Posts tagged ‘proposed regulation’

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

What’s next for the CLF?

 As someone who is just waking up after having watched the Giants beat the 49ers to make it to the Superbowl, I know there are more enjoyable things to consider than what mechanisms credit unions should use to make sure they have access to emergency credit, but few issues are more important.  It is my opinion that Seinfeld and the Godfather trilogy provide guidance on almost any issue confronting mankind.  For example, in reading a recent post in Keith Leggett’s Credit Union Watch column, I was reminded of Don Corleone’s admonition to keep your friends close and your enemies closer.

As I blogged previously, NCUA has posted an Advanced Notice of Proposed Rulemaking (ANPR) seeking credit union input as to what regulatory changes should be made to the Central Liquidity Fund (CLF) with the wind down of US Central.

Currently, the vast majority of credit unions can access the CLF-which acts as the industry’s lender of last resort-by virtue of being a member of  a corporate credit union.  In addition, the borrowing authority of the liquidity fund is generally equal to 12 times the total subscribed stock.  Since US Central owns most of those shares and will be cashing them in as part of the wind down, the amount of that money available to credit unions will eventually be reduced from the current line of credit of approximately $50 billion to a little more than $2 billion.  Clearly, this is not sufficient.  Something has to be done.

The ABA has graciously offered its input on the issue, suggesting, among other things, that larger credit unions be required to establish credit with the Federal Reserve’s Discount Window, which acts as the lender of last resort for the banking industry.  Ultimately, the bankers argue, Congress should do away with the CLF.  Thanks for the advice: here are my concerns.

First, while I’m admittedly a little paranoid when it comes to banks,  if and when we have another credit emergency, I prefer the idea of the industry being dependent on the willingness of the CLF to provide emergency liquidity rather than the Federal Reserve.  Funding from the Discount Window is not a right but a privilege extended to financial institutions only upon its assessment that there is adequate capital and the institution can be saved.  As Henry Kissinger pointed out, even paranoids have enemies and somehow I don’t think that saving credit unions would be as high on the on the list of Federal Reserve priorities as saving Citibank.

In addition, I suspect that only the largest credit unions will have the necessary collateral and staff resources to appropriately manage a relationship with the Discount Window.  In contrast, a reconstituted CLF maintains industry unity at a time when security needs to be maintained more than ever.

No matter what solution we come up with, it’s likely that it will cost more money, either directly through credit union contributions of capital into the CLF, or indirectly through their corporates.  Although credit unions seem most concerned about NCUA’s proposal dealing with participation loans, for my money, this is emerging as the most important proposal of the year.

January 23, 2012 at 7:01 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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