks are allowed to charge the interest rate permitted by the state in which they are based.  The interest rate is valid even if the loan is made to an individual located in the state which has a usury cap lower than the interest rate charged on a bank’s loans.  Similar protections are extended to state chartered banks by the FDIC.  This “valid where made” rule is why so many credit card banks are located in states that don’t have usury laws.    Incidentally, for federally chartered credit unions, which are already subject to NCUA’s interest rate cap, the law is more clear-cut, authorizing them to make loans without reference to state usury limits.   

But what happens when a loan is sold to a non-bank? In 2015 the Court Of Appeals for the 2nd Circuit created quite the uproar.  In Madden v. Midland Funding, LLC, the court ruled that a debt collector who had bought a package of loans from a federal bank could be sued for violating a state’s interest rate cap because the preemption afforded to banks did not extend to non-bank entities. 

This is not an arcane debate.  Many fintech lending models are based on obtaining packages of loans from originating banks and then selling or participating out portions of these loans.  This entire model is much less attractive if loans purchased by these fintechs are subject to one of the 43 state usury limits.

The OCC responded by promulgating a rule effectively overturning the Midland decision and clarifying that the validity of an interest rate is determined by its legality when it was originally made by a bank.  Debt collectors and other third parties that purchase loans did not have to worry about state lending caps. 

Which brings us to the punchline in today’s blog.  New York and other states brought a lawsuit challenging the new regulations.  They argued that the FDIC and OCC did not have the authority to extend interest rate protections to non-bank entities.  Yesterday, Round 1 went to the national banks.  In a fairly straightforward analysis of administrative law, the district court upheld the new federal regulations.  The case will, of course, be appealed but the issue could be addressed either by federal legislation or if the OCC and FDIC, both of which are under new leadership, withdraw or amend the regulation.

On that note, enjoy your day.

February 9, 2022 at 9:42 am Leave a comment

The Cryptocurrency Train is Leaving the Station, Will Credit Unions be Onboard?

Good morning, folks.  The American Banker reports this morning that VISA is nudging banks and credit unions to expand their cryptocurrency options for members using their network. 

Visa on Wednesday launched a crypto advisory service that’s designed to help the company’s banks and credit unions further their cryptocurrency strategies.” 

If this blog sounds somewhat redundant, it’s because I blogged recently about a similar announcement by MasterCard. 

There are two key components involved in this trend that the industry has to more aggressively deal with than it has to date.  First, it is important to underscore precisely why VISA and MasterCard are going to get increasingly aggressive in coaxing the industry into the cryptocurrency space. 

At its core, cryptocurrency is about using technology to facilitate efficient black and white financial transactions without a middle man.  In other words, the increasing use of cryptocurrencies is a direct threat to the VISA and MasterCard business model.  The sooner they integrate themselves into the cyber network by ensuring that members can conveniently access cyber currencies through their networks, the less likely members are to go through the hassle of setting up their own digital wallets. 

Secondly, yours truly remains more than a little concerned about how methodically the NCUA is going about providing guidance for credit unions engaging with this space.  For example, this fall it requested credit union feedback on issues related to cryptocurrencies and I am hoping this means that we can expect additional guidance next year.  In contrast, the OCC has written three interpretive letters to banking institutions providing guidance on various aspects of cryptocurrency banking.  Most importantly, it recently issued a letter summarizing the guidance and explaining that while banks can go forward in this area, they should do so only after informing their regulators of their intentions.

If anything, cryptocurrency issues will probably be even more challenging for credit unions because of Field of Membership concerns and the asset size of many of our credit unions.  Still, for better or worse, and I believe mainly for worse, all the cool kids are doing it and it’s time to get the regulatory framework in place.

December 9, 2021 at 9:08 am Leave a comment

Bank Preemption Takes Center Stage

There is currently a case before New York’s Court of Appeals for the Second Circuit that could have a direct impact on your credit union’s bottom line even if you don’t have the great fortune of living in New York. The issue is whether or not federally chartered banks are subject to a New York law mandating that lenders provide interest payments to borrowers with mortgage escrow accounts. If the court upholds two lower court rulings, federally chartered credit unions should be prepared to also provide interest payments. NCUA preemption standards are less stringent than those typically exercised by the OCC.  The cases being appealed are Hymes et al. v. Bank of America NA, case number 21-403, and Cantero v. Bank of America NA, case number 21-400, in the U.S. Court of Appeals for the Second Circuit.

I have blogged about these cases before, and I just wanted you to know that I am not the only one paying attention.  Law360 reported that the OCC has weighed in with an amicus brief.   The issue is the applicability of New York General Obligation law 5-601 which requires banks and credit unions to pay interest on mortgage escrow account balances. The statute has been around for decades, dating to the early 80’s when high inflation rates chipped away at member’s savings. But since the law’s inception, courts have ruled that its provisions don’t apply to federally chartered institutions.  The OCC argued that in refusing to preempt New York’s law, the lower courts adopted a legal standard which violates long standing precedent.

If you think you got it bad…

If you’ve been obsessing about your credit union’s influx of cash, you are not alone.

Yesterday, the FDIC released this report detailing the impact that the unprecedented influx of cash has had on banks. The report was required as part of a restoration plan that had to be imposed on banks after they fell below their statutory deposit baseline.

What struck me about the report is just how much financial institutions have riding on the assumption that this glut of money is a short-term phenomenon.  Obviously, if people start spending money again now that the COVID restrictions have been lifted, the savings glut will be a short-term glitch that we can reminisce about over drinks when we look back at the pandemic. But what happens if inflation continues to rise and consumers are weary to spend too much money as the economic outlook remains uncertain? Hopefully we will not have to find out.

June 16, 2021 at 10:09 am Leave a comment

Court: NY Jumps Gun on FinTech litigation

For the second time in less than four years, a federal court ruled yesterday that New York committed the legal equivalent of a false start when it filed a lawsuit against the Office of the Comptroller of the Currency (OCC) after it announced that it would begin accepting charter applications from non-depository FinTechs interested in obtaining federal bank charters. If you think you’re suffering from deja vu, you’re not. In 2017, a district court dismissed an earlier lawsuit New York’s Department of Financial Services filed against the OCC on the same grounds.

One of the key legal issues in banking is whether or not the OCC has the authority to grant federal bank charters to FinTechs even if they do not accept deposits. In the early 2000s, the OCC promulgated regulations permitting companies to apply for bank charters provided they engage in activities such as executing payment transactions. If the OCC has this power, it will enable many FinTechs to provide services traditionally regulated by the states, such as payday lending and perhaps even mortgage banking.

In Lacewell v. Office of Comptroller of Currency NYS is arguing that the OCC is acting beyond its authority by considering granting charters to non-depositories. It claims to be harmed by the revenue it would lose from licensing non-depositories and that New York consumers will be harmed by banking products which aren’t subject to New York’s consumer protection laws, such as its cap on interest rates.

But in yesterday’s ruling the court held that in the absence of a charter actually being granted, New York could not demonstrate it had been harmed enough to give it access to the federal courts.

Enjoy your weekend, folks!

June 4, 2021 at 10:03 am Leave a comment

The Losing Race Against the Machine

In the waning days of this lousy year, one of the most important battles about the future of the financial services industry is coming to a head. Regulators, judges, Silicon Valley entrepreneurs and industry stakeholders are trying to figure out how federal law with its roots in the 19th Century is to be applied to banking institutions based on technology created in the 21st. However this battle is decided, its outcome will have tremendous implications for the future of credit unions and all but the largest banks. 

In November, a coalition of banks, credit unions – including CUNA and NAFCU – and consumer rights groups wrote letters in opposition to an application by Figure Technologies to obtain a national bank charter from the OCC. On December 7th, BitPay also applied for recognition by the OCC as a nationally chartered trust. What both of these applications have in common is that the entities in question want the benefits of being a national bank – i.e. the possibility of providing services to anyone, anywhere in the country – while picking and choosing the banking services they actually provide. For instance, Figure wants to avoid FDIC oversight by only taking uninsured deposits. It’s not entirely clear how exactly this is going to work, but apparently, the idea is to only take money from large investors. At the same time, Figure will use its existing block-chain technology to offer an ever-larger variety of loans such as HELOCs and mortgage loans to persons around the country. On the one hand, regulators such as the OCC are anxious to offer a home for these FinTechs, but on the other hand, if they don’t have to accept deposits and they aren’t subject to the more rigorous regulations currently imposed on non-banks by states, then banks and credit unions will be at even more of a disadvantage against FinTechs than they already are, and a good chunk of the consumer protection framework will become obsolete. 

This is why New York’s Department of Financial Services is suing the OCC over its attempt to offer non-bank charters. A decision in this case, which is currently pending before the Court of Appeals for the Second Circuit could come any time now, and Figure’s maneuvers to comply with the OCC’s traditional chartering requirements while avoiding the need for FDIC oversight and insurance is clearly an attempt to get around a ruling in favor of the DFS. 

Finally, the FDIC is trying to protect its turf. It just finalized regulations clarifying the ability of non-banks to consolidate with industrial loan banks without becoming holding companies subject to Federal Reserve Board supervision. 

All this is being done against the backdrop of truly amazing technology, which will redefine banking, and vastly improve the consumer experience. For example, Figure’s ultimate goal is to use block-chain technology to streamline the entire mortgage process, from origination to sale to the secondary market. If everything goes according to plan, the certainty of using block-chain technology will reduce the need for most lawyers (dear god!), compliance folks and settlement agents – a process that takes several weeks will be reduced to a matter of days. All this is good for consumers, but only if this innovation takes place in a modernized framework which takes into account not only consumer protections, but safety and soundness concerns, particularly as the distinction between the revenue earned by FinTechs engaging in traditional commerce, and their role as quasi-bankers becomes blurred. There’s only one institution that can fix this mess, and that’s Congress.

December 17, 2020 at 10:00 am 2 comments

When it Comes to Vendor Management, You Are Your Brother’s Keeper

The people who read this blog are a pretty sophisticated group when it comes to risk management. So why is yours truly spending time on a topic as basic as vendor management? Because two recent regulatory enforcement actions underscore the risk that as banking services become more sophisticated, and those institutions both big and small become more dependent on vendor services, it is incumbent on all of you risk-mitigation folks out there to make sure that what is being committed on paper is executed in reality. 

Exhibit A comes courtesy of Morgan Stanley. The banking behemoth was doing some house cleaning a few years ago and decided to close down some of the data-processing centers it used to facilitate its wealth management business. It hired a third-party vendor to get rid of the data, and given its size and sophistication, I’m going to assume that it had properly drafted contracts and engaged a vendor only after appropriate due diligence. Nevertheless, it now finds itself paying a $60 million fine with a lawsuit alleging that it was negligent in protecting the data maintained on its databases. According to the OCC, its oversight reflected in part a failure to properly assess the risks posed by the vendor project.

Then there’s this announcement that the CFPB and Attorneys General from across the nation had settled a legal action brought against Mr. Cooper, formerly known as Nationstar, for continuing to go forward with foreclosures even as they engaged in loan modifications with some of these consumers. Again, this is a sophisticated company with the resources to avoid such basic mistakes. It appears, however, that there was a disconnect between the arm of the company that onboarded mortgages for servicing and the part of the company responsible for loss mitigation efforts. They too now undoubtedly face a lawsuit or two, increased regulatory scrutiny, and the reputational risks that come with making these kinds of mistakes. Here’s the punchline: if you are reading this blog, secure in the knowledge that your credit union is not vulnerable to these mistakes – my question is why? For your big, most important vendor relationships, and your most important internal operations, how often does your credit union actually double-check its work? 

On that note, Anonymous Chameleon – the name given to me by my google doc link this morning – signs off and wishes everyone a pleasant day.

December 8, 2020 at 9:24 am Leave a comment

New York and OCC Battle Over What Is A Bank

When is a bank a bank?  The answer to this question is not simply of interest to your faithful blogger.  It has real important practical consequences for your credit union and the competition it will be facing in the coming years.  Simply put, at what point do the Apples of the world become so intertwined with traditional banking activity that they should be subject to at least some of the same safety and soundness constraints as banks and credit unions?

The answers to some of these questions will begin to be answered sooner than you might think and New York’s Department of Financial Services is playing a leading role in the debate.  Politico has reported that Acting Comptroller of the Currency Brian Brooks plans on shortly allowing payment processors to apply for federal charters with the OCC.  It is not entirely clear from the article, but the OCC is either prepared to argue that payment processors can be licensed under its proposed FinTech charter or can be granted a separate charter unique to their business model.

This news comes as New York is suing the OCC over its authority to charter FinTechs which help process bank transactions but don’t hold deposits.  A case is before the Court of Appeals for the 2nd Circuit.  DFS argues that the OCC has no authority to grant charters to FinTechs because they don’t accept deposits.  The OCC argues that deposit taking is not a mandatory criterion to be chartered by the OCC.

Even as a decision in the lawsuit is pending, the OCC and DFS have continued their increasingly public debate.  On Wednesday (Law360 subscription required) acting OCC Comptroller of the Currency Brian Brooks and DFS Superintendent Linda Lacewell both appeared at a forum sponsored by the Cato Institute.  Brooks took the opportunity to argue that there is nothing in the national bank act which precludes the OCC from chartering non-depositories.

If he is correct, then over time you will see the nationalization of businesses such as mortgage bankers and licensed lenders who have historically been subject to state consumer protection laws which are generally more extensive than federal requirements.

No matter which side ultimately wins the debate, recent events have underscored just how loosely regulated the payment processing industry is, even as it continues to be free of the traditional regulatory oversight imposed on financial institutions. Recently the CEO of one of the most high profile payment processors, German based Wisecard, was arrested after the company was unable to account for $2.1 billion missing from its balance sheet.

September 11, 2020 at 12:46 pm Leave a comment

Why You Need to Start Preparing for the End of Libor

New York State’s decision to mandate that regulated financial institutions report in writing the steps they are taking to prepare for the end of Libor is a tad heavy-handed. That being said, the Department is onto something by putting financial institutions on notice that it is time to think about life after the London Inter-Bank Offered Rate. In other words, even if you are not a state charter, your institution should start assessing the impact of a post-Libor world on your operations. Here’s why.

Libor is in many ways a classic British creation reflecting how much banking norms have changed in a very short time. It has its roots in key banks in a group of institutions in the old city, consulting with each other on a daily basis about the interest rates they were charging. In an era when half the people on the phone undoubtedly knew each other from their days at Eton and Oxford, this kind of chummy professionalism was not unheard of. In fact, Libor became such a widely used index for pegging interest rates that credit unions are still allowed to use it when making their own variable rate investments, pursuant to 12 C.F.R. 703.14, even though it is not a domestically derived index. Unfortunately, Libor’s simplicity made it extremely easy for investment bankers to conspire to manipulate. For example, Bank A could simply lobby the other banks to set a higher index rate on a daily basis.

This was, of course, illegal. NCUA successfully sued banks over their Libor manipulation. In late July 2019, it unsuccessfully tried to get out of its settlement after realizing just how much investment interest had been lost to the industry.

It is not surprising, then, that regulators want to see Libor ended, and it is widely assumed that this will occur by the end of 2021. DFS has joined other financial regulators in telling financial institutions that it is time to plan for life after Libor. For example, a faithful reader directed me to the most recent OCC risk assessment, in which it explained that “many market and banking participants use Libor as a benchmark for pricing financial instruments. The OCC is increasing regulatory oversight of this area to evaluate bank awareness and preparedness for Libor’s anticipated cessation.”

While it is true that credit unions do not have hundreds of sophisticated contracts tied to interest rate derivatives, as the existing regulatory framework makes clear, credit unions have long used Libor as an index. The end of Libor can be easily prepared for. In contrast, the failure to make plans now could get you enmeshed in the proverbial sticky wicket of contract disputes, which would make for great blog content, but a lousy day in credit union land.

Something to do for the weekend

For those of you who inexplicably want to get out of the house this weekend, instead of watching a gazillion hours of football, yours truly suggests going to see Knives Out. It is by far the most intelligent, entertaining movie I’ve seen in years. It is the type of plot which typically makes for one of those 10 hour Netflix series.

On that note, enjoy your weekend. Go Titans.

January 3, 2020 at 9:16 am 2 comments

It’s Back: Beware of the Inverted Yield Curve

One of the many things that spooked Wall Street yesterday was the return of the dreaded inverted yield curve. Specifically, on Monday, Bloomberg reported “the spread between 3- and 5-year yields fell to negative 1.4 basis points , dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed.” Why does this matter?

Well, you folks know a lot better than I do that from a banking perspective as the yield for shorter term bonds rises faster than the yield on longer term bonds, you end up in a classic squeeze of your operating margins making it more difficult to generate money off member funds. In addition,  the yield curve has an uncanny knack foredicting a coming recession, which makes sense because the higher yield being demanded for shorter term investments means that investors would rather put their money where they can lock in returns for the next few years.

Remember there is also a huge safety and soundness/interest rate risk component to all this. I would expect your examiners to be scrutinizing your knowledge of your interest rate risk exposure in the next round of examinations even more so than usual.

By the way, the inverted yield curve is coming at a time when things on the international stage may once again have a potential impact on the American economy. Just as the Greek debt crisis in the fear of that country opting out of the Euro produced economic reverberations throughout the international economy, we will have to wait and see just how big of an impact England’s inability to decide on divorce terms with the European Union will have on world economic growth.

By the way, British Prime Minister Theresa May, may go down as one of the worst politicians ever. A vote on the plan she negotiated with Europe establishing the terms of England’s post-Brexit relationship with Europe is expected next week and has so far been about as well received as year old candy on Halloween. It’s so bad that the one thing opponents and proponents of Brexit agree on is that Britain would be better off with no Brexit deal than the one being offered by May. That’s quite the trick.

New York’s Economy Continues to Grow But Gaps Remain

Closer to home, the New York Federal Reserve Bank released its latest analysis of the New York economy and if you’re a downstate credit union finding it hard to fill positions you’re not alone. According to the bank, “Employment in New York City is up about 25 percent from its trough following the Great Recession, which is considerably more than the nationwide increase. Meanwhile, upstate New York has not fared as well. Albany had seen solid job growth through much of the expansion, but growth has slowed over the past year. In Western New York, after years of modest employment gains, Buffalo and Rochester have seen job growth slow considerably since 2016.” One can only wonder just how much more the Upstate and Downstate economies will diverge once Amazon moves into town.

OCC: New York DFS Jumped The Gun On FinTech Litigation Again, New York Responds “Not So Fast”

In this letter to the court, the OCC explained that DFS’s lawsuit must be dismissed because no harm has been suffered by anyone since no FinTech Charter has been issued. Meanwhile, the CU Times reported that DFS has responded to this allegation by asking the court to block the OCC from approving any FinTech Charters before the litigation is resolved. Stay tuned, at some point we will actually have extremely important litigation defining the parameters of the OCC’s chartering powers and helping to frame an important public policy debate about how best to regulate hybrids of banks and technology companies.

December 5, 2018 at 9:07 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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