Supreme Court Petition Seeks Early Review of Harper, Otsuka Removal Case

The high-stakes battle over whether former President Donald Trump lawfully removed Todd Harper and Tanya Otsuka from the NCUA Board has landed before the U.S. Supreme Court.

On Sept. 25, attorneys for Harper and Otsuka filed a petition for certiorari before judgment, asking the justices to take up their case immediately rather than wait for a ruling from the U.S. Court of Appeals for the D.C. Circuit. The petition was placed on the Supreme Court’s docket Sept. 29.

Read my take in Credit Union Times!

Supreme Court Petition Seeks Early Review of Harper, Otsuka Removal Case - The high-stakes battle over whether former President Donald Trump lawfully removed Todd Harper and Tanya Otsuka from the NCUA Board has landed before the U.S. Supreme Court.

Supreme Court Sends Strongest Signal Yet That Independent Agencies Are Dead

The Supreme Court sent its strongest signal yet that it is prepared to rule that independent agencies, such as the NCUA, are unconstitutional to the extent they limit ...

Yesterday, the Supreme Court sent its strongest signal yet that it is prepared to rule that independent agencies, such as the NCUA, are unconstitutional to the extent they limit a President’s authority to remove agency heads except “for cause.” 

Trump v. Slaughter involves a challenge by a Democratic member of the Federal Trade Commission whom the Trump Administration fired. She claimed that her removal violated federal statute and prevailing caselaw, pursuant to which FTC commissioners can only be removed for cause. An almost identical argument is, of course, being made by former NCUA board members Todd Harper and Tanya Otsuka, following the firing of the two Democrats from the NCUA board. 

Yesterday, the Supreme Court made two important rulings. First, it decided to hear the FTC case in the upcoming term. Second, it allowed the Trump Administration to continue to keep Slaughter off the board pending its ruling on the merits. It follows similar rulings by the court in relation to other independent agencies, including the NLRB and the Product Safety Commission, among others. 

In deciding to hear the case, the court wants the parties to brief whether the statutory removal protections for members of the Federal Trade Commission violate the separation of powers and, if so, whether Humphrey’s Executor v. United States, 295 U. S. 602 (1935), should be overruled? 

In October 1933, President Roosevelt attempted to remove William E. Humphrey, an appointee of the Hoover Administration, from the Federal Trade Commission. Humphrey argued successfully that, under the law passed by Congress creating the Federal Trade Commission, he could only be removed for cause. The Supreme Court agreed, ruling that Congress had the authority to protect agency heads from removal, provided they were not exercising substantial executive power. It is this decision that provides the basis for Harper and Otsuka’s argument that their removal from the board was illegal. 

Writing in dissent, Justice Kagan argued that it was a misuse of the court’s emergency docket to uphold the Administration’s removal of the commissioner, pending a decision on the merits. She argued that the President “cannot, under existing precedent, fire the FTC commissioner without cause,” and that he isn’t authorized to do so until the majority reverses Humphrey’s on the merits. She complained that “our emergency docket should never be used, as it has been this year, to permit what our precedent bars. Still more, it should not be used as it has been here, to transfer government authority from Congress to the President.” 

In November, the Court of Appeals is scheduled to hear arguments in the NCUA case. It may be several months before the court gives definitive guidance on the constitutionality of the NCUA’s governing structure. The NCUA board has cancelled its October meeting, but Chairman Hauptman has indicated that the NCUA will be holding its annual budget hearing. He also indicated that there was precedent for allowing a single board member to promulgate regulations.

Supreme Court Sends Strongest Signal Yet That Independent Agencies Are Dead - https://thecreditunionconnection.com/supreme-court-sends-strongest-signal-yet-that-independent-agencies-are-dead/

CU Industry Voices Concern as Hauptman Hints at Empty NCUA Boardroom

NCUA Chairman Kyle Hauptman startled the credit union industry Thursday by suggesting there may come a time when the agency has “zero” board members.

NCUA Chairman Kyle Hauptman startled the credit union industry Thursday by suggesting there may come a time when the agency has “zero” board members.

“You may notice that I continue to be the only person sitting at this table today,” Hauptman said during his prepared opening statements at the NCUA’s September board meeting. “At some point in the future, there’s not going to be one board member. There may be zero. There may be two. There may be three. But regardless, my mission and that of my colleagues here is doing the best jobs we can on behalf of America’s 140 million credit union members.”

Read more in Credit Union Times!

CU Industry Voices Concern as Hauptman Hints at Empty NCUA Boardroom - https://www.cutimes.com/2025/09/18/cu-industry-voices-concern-as-hauptman-hints-at-empty-ncua-boardroom/

Update: NCUA Will No Longer Consider Disparate Impact When Evaluating Credit Unions’ Lending Policies 

The NCUA announced that it would no longer consider disparate impact as part of its examination of federally insured credit unions. In a letter to credit union boards of directors ...

The NCUA announced that it would no longer be considering disparate impact as part of its examination of federally insured credit unions. In a letter to credit union boards of directors released on Thursday, the NCUA explained that examiners will no longer review, conclude, or follow up on “matters related to a credit union’s disparate impact risk, internal disparate-impact risk analysis, or disparate-impact risk assessment processes or procedures.” 

The NCUA’s action came shortly after the FDIC announced that its regulators could no longer examine bank practices to determine if they have a disparate impact on minority loan applicants. The announcement could have a major impact on a wide range of lending practices.  

The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) outlaw discrimination on the basis of race, sex, age, and other protected characteristics. It is a bedrock compliance principle that in evaluating an institution’s lending practices, care has to be taken not only to prohibit intentional discrimination – i.e. disparate treatment – but also to guard  against policies and practices that had the effect of disproportionately harming a protected class. 

As part of the announcement, the NCUA released an amended version of its Fair Lending Guide. The amended guide removes the “effects test”, pursuant to which the NCUA had examiners use the following questions for purposes of evaluating whether credit unions may be committing a violation of the ECOA; 

1. Does a particular credit practice have a statistically disproportionate impact on a protected group (those covered under the prohibited basis definition)? 

2. If so, can the credit union show that the practice serves a genuine business need? 

3. If so, is there a less discriminating way to meet that business need?

The redacted FDIC manual contained the following example: A mortgage lender has a policy of only making mortgage loans for $60,000 or more. According to the redacted manual, the policy disproportionately harms minority mortgage applicants. As a result, the lender would have to demonstrate the policy reflects a “business necessity” which very generally means evidence that the policy is necessary to implement a nondiscriminatory requirement. The key distinction is that, whereas disparate treatment is proven with the evidence of intent to discriminate, disparate impact has no corresponding mental state requirement and can often be proven with statistical evidence. 

In April, the Trump Administration issued Executive Order 14281 “Restoring Equality of Opportunity and Meritocracy.” It ordered executive branch agencies, a designation the Trump Administration argues includes the NCUA, to work with the Attorney General to examine “all existing regulations, guidance, rules, or orders that impose disparate-impact liability or similar requirements, and detail agency steps for their amendment or repeal, as appropriate under applicable law.” It also mandated that they evaluate similar state level laws and regulations. The NCUA action follows similar moves by the FDIC and OCC.

Although the NCUA took this action in response the Executive Order issued in April, it is part of a larger legal battle that has been brewing for decades over the proper interpretation of the Fair Housing Act and the ECOA. For example, in the 2005 case Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062, 1068 (S.D. Cal. 2008) African Americans sued a loan originator over its policy of granting brokers discretion when charging fees to loan applicants. The plaintiffs argued that the policy disproportionately impacted minority applicants because they were charged higher fees. The lender argued that neither the ECOA or the FHA prohibited policies that disproportionately impacted minorities in the absence of proof that the disparity was intentional. The District Court refused to dismiss the lawsuit. 

Update: NCUA Will No Longer Consider Disparate Impact When Evaluating Credit Unions’ Lending Policies  - https://henrymeieresq.com/law-office/article/fdic-will-no-longer-consider-disparate-impact-banks-lending-policies/

FDIC Will No Longer Consider Disparate Impact When Evaluating Banks’ Lending Policies

The FDIC announced that its regulators could no longer examine bank practices to determine if they have a disparate impact on minority loan applicants. This announcement could have a major impact on a wide range of lending practices.

On Friday afternoon, before the start of a holiday weekend, the FDIC announced that its regulators could no longer examine bank practices to determine if they have a disparate impact on minority loan applicants. This announcement could have a major impact on a wide range of lending practices.

The announcement came in the form of an amended version of the FDIC’s Consumer Compliance Examination Manual and announced: “Manual has been updated to reflect that the FDIC will evaluate potential discrimination under the Equal Credit Opportunity Act (ECOA) and Fair Housing Act only through evidence of disparate treatment,” and not disparate impact.

The ECOA and the Fair Housing Act (FHA) prohibit discrimination based on race, sex, age and other protected characteristics. It is a bedrock compliance principle in evaluating an institution’s lending practices; care must be taken not only to prohibit intentional discrimination (i.e., disparate treatment) but also to guard against policies and practices that have the effect of disproportionately harming a protected class.

The redacted manual contained the following example: A mortgage lender has a policy of only making mortgage loans for $60,000 or more. According to the redacted manual the policy disproportionately harms minority mortgage applicants. As a result, the lender would have to demonstrate the policy reflects a “business necessity,” which very generally means evidence that the policy is necessary to implement a nondiscriminatory requirement. The key distinction is that whereas disparate treatment is proven with the evidence of intent to discriminate, disparate impact has no corresponding mental state requirement and can often be proven with statistical evidence.

In April, the Trump Administration issued Executive Order (EO) 14281, “Restoring Equality of Opportunity and Meritocracy.” It ordered executive branch agencies, a designation the Trump Administration argues includes the NCUA, to work with the Attorney General to examine “all existing regulations, guidance, rules or orders that impose disparate-impact liability or similar requirements. It also details the agencies’ steps for their amendment or repeal, as appropriate under applicable law.” The EO mandated that they evaluate similar state-level laws and regulations. The FDIC is the second banking regulator to reevaluate its policies following the EO. In July, the Office of the Comptroller of the Currency (OCC) took similar steps regarding its fair lending manual.

The FDIC’s action is the latest in the legal battle that has been brewing for decades over the proper interpretation of the FHA and the ECOA. For example, in the 2005 case Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062, 1068 (S.D. Cal. 2008) African Americans sued a loan originator over its policy of granting brokers discretion when charging fees to loan applicants. The plaintiffs argued that the policy disproportionately impacted minority applicants because they were charged higher fees. The lender argued that neither the ECOA nor the FHA prohibited policies that disproportionately impacted minorities in the absence of proof that the disparity was intentional. The District Court refused to dismiss the lawsuit.

Although the acts taken by the FDIC, of course, have no direct impact on the NCUA, given the EO, it seems likely the NCUA will take a similar stance. From a risk management viewpoint, an examination framework that deemphasizes statistical disparities could impact everything from your credit union’s hiring practices to its lending policies. 

FDIC Will No Longer Consider Disparate Impact When Evaluating Banks’ Lending Policies - https://thecreditunionconnection.com/fdic-will-no-longer-consider-disparate-impact-when-evaluating-banks-lending-policies/

The Supreme Court Looms Over Credit Unions

It’s not often that the credit union industry is even somewhat connected even the slightest bit to decisions coming down from the Supreme Court, but lately, that’s where we find ourselves.

It’s not often that the credit union industry is even somewhat connected even the slightest bit to decisions coming down from the Supreme Court, but lately, that’s where we find ourselves.

This is why we called on our very smart friend and frequent CU Times contributor, Henry Meier, Esq., to open up his credit union-focused legal brain to help connect some dots to the legal moves happening in Washington, D.C. for this episode of "Shared Accounts With CU Times." Listen now!

The Supreme Court Looms Over Credit Unions -

Is A Loan Originator Compensation Rewrite On The Horizon? Yes, According To The CFPB

Toward the end of the first week of June, the CFPB submitted to the Office of Management and Budget (OMB) proposed regulations that would, among other things, address existing Loan Originator Compensation requirements under Regulation Z. 

Buckle up, loan officers, because many of the restrictions on your pay spawned by the housing crisis could disappear.

Toward the end of the first week of June, the CFPB submitted to the Office of Management and Budget (OMB) proposed regulations that would, among other things, address existing Loan Originator Compensation requirements under Regulation Z. Notice of the submittal to the OMB was not coupled with a public release of the proposed amendments, but it means proposed changes could be coming soon. Still, the fact that the CFPB is considering making changes to the loan originator rule could mean that we are on the verge of one of the most significant regulatory rollbacks under the Trump Administration’s CFPB.

News of potential changes to these regulations is about as exciting to anyone who wrestled with implementing these mandates as it is to tell a 5-year-old that Christmas Eve is coming early this year. There is much that could be changed that would make the compliance professional a more welcome presence from mortgage lenders across the country.

For those who managed to block out the trauma, a quick refresher: Regulation Z’s current Loan Originator Compensation framework stems from Dodd-Frank’s post-2008 directive to curb the Wild West practices in mortgage lending. Under rules finalized in 2013, loan originators cannot be compensated based on a loan’s terms or conditions (read: no steering toward higher interest loans), and dual compensation—receiving payment from both the consumer and another party in a single transaction—is a hard no. The rules also require licensing disclosures, record retention, and specific anti-steering safe harbor provisions. In short, it’s a minefield with paperwork.

And it’s not just speculation. OMB’s dashboard shows the proposed rule is now under review, putting us officially on “any day now” watch. While the text of the proposed amendments hasn’t been made public, mortgage industry advocates are already lobbying for changes that would allow more flexibility in structuring compensation and revisiting long-standing concerns like paying originators differently based on loan type or complexity.

Those of you who want to take an unpleasant trip down memory lane should review this Federal Register posting from 2013. The loan originator compensation rules touched on a broad range of issues, including:

• The mortgage loan conditions that could be used as the basis for compensating an originator
• Further clarification of dual compensation arrangements
• Severe restrictions on the circumstances under which loan originators may be compensated by more than one person for the same transaction
• Base-level licensing and record-keeping requirements

Remember that many of these regulations were required to be promulgated under the Dodd-Frank Act. Once we get the proposed changes, one of the key legal debates will be whether the proposed amendments exceed the CFPB’s statutory authority. Stay tuned!

Is A Loan Originator Compensation Rewrite On The Horizon? Yes, According To The CFPB - https://thecreditunionconnection.com/is-a-loan-originator-compensation-rewrite-on-the-horizon-yes-according-to-the-cfpb/

Why The NCUA Board Lawsuit Is Like Ross & Rachel: Will They Or Won’t They?

What happens when the President of the United States fires independent federal agency board members and they fight back? That’s the legal showdown unfolding...

What happens when the President of the United States fires independent federal agency board members and they fight back? That’s the legal showdown unfolding between two former NCUA Board members and the Trump Administration. It’s a case that could send shockwaves well beyond the credit union industry.

In this revealing interview, The Credit Union Connection Founder/CEO Sarah Snell Cooke sits down with Henry Meier, Esq., to unpack what’s really at stake. If you’ve followed credit union policy, you know Henry as one of the most respected legal minds in the space. And if you haven’t? Now’s the time to start paying attention. (Article continues below. Be sure to watch the dang video!! Oh yeah, the transcript is below, too.)

The will they, won’t they? Two former Democratic members of the NCUA Board were abruptly and controversially dismissed by President Trump. In response, they sued to be reinstated. A lower court initially agreed with them, ordering that they could return to their posts. But before they could pack up their coffee mugs and head back to their offices, an appellate court stepped in and issued a stay, blocking the reinstatement while the appeal plays out.

The legal battle is bigger than two jobs or even one agency. According to Henry, this case is teeing up a direct challenge to Humphrey’s Executor, a Supreme Court precedent from 1935 that upheld the independence of regulatory agencies from direct presidential removal. If that precedent is revisited or overturned the entire structure of how independent federal agencies operate could change. That includes not just the NCUA, but the Consumer Financial Protection Board, the Federal Trade Commission and others.

“While the firing of Todd Harper and Tanya Otsuka is understandably sending a jolt through the credit union system, it is not surprising,” Henry opined. “Since his first days in office, President Trump has openly questioned the constitutionality of independent agencies … A strong argument can be made that the Supreme Court will overturn its own precedent in this area.”

Throughout the conversation, Henry breaks down what makes this case so legally complex and politically loaded. He walks us through the potential implications for future presidential authority, regulatory independence, and how credit unions might feel the ripple effects.

We also dive into why the Supreme Court is almost certainly the next stop for this case. With SCOTUS’ growing appetite for reassessing precedent and executive power, this legal standoff may become one of the defining constitutional rulings of the decade.

This isn’t just a courtroom drama. It’s a power struggle wrapped in constitutional theory, wrapped in the future of American regulatory governance.

If you care about the rule of law, checks and balances, or how credit unions and financial services in general are governed in the United States, this is a must-watch. Henry doesn’t just break it down, he puts it in context: where it’s going, why it matters and what you should be watching for next.

Watch the full interview now to hear Henry’s unfiltered take on the lawsuit, the precedent it’s challenging, and why it’s one of the most important cases credit unions—and possibly the entire country—will face in the coming years.

Why The NCUA Board Lawsuit Is Like Ross & Rachel: Will They Or Won’t They? - https://thecreditunionconnection.com/ncua-board-lawsuit-is-like-ross-rachel-will-they-or-wont-they/

SCOTUS Ruling On Education Department RIF Signals Trouble Ahead For CFPB – And Potentially The NCUA

The Supreme Court issued yet another significant order in McMahon v. New York, allowing the U.S. Department of Education to proceed with a proposed reduction-in-force despite ongoing legal challenges. 

The Supreme Court issued yet another significant order on July 14, giving the president wide latitude to reduce and reorganize executive branch agencies. Specifically, the court’s order in McMahon v. New York allows the U.S. Department of Education to proceed with a proposed reduction-in-force (RIF) despite ongoing legal challenges. 

SCOTUS’ decision to allow the executive branch to proceed with a significant restructuring of a federal agency, before full judicial review is another sign that the Supreme Court is adopting a view of executive authority that will have implications for all federal agencies. In particular, the Consumer Financial Protection Bureau (CFPB) – and potentially the NCUA – should take note. 

Certainly, credit union leaders must take this seriously as a strategic consideration. Suppose this order reflects a broader judicial willingness to affirm the executive’s authority to reorganize agencies mid-litigation. In that case, ostensibly independent regulators, such as the CFPB and the NCUA, are likely to find themselves increasingly vulnerable to structural overhauls. 

Now, as tempting as it may be for at least some of you to welcome these developments; (after all, don’t credit unions want fewer regulations? ), remember that the same authority exercised by President Trump is authority that isn’t being exercised by your local Members of Congress who you have known for the last 20 years or could be used by a future president with whose ideology you may not agree. Senator Sanders to the rescue? 

Executive Control and Constitutional Framing

Secretary of Education Linda McMahon was quick to issue a public statement yesterday, asserting, “Today, the Supreme Court again confirmed the obvious: The president of the United States, as the head of the executive branch, has the ultimate authority to make decisions about staffing levels, administrative organization and day-to-day operations of federal agencies.”

This is not simply offhand political commentary; it reflects a constitutional theory of the unitary executive, in which the president enjoys broad, centralized control over the administrative state. In recent years, this theory has gained traction at the Supreme Court, and this latest order may be its most practical affirmation yet. This ruling opens the door for an administration to dismantle or shape a federal agency’s workforce and structure via executive order, without waiting for the courts to resolve pending legal objections. That should raise eyebrows of regulators and the regulated.

What This Means for the CFPB

For those who have followed the CFPB constitutional controversies, this decision represents another possible inflection point. Although it is ostensibly independent, it is operating as part of the executive branch. Should a future administration wish to reduce its regulatory scope or reassign its functions, the Supreme Court’s reasoning in the Department of Education case suggests such a move could proceed quickly, even while challenged in court.  

Even if the CFPB remains intact legally, the Court’s order suggests that the executive could initiate significant workforce reductions or internal reorganizations before courts intervene. That raises real concerns about the continuity and functionality of the CFPB’s enforcement, supervision and rulemaking arms under a more aggressive political agenda. To be clear, the administration argues that it will uphold non-discretionary legal obligations even as it makes these cuts, but when you read the plain language of the secretary’s pronouncements, it is fair to question at what point this becomes a distinction without a difference. 

Broader Implications for All Independent Agencies

The reach of this order extends well beyond the CFPB. The precedent it sets could be applied to any independent federal agency whose statute, like the NCUA and the FDIC, does not explicitly prevent executive branch restructuring. 

If an administration were inclined to reduce or eliminate perceived regulatory redundancies, it could propose merging the NCUA into the Office of the Comptroller of the Currency (OCC) or consolidating enforcement functions with another prudential regulator. While such a move would face legislative, legal and operational hurdles, SCOTUS’ order quietly lowers one of the highest obstacles: the need to delay restructuring until litigation concludes.

Appropriations and Agency Design

Another noteworthy element of this case is what it suggests about the limits of congressional control over independent executive agencies. The Education Department’s RIF plan affects the federal budget, yet the Court declined to prevent it from proceeding. This signals that judicial deference to executive reorganization authority may extend to areas traditionally considered within Congress’ purview, particularly when it comes to managing personnel and administrative structures.

This development should prompt serious reflection in both legislative and regulatory circles. If staffing levels and internal operations are now fair game for executive branch directives, regardless of congressional design or appropriations intent, the independence and predictability of federal oversight agencies could be significantly compromised.

A Legal and Strategic Turning Point

While the Court’s order did not address the merits of the underlying lawsuit, the implications are clear: The executive branch may have greater latitude to reshape federal agencies in line with its policy objectives than we previously thought, and even before legal challenges are resolved. After all, as I noted above, just last week, the court upheld the legality of mass layoffs organized pursuant to an executive order instructing all agencies, including the NCUA, to reduce their headcount. 

When the court issued this order, Justice Jackson was the only dissenting voice. Justice Sotomayor explained she was voting in favor of that order because the relevant order stipulated that the reductions were to be executed “consistent with applicable law.” Fast-forward just a week, and that same justice wrote in unequivocal language that the majority’s order amounted to sanctioning “the president’s unilateral efforts to eliminate a cabinet-level agency established by Congress.” The key question is, at least for the court’s liberal minority, how much deference should be given to executive branch staffing determinations. 

For the CFPB, the NCUA, and their stakeholders, this is not just an academic debate; it is a paradigm shift. From now on, defending an agency’s independence may not be enough. Agencies may now need to develop contingency plans for operating at the whim of executive fiat.

This case adds to the growing list of reasons credit unions and the NCUA should closely monitor how executive authority is interpreted and applied.

SCOTUS Ruling On Education Department RIF Signals Trouble Ahead For CFPB – And Potentially The NCUA - https://thecreditunionconnection.com/scotus-ruling-on-education-department-rif-signals-trouble-ahead-for-cfpb-and-potentially-the-ncua/

Executive Orders Are Shaping The Rules: What That Means For Credit Unions

The Supreme Court's recent unsigned order allowing the Trump Administration to go forward with reductions to the federal workforce is the latest example that the traditional regulatory process is changing. Is your institution ready to react to this new, faster environment?

Executive Orders Are Shaping The Rules: What That Means For Credit Unions -

Executive Orders Are Shaping The Rules: What That Means For Credit Unions

On July 8, the Supreme Court issued an emergency order that allowed the Trump administration to move forward with a sweeping executive order to reorganize and dramatically downsize parts of the federal workforce, even before the legality of the order is confirmed.

When it comes to federal policy shifts, most of us in the credit union industry are accustomed to the slow, winding process of legislation or the formal regulatory rulemaking process. You know the drill: proposals, comment periods, revisions and then finally, rules. That may no longer be the norm.

This week, things got a jolt from the top. On July 8, the Supreme Court issued an emergency order that allowed the Trump administration to move forward with a sweeping executive order to reorganize and dramatically downsize parts of the federal workforce, even before the legality of the order is confirmed. Even before the legal battle involving former NCUA Board Members Todd Harper and Tonya Otsuka plays out. 

In plain language, executive orders are being permitted to reshape the federal government. It’s not a passing fad. It’s the new playbook.

What’s Really Going On

SCOTUS issued an emergency order permitting the Trump administration to go forward with plans to reorganize and implement massive cuts to the Federal Government, as the underlying legality of his actions is being litigated. This decision overturned a California district court’s decision, affirmed by the Ninth Circuit Court of Appeals, blocking the Trump administration from carrying out its executive order before the case makes its way through the normal litigation and appeals process. It will still, ultimately, be decided by the Supreme Court.

What’s interesting is that the Court’s order was not accompanied by a written majority opinion explaining its rationale. As a result, we don’t know how expansively SCOTUS views the executive branch’s authority to reorganize the federal workforce.

So, what, you ask?

A Quiet Green Light for Executive Power

Because the Supreme Court acted through its so-called “emergency docket,” it didn’t explain its reasoning. That leaves a big question mark: How far does this green light go? Could it make it easier for any future president to reorganize or even consolidate independent agencies, such as the NCUA, FDIC or OCC, without requiring congressional approval or the usual regulatory process? No one knows, but a precedent is quietly being established.

For credit unions, that uncertainty is more than academic. We’ve already seen the two board members removed (unrelated to the federal government staff reduction). The NCUA is voluntarily complying with the Trump administration’s executive order, reducing its workforce 18% by year-end. This is a profound shift in how things have been done in Washington.

By granting this order the way SCOTUS did, we could hypothetically have a situation in which the executive order pursuant to which the NCUA’s retirement plan was put in place is found to be unconstitutional after it has already taken effect.

Regulation By Memo

Historically, credit union regulations have been developed through a deliberate and open process. That’s part of why the credit union industry has led with a strong voice to shape policy. We’ve participated in that process, submitted comment letters, attended hearings and worked closely with lawmakers and regulators.

But if executive orders and emergency legal maneuvers become the default, then public comment from the people, like you and me, becomes optional or worse: irrelevant.

This shift has been building. Earlier this year, we saw warning signs that traditional regulatory norms were being pushed aside. This article takes a closer look at how issues like the credit union tax exemption are being pulled into broader political fights. 

The risk? Decisions with massive implications for our movement will be made without consultation, transparency or possibly due process.

And frankly, weren’t we just a little more than six months ago complaining about the CFPB, under the then-Democratic administration, regulating by press release? It’s déjà vu all over again.

True, there has been an increasingly aggressive use of executive orders dating back to President Bill Clinton. However, President Trump is using them to an extent and to address virtually every major policy issue facing the country. Congress has had little appetite for checking this power. We are in a fundamentally different era where the rules of the game are being changed.

So, What Should Credit Union Leaders Do?

To begin, we must acknowledge that we’re operating in a more volatile and unpredictable policy environment. Executive orders aren’t new, but their growing influence and the way courts are treating them mean credit union strategies must be nimble.

Second, stay plugged in. Know which executive actions are affecting financial regulation and which agencies are quietly being restructured. Keep a close eye on the shifting balance of power between the executive branch, Congress and independent regulators.

And finally, don’t count on the old playbook. If your credit union relies on a stable regulatory framework to plan investments, services or compliance strategies, revisit your assumptions. This is what we’ve got to work with, and we can’t let it freeze us.

What It All Boils Down To…

…is that no one’s really got it figured out just yet, as Alanis Morissette sang. We don’t know how the courts will rule in the end. Some of these aggressive executive actions may be walked back. However, the machinery is already in motion, and in some cases, it’s altering the landscape before the legality is even decided.

The Court’s action is yet another strong indication that we will continue to see dramatic and rapid changes in Washington. The Court has still not ruled on whether to reverse Humprey’s executor, which codified that Congress can limit the president’s powers to remove officials from independent federal agencies, such as the NCUA. Nevertheless, we already have independent agencies complying with and being affected by some of the most aggressive executive orders ever issued. It is increasingly unlikely that the traditional proposal and comment regulatory process will continue to play as important a part of the governing process as it has in the past.

Regardless of your credit union’s field of membership, size or location, Washington is dramatically changing shape. And your credit union must morph to change how we watch, adapt and lead.

Executive Orders Are Shaping The Rules: What That Means For Credit Unions - https://thecreditunionconnection.com/executive-orders-are-shaping-the-rules-what-that-means-for-credit-unions/

Stablecoins: Credit Unions Can Either Lead, Follow or Get the Hell Out of the Way

Credit unions may find themselves competing against some of the largest companies in the world - not just banks!

Credit unions may find themselves competing against some of the largest companies in the world - not just banks! What's your credit union going to do?! Read my full analysis in Credit Union Times.

Stablecoins: Credit Unions Can Either Lead, Follow or Get the Hell Out of the Way - https://www.cutimes.com/2025/06/26/stablecoins-credit-unions-can-either-lead-follow-or-get-the-hell-out-of-the-way/

Can the Industry Grow Without Merging Small CUs Out of Existence?

The threat of ending the tax exemption for “large” credit unions should serve as a reminder to the industry that it has a vested interest in protecting the core attributes of what makes a credit union a credit union. 

The threat of ending the tax exemption for “large” credit unions should serve as a reminder to the industry that it has a vested interest in protecting the core attributes of what makes a credit union a credit union. Read more in Credit Union Times!

Can the Industry Grow Without Merging Small CUs Out of Existence? - https://www.cutimes.com/2025/06/02/can-the-industry-grow-without-merging-small-cus-out-of-existence/

Who Can Vouch For Your Arbitration Clause?

If your credit union has already implemented an arbitration clause, you may think that you have done all you can to protect yourself against class-action lawsuits. Even as ...

If your credit union has already implemented an arbitration clause, you may think that you have done all you can to protect yourself against class-action lawsuits. Even as NCUA debates who can exercise what powers and the CFPB goes into a regulatory-induced coma, it is essential to remember that your credit union still faces this legal threat. But is your confidence justified? 

If your credit union has an arbitration clause, it still has the burden of proving that your arbitration clause was agreed to by the members seeking to sue you. One of the most common ways attorneys try to get around arbitration clauses is to claim that the procedures used by the credit union did not give members adequate notice of what they were agreeing to or provide a mechanism to reject the arbitration. Typically, the way a credit union would respond to this claim would be to submit an affidavit from a credit union employee, hopefully with accompanying material and screenshots detailing the steps that were taken to notify members of the arbitration clause. 

Under the federal rules of evidence, “a witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter.” Who at your credit union satisfies this standard when it comes to testifying about how you implemented the credit union’s arbitration clause? 

That is the nub of an issue recently addressed in Moshe Borukh v. Experian Info. Sols., Inc., 2025 U.S. Dist. The United States District Court for the Eastern District of New York provided the latest example of how this issue comes up in the context of arbitration. 

The plaintiff in this case brought a lawsuit against Experian, alleging violations of the Fair Credit Reporting Act. Experian moved to compel arbitration pursuant to language contained in an online click agreement, which the member concedes he agreed to. The plaintiff argued that the only evidence submitted by Experian in support of compelling arbitration was inadmissible. 

According to the plaintiff, the Declaration of Dan Smith, who holds the title of Director of Project Operations, is not based on his personal knowledge as required by federal procedure. Crucially, however, the court held that since the declarant was generally responsible for overseeing the arbitration integration process, he could familiarize himself with the credit union’s specific records and testify to the procedures used to document the plaintiff’s consent. Remember, however, that even though its vice president was confident to testify, Experian was only successful because it had adequate documentation that could be reviewed and testified to. 

Any credit union that decides to integrate an arbitration provision into its account agreement must not only be concerned with drafting the appropriate language but also ensuring that it can document how members were notified of the arbitration clause and how your credit union documented the member’s acceptance of the changed terms. As part of this process, working with legal counsel to ensure that it is familiar with your jurisdiction’s approach to deciding who is competent to testify on issues relating to arbitration. These issues are literally being litigated across the country, and not all states are committed to arbitration. 

Last but certainly not least, archive the material needed to support what you want your employee testifying to. For example, if you sent out an email containing information about the arbitration clause, then you should have a copy of the email and material. This may sound obvious, but one of the most basic mistakes businesses make when implementing arbitration clauses is to not archive evidence related to member approval procedures. The burden is on the party seeking to compel arbitration to prove that it has been agreed to.

Who Can Vouch For Your Arbitration Clause? - https://thecreditunionconnection.com/who-can-vouch-for-your-arbitration-clause/

Washington Is Moving Fast - Except When It’s Not

Hurry up and wait! The Trump Administration is moving a mile a minute, and as it does so, regulators are kinda stuck. Here are my thoughts on the NCUA Board Member dismissals and the semi-fangless CFPB. I'd love to hear what you think!

Last week was another unprecedented week for the credit union industry. First, the White House fired Todd Harper and Tanya Otsuka, the two Democratic members serving on the three-member NCUA Board. Secondly, the CFPB is considering rescinding all previous guidance issued by the CFPB since its inception. Both developments could have a direct and immediate impact on your credit union’s operations. Here is a look at some of the key implications of these changes.

NCUA Firings

Recently, I have had a number of exchanges with the Chairman and he is a classic small government conservative who will look for ways to reduce regulatory burden. But, without a full board, his ability to act is limited. So long as Chairman Hauptman remains in place, NCUA is able to carry out basic day-to-day functions. Section 12 USC 1752a(e) gives the Chairman several additional powers and responsibilities, including directing “the implementation of the policies and regulations adopted by the board.” Pursuant to this authority, examinations and general oversight of the industry can ostensibly continue until replacements are appointed and approved by the Senate. 

In contrast, former NCUA Chairman Dennis Dollar (the best last name for a financial regulator in history) opined in an interview with CU Today that the chairman’s power extends to rule-making authority. This is a highly questionable proposition. NCUA’s enacting statute vests rule-making authority in the Board, and the Board cannot operate without a quorum. The much more likely scenario is that the chairman will simply wait for new board members to be appointed before taking additional regulatory action. 

In addition, the board carries out several quasi-judicial functions such as deciding appeals related to materially adverse examiner findings with which a credit union disagrees. A prolonged absence of a quorum would raise questions as to the legality of NCUA enforcement actions in the absence of the availability of administrative appeals. In short, the legislative and regulatory structure does not envision a prolonged interregnum in which there is no functioning board. 

Some NCUA supporters have expressed concern that the Administration’s actions could also facilitate dramatic policy changes. For instance, a board of Trump Administration appointees could presumably be more receptive to efforts to restructure the NCUA by consolidating it into the FDIC or OCC. However, such concerns may prove to be exaggerated. As aggressively as the Trump Administration has acted, its decision to remove Democratic board members from independent agencies is based on a very plausible interpretation of existing Supreme Court case law. In contrast, the NCUA, like the CFPB, is a congressional creation that can only be restructured with Congressional approval. 

Is the removal of the board members legal? 

The Trump Administration’s decision to fire the two Democratic appointees has jolted the industry but is hardly surprising. In this Executive Order, the President explained that “so-called independent regulatory agencies” are unconstitutional infringements on the President’s executive authority. He further indicated that the Executive Order made almost all independent agencies subject to the oversight of the Executive Branch, with the exception of the Federal Reserve’s “conduct of monetary policy.” 

Since issuing this order, the President has fired several Democratic appointees on boards that were previously considered independent. Consequently, there is ongoing litigation, which will ultimately reach the Supreme Court, that will provide guidance as to the legality of the President’s actions. One such case is Grundmann v. Trump, No. CV 25-425 (SLS), 2025 WL 782665 (D.D.C. Mar. 12, 2025). On February 10th, the plaintiff was fired from her board position on the Federal Labor Relations Authority (FLRA). Under its enacting statute, members can only be removed for cause. The members also serve defined terms and, like the NCUA, no more than two of the three members of the board are permitted to be of the same party. 

These legal disputes involve two fundamental issues. First, is the Humphrey’s Executor case, in which the Supreme Court upheld the constitutionality of independent boards, still good law or will it be overturned by the Supreme Court? There are strong indications that the Court will, in fact, overturn this precedent. Secondly, even if the Court upholds Humphrey’s Executor, the Trump Administration is arguing that the courts have no power to force it to rehire dismissed board members.

CFPB Moves to Rescind “Illegal” Guidance

Law 360 is reporting that CFPB staff has been ordered to undertake a “comprehensive internal review” of existing CFPB guidance. An appendix accompanying this memo includes a list of 120 such documents dating back as far as 2012. Law 360 quotes Acting Director Vought saying, “For too long, the Agency has engaged in weaponized practices that treat legal restrictions on its authorities as barriers to be overcome rather than laws we are bound to respect. This weaponization occurs with particular force in the context of the Agency’s use of sub-regulatory guidance.” 

Once again, we are in unchartered territory. Past guidance issued by the Bureau touches on everything from overdraft fees to fair lending laws. Crucially, many of these policy statements are predicated on the Bureau’s interpretation of its UDAAP powers. While the Bureau’s actions would be a positive development for financial institutions, the exact consequences of rescinding guidance remain to be seen. For instance, even assuming that the Bureau ultimately withdraws guidance making overdraft fee charges a violation of UDAAP, there is now federal case precedent that reaches the same conclusion. 

Its most direct impact could be on the enforcement of federal law by state agencies such as the Department of Financial Services (DFS).  Under the Dodd-Frank Act, states have the independent authority to enforce most consumer protection laws but as applied to federal credit unions, state agencies can only enforce violations of federal regulations promulgated pursuant to such laws. This distinction means, for example, that DFS would not be allowed to sue a federally chartered bank or credit union based on its own interpretation of the Truth in Lending. However, it could sue for a violation of Regulation Z. 

A second issue, which the CFPB’s actions could once again bring to the forefront is whether the authority of state agencies to enforce federal consumer protection laws extends to the Bureau’s authority to bring enforcement actions under federal UDAAP authority. See 12 USC 5531. 

What is the Consequence for Your Credit Union?

First, the positives. The Harper Chairmanship aggressively attacked the consumer practices of credit unions in general and larger credit unions in particular. This period is over. The Chairman has the authority to establish examination priorities, and he has already stated that he is opposed to the regulation of overdraft fees. Second, once a new board is established, we may see rapid movement on mandate relief in areas such as mandatory succession planning and record retention. We may even see an expedited examination process. These are all areas that the Chairman has referred to in the past. Even if the Court ultimately rules against the Trump Administration, we are in a period where the NCUA, like the CFPB, is in a regulatorily induced coma.

The most dramatic impact of all these changes will continue to be on the CFPB. In the coming months, expect several existing regulations, including the Small Business Lending Rule, to be reexamined. In addition, by putting an end to regulation by enforcement action, the Bureau will move at a much slower pace, and it should be easier for all financial institutions to comply with its mandates.

What are the negative consequences? The answer depends in large part on what actions Congress takes in the coming weeks. The federal credit union industry is a statutory creation, and its key features, including a separate regulator and tax-exempt status, can only be eliminated with congressional action. However, we have already seen with the actions taken against the Bureau what a determined bureaucrat can do to limit the effectiveness of an agency. 

In the context of NCUA, in a worst-case scenario, we could have a board that openly advocates for Congress to consolidate NCUA into another banking regulator, such as the OCC. In addition, the Board could effectively halt all large credit union mergers on policy grounds. We could also see a dramatic reduction in staff.

As important as the NCUA is, the most important issue is, of course, the continued independence of the Federal Reserve Board. By establishing the precedent of direct control over independent financial agencies, the President is clearly laying the groundwork to argue that the same authority authorizes the Executive Branch to have direct oversight over the monetary policy functions carried out by the Federal Reserve.

As always, if you have any questions or wish to further discuss, please do not hesitate to reach out to me.

Washington Is Moving Fast - Except When It’s Not -

NCUA In Transition: “Wrongful” Firings Stymie Credit Union Watchdog

While the firing of Todd Harper and Tanya Otsuka is understandably sending a jolt through the credit union system, it is not surprising. Since his first days in office, President Trump has openly questioned the constitutionality of independent agencies, and the NCUA was not going to avoid this scrutiny. 

Henry Meier, Esq., provides his thoughts:

While the firing of Todd Harper and Tanya Otsuka is understandably sending a jolt through the credit union system, it is not surprising. Since his first days in office, President Trump has openly questioned the constitutionality of independent agencies and the NCUA was not going to avoid this scrutiny. As a legal debating point, a strong argument can be made that the Supreme Court will overturn Supreme Court precedent in this area and hold that independent agencies such as the NCUA are unconstitutional. The public’s response to the policy implications of this shift remain to be seen. Just as there is no Republican or Democratic way of filling a pothole, is there really a Democratic or Republican way to ensure the safety and soundness of a member’s savings? 

While the actions taken against Harper and Otsuka are a big deal within the industry, they may be a lead up to the president seeking to place the Federal Reserve Board under the direct control of the Executive Branch. Even as he has moved aggressively against most other independent agencies, he has moved more cautiously in relation to the Federal Reserve. For instance, in the Executive Order taking control of independent agencies, the monetary functions of the Federal Reserve Board were exempted. The ultimate question is if the President will seek to exercise direct oversight over interest rates and the implementation of monetary policy.

On a practical level, assuming that they are both replaced with Republican appointees, credit unions may quickly see the consequences of this decision in the form of a dramatically reduced emphasis on separate consumer protection examinations, much more flexibility to charge overdraft fees, and perhaps even a greater emphasis on making the examination process less burdensome for credit unions. Conversely, it is, of course, possible that the two appointees will not advocate forcefully for the NCUA to remain a standalone agency. 

Read more in The Credit Union Connection!

NCUA In Transition: “Wrongful” Firings Stymie Credit Union Watchdog - https://thecreditunionconnection.com/?s=Henry+MEier&e_search_props=c6d3b54-1355

CFPB Through The Looking Glass

Will they? Won't they? The CFPB is caught in sitcom land.

The bizarre saga that is the fate of the CFPB is continuing to unfold on an almost daily basis. 

How does an administration meet its baseline statutory obligations to administer the functions of an agency it doesn’t favor? 

Strip away all the legalities, and that really is the legal issue being debated in DC Federal Court. 

For the last couple of weeks, for example, a coalition of federal employees, consumer rights groups, and civil rights advocates continues to seek a restraining order against the Trump Administration’s efforts to deep-freeze the CFPB. The Trump Administration is committed to ensuring that the Bureau continues to carry out all its statutorily required functions even as it tries to move forward with steps to reduce significantly the Bureau’s footprint.  

Following a hearing in DC Federal Court on this issue in mid-March, the Judge urged both sides to try to develop a mutually agreed upon preliminary injunction order should the court decide to block the Administration’s actions. A compromise could not be reached. The Trump Administration argued that it is performing all the Bureau’s required statutory functions, but at the same time, it insisted that a preliminary injunction codifying these requirements would be ambiguous.  

The plaintiffs propose prohibiting the wholesale cancelation of contracts with the CFPB but allowing the Bureau to halt services on a contract based on an individualized assessment that the contract is unnecessary to a “statutory function.” The latest dispute demonstrates yet again that we are in legally unchartered waters. The President has a constitutional obligation to make sure that the laws passed by Congress are faithfully executed. Is there a way of devising criteria that courts can use to determine if this obligation is being upheld, or is the issue so inherently political that it is best left resolved by Congress and the Executive?

CFPB Through The Looking Glass -

Not ‘As You Wish’ Goes The CFPB

The Consumer Financial Protection Bureau’s (CFPB) legal status reminds me of The Princess Bride - it's only mostly dead.

The Consumer Financial Protection Bureau’s (CFPB) legal status reminds me of The Princess Bride. The administration insists that the CFPB continues to conduct all legally required operations, even as it cancels the bureau's Washington, DC, lease. And Elon Musk publicly proclaims the CFPB shall rest in peace. If it's not dead, it certainly is 'mostly dead.' It is the legal equivalent of being in a medically induced coma.

So, what does this mean for your credit union? Here are some considerations to keep in mind.

1. The fate of the CFPB is relevant to your credit union, whether you have $10 billion or $50 million in assets. While only the big guys get supervised by the CFPB, all credit unions must comply with relevant federal consumer laws and regulations. The Dodd-Frank Act made the CFPB responsible for interpreting these laws on behalf of consumers, other federal regulators and state officials.
2. The CFPB cannot be eliminated without an act of Congress. As aggressively as the Trump Administration is interpreting its authority to issue Executive Orders in court filings, it is not suggesting that it has the ability to do away with agencies created by Congress. In fact, on Tuesday, a hearing was held in DC so that a federal district court judge could hear competing claims about how much or how little the Bureau is doing.
3. Suppose the CFPB ultimately decides to do only what is necessary to comply with its statutory requirements. In that case, a mechanism is in place for federal consumer laws to still be enforced. Dodd-Frank addressed this possibility. Specifically, 12 U.S.C. § 5552 (2)(A)(1) gave state Attorneys General authority to enforce federal consumer protection laws within their jurisdictions independently. In Pennsylvania v. Navient Corp., 967 F.3d 273, 283 (3d Cir. 2020), the Court of Appeals for the Third Circuit affirmed a straightforward reading of this provision. As a result, your credit union is still subject to federal consumer protection law, and there is a mechanism to enforce it against your credit union, should your state’s Attorney General be so inclined. 
4. In a nod to federalism, state officials can only enforce federal regulations against federally chartered banks. Presumably, this provision was put in place to prevent states from implementing varying interpretations of federal law on financial institutions. As drafted, this restriction does not extend to federally chartered credit unions. 

Once the new director is confirmed, I hope and assume that one of their first actions will be to reinterpret the CFPB’s UDAAP authority. This would be welcome news since this authority has been used as a predicate for imposing a wide range of restrictions without going through the meddlesome process of publishing regulations and getting feedback from interested stakeholders. One potential legal dispute could be deciding whether the states’ Attorneys General can independently exercise the CFPB’s UDAAP power. The CFPB, under previous Director Chopra, took the position that states have this authority, but whether the courts would agree is an open question.

Congress could, of course, take decisive action in this area. For example, if it came down to a simple majority vote, it might be willing to repeal Dodd-Frank and its accompanying regulations. But don’t get your hopes up because unless major agency reforms can be included in the budget reconciliation process, which they most likely cannot be, the CFPB is not going away. This is why Congress should reform but not eliminate the Bureau. And even that is a highly unlikely possibility. 

Which brings us back to those core constitutional and legal questions that need to be resolved. These include: 

• How much authority does a president have to oversee and direct independent agencies? 
• Does the president’s obligation to see that the laws of the land are faithfully executed mandate that agencies created by statute receive a baseline amount of funding and conduct a baseline amount of rulemaking? 
• Or are these issues best decided between Congress and the Executive Branch without court intervention?

As these questions are decided, the industry will face years of regulatory and legal uncertainty, during which issues ranging from the propriety of foreclosures to the adequacy of your credit union’s responses to consumer questions about their outstanding loan payments remain in doubt. 

Have fun storming the castle.

Not ‘As You Wish’ Goes The CFPB - https://thecreditunionconnection.com/not-as-you-wish-goes-the-cfpb/

Let’s Talk About the NCUA With Henry Meier

If you're considering hiring a credit union attorney with a broad range of practice areas including regulatory compliance and legal analysis. This podcast will give you an idea of who I am and what I do.

The phrase, “If history is any guide…” has kind of flown out the window in recent weeks. With that being said, we are absolutely excited to finally get the mind of Henry Meier, Esq. on the podcast to discuss credit union issues from a legal perspective.

As former Senior Vice President and General Counsel at the New York Credit Union Association and now running his own practice, The Law Office of Henry Meier, Esq., has been a well-known figure in the credit union space for years, and he writes commentaries concerning regulatory and compliance issues for CU Times. In short, he’s incredibly smart, and we love him.

Give This Episode of Shared Accounts a listen!

Let’s Talk About the NCUA With Henry Meier - https://www.cutimes.com/2025/02/14/lets-talk-about-the-ncua-with-henry-meier/

Ensuring Accountability for All Agencies – The White House

Are independent agencies constitutional? This executive order says they are not and makes the NCUA directly accountable to the executive branch.

Ensuring Accountability for All Agencies – The White House -

CU Experts See NCUA’s Independence Fading With Executive Order

How will the Trump Administration's actions impact your credit union's operations? Recently I discussed this issue with the CUTimes.

CU Experts See NCUA’s Independence Fading With Executive Order -

Credit Union Times: Let’s Talk About the NCUA With Henry Meier

Henry Meier. Esq. joins Michael Ogden and Natasha Chilingerian of Credit Union Times' Shared Accounts Podcast to drill down on the early days of Chairman Hauptman’s term at the NCUA and the chaos happening in other parts of the CU industry. Click to listen!

Henry Meier. Esq. joins Michael Ogden and Natasha Chilingerian of Credit Union Times' Shared Accounts Podcast to drill down on the early days of Chairman Hauptman’s term at the NCUA and the chaos happening in other parts of the CU industry. Click to listen!

Credit Union Times: Let’s Talk About the NCUA With Henry Meier - https://www.cutimes.com/2025/02/14/lets-talk-about-the-ncua-with-henry-meier/

What a World Without the CFPB Would Mean for Your Credit Union

Even though it is tempting to dance on the CFPB's grave, your financial institutions may find that a world without the CFPB is a recipe for compliance chaos. 

What a World Without the CFPB Would Mean for Your Credit Union -

Two Reforms to Rein in the CFPB

In my latest article for the CUTimes, I discuss how curtailing the CFPB's UDAAP authority and ending "regulation by enforcement action" would provide all financial institutions welcomed relief from vague and constantly evolving mandates.

Two Reforms to Rein in the CFPB -

Why Your Credit Union Needs a Chief Data Officer

Regardless of your credit union's size, how it uses, stores and protects data is an increasingly important component of its growth. 

Why Your Credit Union Needs a Chief Data Officer -

The CFPB Has More Power Than You Think

As I explained in this article, the CFPB is even more powerful than you think. Just how effectively the Trump Administration can trim its wings is one of the key questions that will define the next four years.

The CFPB Has More Power Than You Think -

5 Ways the Trump Administration Will Impact Your Credit Union

With the inauguration of President Trump, we are about to see one of the most decisive and dramatic policy shifts in American history. In this article, I describe some of the key changes that credit unions should anticipate. If you would like to discuss the potential impact on your credit union, please send me a note or give me a call.

5 Ways the Trump Administration Will Impact Your Credit Union -

Chevron Wasn’t the Only SCOTUS Decision to Upset Credit Unions’ Compliance Apple Cart

Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., the Court greatly expanded the ability of individual businesses to challenge regulations, even if they have already been upheld by a court. The three-justice dissenting opinion...

The same day the Supreme Court ruled in Loper Bright vs. Raimondo that courts should no longer use the so-called Chevron deference when ruling on the legality of federal regulations, it decided a second case that could have almost as big an impact.

If you recall, Chevron provided deference to regulators when the law was unclear or incomplete. The NCUA, CFPB and others could see a flurry of activity regarding regulations previously covered by Chevron.

In the second case, Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., the Court greatly expanded the ability of individual businesses to challenge regulations, even if they have already been upheld by a court. The three-justice dissenting opinion went so far as to call the decision “destabilizing.” Not surprisingly, the majority argued that these concerns were overblown.

Credit unions and other heavily regulated institutions will now be firsthand observers of who has the better argument. 

Words Matter

First, let’s have a little vocabulary lesson.

A facial challenge to a regulation argues that a regulation is illegal as written. As explained by Black’s Law Dictionary, it is an argument that a regulation or statute “operates unconstitutionally.”

An applied challenge is an argument that a “law or governmental policy is legal on its face but is being applied in an illegal manner.” 

A statute of limitations is the amount of time a party has to bring a lawsuit. Everyone agrees that challenges to federal regulations must be brought within six years of when a “right of action first accrues.”

This means that, for a credit union negatively affected by a new regulation wishing to bring a facial challenge, the clock starts running when the regulation is finalized. Corner Post decided when the six-year clock starts running for a business that did not exist when the regulation in question was enacted.

Down Memory Lane

In 2010, Congress passed the Durbin Amendment, which tasked the Federal Reserve Board with capping debit card interchange fees at a level that was reasonable and proportional to the cost of providing debit card services by institutions with $10 billion or more in assets. The merchants sued after the agency promulgated Regulation II, arguing that the Federal Reserve gave too much money to the affected institutions. 

Fast forward to 2018, when Corner Post, a small truck stop and convenience store in Waterford City, N.D., opened for business. The cost of debit card interchange fees quickly added up for the new business – it had to pay thousands of dollars in interchange fees, which it passed on to its customers. Our frustrated merchant brought a facial challenge to Regulation II, once again arguing that the Federal Reserve’s final regulation did not properly interpret the Durbin Amendment and its resulting regulation, causing higher interchange fees for our merchant. 

Notwithstanding the merchant’s frustration, the federal district court and the Court of Appeals for the Eighth Circuit both ruled that, because six years had passed since the regulation was finalized in 2011, it could not bring a facial challenge to the regulation. In making this ruling, the Eighth Circuit joined six other circuits in interpreting that facial challenges to federal regulations to start running when a regulation is finalized.

However, in a decision written by Justice Barrett, the Supreme Court ruled that the statute of limitations for facial challenges to federal regulations begins to run only after a business has been injured by the regulation. In contrast, all but one federal appellate court that has examined the issue concluded that the statutes of limitation for facial challenges to regulations begin to run on the day the regulation is finalized, after which there are six years to challenge its legality.

Because of the Court’s ruling, Corner Post had more than enough time remaining to bring a facial challenge; after all, it wasn’t even in business until six years after the regulation initially took effect. 

So What?

Why is this such a big deal? Because the Supreme Court has just opened the door for new challenges to regulations no matter how old they are or how many legal challenges they have already survived. For instance, a new financial institution could challenge regulations promulgated by the CFPB in 2013. And remember, these challenges would not have to overcome the obstacle of Chevron deference, which mandated that the courts defer to reasonable agency determinations. 

Consistency Is Key

I was happy when the Supreme Court upheld the constitutionality of the CFPB’s funding mechanism. At some point, the value of consistency outweighs the advantages of getting a regulation or statute repealed. What makes me uneasy about this Supreme Court ruling is how much it could raise questions about a host of regulations. While it is true, as the majority suggests, that many of these challenges will ultimately be dismissed, the very fact that long-standing regulations could be overturned makes it more difficult for compliance people and their bosses to know how much time and resources should be put into complying with a regulation. 

Both sides of the debate agree that Congress could, if it chooses, simply reverse the Supreme Court’s ruling by amending the relevant statute. To me, this makes sense. While the ruling is ultimately very consistent with the court’s approach to statutory interpretation as a matter of legal interpretation. As a matter of policy, it’s in no one’s interest to make agencies perpetually face challenges to regulations every time a new business is confronted with a rule it doesn't like. 

And let’s remember one thing: The merchant in the Corner Post case had the ability to understand the challenges it faced in opening a business. It chose not to do adequate due diligence or complain about the burdens placed on it by regulations that were in place long before its business started. Its remedy is to complain to its local congressmen and not to seek to relitigate settled law. The merchant reminds me of the kid who takes a job at the ice cream parlor that is open seven days a week and then is annoyed that he must work on the weekends.

One more potentially troubling aspect of this ruling is that associations typically lead the way in challenging new regulations. This makes sense since a well-functioning association is well-positioned to understand the opinions of its membership and to develop a consensus in determining whether suing a regulator is a step worth taking. By allowing institutions to effectively have their own statute of limitations, this ruling could increase the temptation of some institutions to bring lawsuits that may or may not be in the interest of an industry writ large.

Chevron Wasn’t the Only SCOTUS Decision to Upset Credit Unions’ Compliance Apple Cart - Originally published in The Credit Union Connection.

Winds Of Change Regarding Credit Union Liability In Elderly Fraud?

A high-profile case in which an estate seeks millions of dollars from Navy Federal and Wells Fargo is headed for ...

A high-profile case in which an estate seeks millions of dollars from Navy Federal and Wells Fargo is headed for appeal. In re Est. of Cook, No. 1:23-CV-00009, 2023 WL 3467209, at *1 (E.D. Va. May 15, 2023) involves an elderly gentleman who was conned into making a series of wire transfers totaling millions of dollars. Navy Federal was so concerned about these transactions that it contacted Adult Protective Services (APS) and urged the member not to make them, but the gentleman refused to listen,and the credit union and bank continued to execute the transfers despite its concerns.

The estate argued that Navy Federal and Wells Fargo had a duty to protect the victim in part by deciding to bring its concerns to the attention of protective services. The plaintiff also argued that the financial institutions were negligent in permitting the transactions to go forward. The court rejected both these arguments, noting that “no provision of Section [8.]4A imposes liability on a receiving bank that properly executes a duly authorized wire transfer by the sender.” Id at 2. In addition, nothing in the account language imposed this obligation on the financial institutions.

While I believe this ruling articulates settled law, this area may change gradually over time. Most notably, the federal district court in Washington, D.C., refused to dismiss a lawsuit brought against PNC Bank after it executed a series of transactions requested by an older customer who was conned into making the transfers. This court held that Article 4A, in conjunction with the account agreement, created an implied duty of ordinary care, which the bank may have breached. PNC settled this case. See Bloom v. PNC Bank, N.A., 659 F. Supp. 3d 27 (D.D.C. 2023).

Winds Of Change Regarding Credit Union Liability In Elderly Fraud? - https://thecreditunionconnection.com/winds-of-change-regarding-credit-union-liability-in-elderly-fraud/

Damn Lies and Statistics: NCUA Is Blurring Lines Between Oversight and Policy Advocacy

NCUA’s announcement that it would be disclosing overdraft fees charged at larger credit unions is causing quite a stir, and rightfully so.

First, the data dump without context...

NCUA’s announcement that it would be disclosing overdraft fees charged at larger credit unions is causing quite a stir, and rightfully so.

First, the data dump without context for this information, which occurred on June 5, was hardly useful. All credit unions of more than $1 billion in assets charged more than $900 million in overdraft fees. Without context, that number could be enormous, or it could be nothing. 

In reality, the overdraft and Not Sufficient Fund fees accounted for just 3.4% of the income for these credit unions. In the aggregate, large credit unions don’t appear to be charging members a lot of overdraft and NSF fees. 

Without knowing their business models, we can’t even speculate as to which institutions are charging “too much” or “too many” so-called junk fees. One credit union charged $0 overdraft fees, but almost 28% of its non-interest income came from NSFs. A casual glance at the list revealed a handful of Community Development Financial Institution-certified credit unions near the top of this list for fee income as a percent of total interest income. These credit unions take a much higher risk than others in their lending to serve their members, typically people with poor or no credit or extremely low incomes. Because of that, they might have to charge more in fees. Another credit union had an 18.6% overdraft and NSF fee income/total income ratio. That’s nearly 20% fee income with more than 18% net worth. 

Without context, none of that means a thing except to those who are looking to confirm conclusions that have already been reached, including CU-bashing bankers, consumer advocates, greedy lawyers, journalists, even politicians and regulators.

NCUA Is Kicking Around All the Lines in the Sand

The NCUA’s decision to make credit unions disclose overdraft fees blurs the line between the regulatory steward of safety and soundness and consumer advocate. These are two distinct activities that are not compatible. This is the job of the CFPB, not the NCUA. To the extent the agency is concerned about safety and soundness regarding revenue streams, examiners can get that from the credit union without disclosing it. In fact, during a recent call with reporters, the NCUA said the data was being collected through the Call Report, so there wasn’t a decision to disclose it because they are public. 

OK, and the NFL doesn’t make teams release injury reports on Wednesdays to help people betting on Sundays.  

NCUA probably could make a better case of putting the DEI survey into Call Reports than it does for overdrafts and NSF fees.

The move is also part of a broader, more significant and disturbing trend in which regulators are substituting the judgment of credit union CEOs and board members with their own. For all the talk during the same call by the NCUA about the credit union leadership’s decision-making, what the agency is really doing is supplanting credit unions’ collaborative, social-capitalist business model with something much more authoritarian.

The agency’s heavy-handed oversight during this administration is stifling innovation. If the CFPB and the like were around to oversee the credit card industry from the beginning, would there even be one? Imagine if US regulators could decide that Tesla should not be allowed to offer electronic pick-up trucks because there are better ways for the average consumer to spend their money.

As if the credit union community needed one more divisive issue between the large and small institutions, yet the agency is driving another wedge into that fissure! And while the largest credit unions are currently bearing the heavy lifting, the influence of these disclosures will also seep into the smaller ones. The indirect pressure will put them on high alert to lower their fees or else. Many won’t survive without the fee income. And this happens precisely when the NCUA says it wants to help smaller credit unions survive.

Finally, and most importantly, the agency is losing trust among the credit unions it regulates. When regulators browbeat the industry instead of working constructively with it to address legitimate safety and soundness concerns, it will cause more significant problems down the line for all. There is a fine line between mandating that credit unions break out specified fees and publishing CAMELS ratings of credit unions that engage in perfectly legal practices with which the NCUA Board of the moment happens to disagree.

Damn Lies and Statistics: NCUA Is Blurring Lines Between Oversight and Policy Advocacy -

Is Your Credit Union A Debt Collector? Look To State Law For The Answer

In passing the Federal Debt Collection Practices Act, Congress clarified that only third-party debt collectors are subject to this law. It defines a debt collector as a person” who ...

An erstwhile observer of the credit union industry recently brought a case to my attention in which a West Virginia federal court ruled that PenFed was a debt collector (JOSEPH BOCZEK, Plaintiff, v. PENTAGON FEDERAL CREDIT UNION d/b/a PENFED, Defendant., No. 1:23-CV-43, 2024 WL 1288667 (N.D.W. Va. Mar. 26, 2024).

I’m glad she did. The case dealt with a nuanced area of law and underscores how challenging it can be for federal credit unions to determine whether to comply with state laws.

First, some basics. In passing the Federal Debt Collection Practices Act, Congress clarified that only third-party debt collectors are subject to this law. It defines a debt collector as a person” who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C.A. § 1692a.

This means that a credit union is not subject to the FDCPA simply because it seeks to collect on a delinquent loan that it originated. In contrast, if your credit union sells delinquent loans to third parties that specialize in debt collection, the entities to which you sell are subject to federal law.

What impact does the FDCPA have on state debt collection laws? Even as Congress provided a narrow definition of ‘debt collector,’ it stipulated that states were free to provide more expansive protection. Specifically, 15 USC Section 1692n provides that the FDCPA does not preempt state laws that provide consumers “greater protection” than the FDCPA. Not surprisingly, courts analyzing this issue have reached a similar conclusion (Pirouzian v. SLM Corp., 396 F. Supp. 2d 1124, 1131 (S.D. Cal. 2005).

Which brings us back to the case that sparked the interest of my erstwhile observer and colleague. Joseph Boczek is seeking to bring a class-action lawsuit against PenFed for violating several West Virginia consumer protection laws, which apply to debt collectors. The lawsuit was brought because PenFed charged a fee to members who made loan payments over the phone.

PenFed made two basic arguments. One was that charging a fee does not make it a debt collector as a matter of state law. The court disagreed, noting that West Virginia has an expansive definition of debt collector to maximize consumer protections. The second argument is why this opinion is worth paying attention to regardless of the state or states in which your FCU operates.

Among the most important powers given to NCUA’s Board by The FCU Act and regulations is the authority to regulate the loans and lines of credit provided to members, including the fees charged for such loans. 12 C.F.R. § 701.21

Since West Virginia sought to penalize a federal credit union for charging a fee in connection with a loan repayment, PenFed argued that it was encroaching on an area of law left to the discretion of NCUA. In fact, several legal opinion letters are posted on the NCUA’s website, using this power to preempt state laws seeking to prohibit certain fees from being charged by federally chartered credit unions. See Preemption of Georgia law regarding check-cashing fees.

But the same regulation also provides that “it is not the Board\’s intent to preempt state laws affecting aspects of credit transactions that are primarily regulated by Federal law other than the Federal Credit Union Act, for example, state laws concerning credit cost disclosure requirements, credit discrimination, credit reporting practices, unfair credit practices, and debt collection practices. Applicability of state law in these instances should be determined pursuant to the preemption standards of the relevant Federal law and regulations.”

Against this backdrop, the court ruled that NCUA’s preemption regulations did not preempt West Virginia’s prohibition against debt collectors charging certain fees.  Otherwise, the Court noted, consumers would not have a remedy against a federal credit union’s “improper fee collection.”  Of course, this presupposes that the fee was illegal in the first place.

Here are some takeaways. When determining whether your federal credit union is subject to state laws related to debt collection, start by analyzing the state’s legislation. Even if your credit union is not subject to the FDCPA, it may very well be subject to state law.

Secondly, preemption is often a fact-sensitive determination. Avoid making categorical assumptions about whether a law applies to your federal credit union. Instead, understand the analytical framework and obtain a lawyer’s advice if the issue is important enough. 

Finally, remember that you are ultimately making a policy decision about whether the burden of complying with a state law outweighs the risk of being sued for noncompliance with a state mandate.

Is Your Credit Union A Debt Collector? Look To State Law For The Answer - https://thecreditunionconnection.com/is-your-credit-union-a-debt-collector-look-to-state-law-for-the-answer/

VIDEO: Meier Talks Lawsuits And Regulations Credit Unions Must Watch!

Every year it seems we’re saying there are more regulations and compliance expenses than ever. Legislation gets rammed through or log-jammed in Washington. Lawsuits galore!

Every year, it seems we’re saying there are more regulations and compliance expenses than ever. Legislation gets rammed through or log-jammed in Washington. Lawsuits galore! 2024 is no different.

Sarah Snell Cooke sat down with Henry C. Meier, Esq., a veteran credit union attorney, to discuss the hot issues and top court cases that credit unions most need to keep an eye on. He also discussed the increasing reliance on technology and its impact on regulations credit unions may see put in place and much more. Give it a watch! (Full transcript below.)

Disclosure: Transcript is automatically generated

Sarah Cooke 00:08
Welcome, everybody to The Credit Union Connection. I\’m here today with Henry Meier. Welcome.

Henry Meier 00:17 Hello Sarah.

Sarah Cooke 00:19
it\’s great to have our Legal Correspondent here with us today. Henry, want to tell us a little bit of your background?

Henry Meier 00:25

Well, my background I go about, I spent a little more than decade and a half with the New York Credit Union Association, where I eventually became the General Counsel and Senior Vice President. In that capacity, not only did I get to meet a bunch of wonderful and work with a bunch of wonderful venues, but I also was involved with a wide variety of legal work, as well as advocacy, when legal work would often take, they take the form of a contract with users. So if we\’re helping out small credit unions with an issue they\’re having, and the advocacy was the type of bread-and-butter advocacy that we do on the state, and federal level, the the important just, the importance is not only did I do legislative, lobbying, but a lot of regulatory lobbying, as well. So that gave me a well rounded background and then about a little bit a little, I guess, almost two years ago now. I went out on my own. So now I am a solo practice. Yep.

Sarah Cooke 01:36

And sounds like the New York Association kept you busy, a wide variety of different things to keep you busy. So with that point of view then, what do you what do you see as the top things coming down the pike for credit unions right now?

Henry Meier 01:51

Well, because I because I do have a broad range of experience, I think you have to look holistically to look at what the key issues are. So so if you look at the one issue, for instance, everyone\’s talking about overdrafts. So that has a… that has a regulatory component to it, obviously, which is, what is the CFPB going going to be doing? It also has and there\’s also some talk about some actions being taken on the state level, there\’s been a lot of emphasis [on] California, at the state level about what they might be doing to put pressure on overdraft as well as in New York State there\’s a, there\’s legislation that was passed, that\’s going to allow them to cap stakeholders. So you have a legislative component to that. You also have a legal component of that, because even without the CFPB, you have a never ending supply and generation of lawsuits, to zeroing in on overdrafting whether they\’ve been properly disclosed. And even if they had been properly disclosed, it can still be argued that they are unfair and deceptive practices. So that\’s one of the key issues. Another key issue, which is also going to require a holistic approach is going to be with regard to vendor management and oversight. Remember that Sherman Hopper has always made a big point of the fact that it\’s UAE is the only financial regulator that doesn\’t have direct oversight over vendors that work with credit unions. His argument frankly was boosted by the fact that we had several credit unions of more than 50 apparently that was subject to a ransomware attack and, a ransomware attack which throws them out of their own, out of their own quote processing systems. And that underscores the importance of not only working, contracting with your direct vendor as but knowing who your vendor is working with as well. So that\’s going to be a big area because that\’s going to inform not only guidance from NCUA embedded oversight by examiners, but also it\’s going to put more and more emphasis on contract, on contract use and what is being done to ensure that you can, what efforts are you making to oversee the actions not only of your vendor, but your vendor\’s vendor. It\’s gonna be, it\’s gonna be a key issue. And then a third issue which is more more generally, generally going to be an issue that has a real practical effect on credit unions going forward is a, believe it or not, we\’re all getting older. It\’s depressing, but the, the baby boomers are getting older. And as that happens, you have a tremendous amount of money, more than ever, ever in history like being placed in banks and credit unions for retirement. And you have this happening precisely at the moment where it is easier is more than easy. It is easier than ever before, for that money to be stolen in a matter of seconds. So one of the key issues is going to be who is ultimately going to be responsible for unauthorized transfer of funds. It\’s not going to be as clear cut as it used to be, it\’s not going to be as simple as, okay, they, you didn\’t give them the right to use your debit card, therefore, you get the money back. Now, this is going to be much more detailed, much more nuanced. And that\’s going to be one of the key issues were as well. So if I had to list my big three, that would be it. That would be it. And then beyond that we have issues such as, I still think one that\’s fading, kind of in the background right now, because of a lack of federal action. But I still think on the state level, you\’re going to see increasing issues around cannabis banking. That\’s going to that\’s going to be key one key one as well. It\’s also going to be interesting to see if we don\’t get movement in the area of data protection and data portability, if you have movement on that at the state level in the absence of federal action. So those are going to be the key issues. And they\’ve got the, all the issues that are having a direct impact, though, on what credit unions should be doing to protect themselves. You\’ve

Sarah Cooke 06:44

written about this for us before in The Credit Union Connection. In particular, you focus in on arbitration, and at account opening. And those contracts. How? Walk us through a little bit of the basics of that. And your feelings on that. Because obviously, there are people, there are lawsuits in that area, too, is like how credit unions can use arbitration and how can they change if they need to change those contracts, things like that?

Henry Meier 07:16

Well, one of the big changes that I\’ve seen, over the time I\’ve been in the industry is it used to be extremely difficult to find class actions brought against credit unions until the extent they were brought against credit unions, they tended to be the much larger ones, the biggest ones, the ones that we expect, such as Navy, for instance. Okay. Now, what you\’re seeing is fast action attorneys are getting more and more sophisticated, I guess you would call it. They are, they are finding it more cost effective than ever, more and more cost effective to go after even smaller credit unions. So now you see one, all credit unions have to protect themselves against class action lawsuits. I firmly believe that the most effective way, or one of the most important steps that credit unions, that all credit unions consider taking, if they feel that they are big enough to face the potential of class action lawsuits is adoption of arbitration clauses. Because what arbitration is allowing you to do is prempte the potential of class action lawsuits. But at the same time, also ensure that there is a mechanism for that individual member to get redress against after the fact the credit union made a mistake. Yes, the members should get back what what that mistake was done, what the credit unions shouldn\’t have to do is give millions out to transaction impunities, while the members see only a fraction of that. So arbitration clauses are a key thing that all credit unions consider it now not surprisingly, as arbitration has become more and more common. You see a lot of pushback against that, that against arbitration. And the key point for keeping to keep people keep in mind is we have a pretty good idea of what language needs to be in the arbitration clause themselves. But what is under attack and when it\’s going to be scrutinized is the process that was used to put new members on notice and to demonstrate to members, in fact, that lead to the arbitration was, so you\’re seeing a lot of litigation over seemingly esoteric issues. That could have a huge impact on whether or not that arbitration clause going to be effective. It comes it comes down to though, Did you provide adequate notice, to remember that the arbitration clause was going be replaced? And depending on the state you live in, and the type of wages you\’ve had in previous agreements, was the member given an adequate opportunity to opt out of that of that arbitration clause?

Sarah Cooke 10:12
Now, certainly a important piece of the contract between the member in the credit union to keep track of certainly, you know, being member owned institutions don\’t want to do things that aren\’t. Exactly. The members interests. But yeah, so also, you alluded to this, when you were speaking a moment ago about other contracts contract review for between credit unions and their vendors as well. NCUA has been looking for oversight on this for years. Why is this becoming so important right now?

Henry Meier 10:53

it\’s always been important to NCUA. But I think, given the increasing technology, given the last 10 years, and not the last seat vendors, but the need to use vendors for so much more technology in banking as a service, or anything, technology is becoming such an integral part of the banking process. And because credit unions, by and large, don\’t have the resources to individually, to independently develop the technology or the platforms, it makes us that much more dependent as institutions on third party vendors. So you have this increased need for third party vendor contracts precisely when the need to oversee vendors is increasing. So in the absence of NCUA\’s ability to directly oversee vendors, my prediction is, and they\’ve said as much, they are going to be doing more does scrutinize what is put in contracts to ensure to the fullest extent possible the, when credit unions enter into these agreements, they do have the ability to properly monitor and least understand what other entities are playing a role in the process. For instance, demand, do they understand that yes, the contract may be with Company A, but it\’s Company B that actually oversees let\’s say, the cloud, the cloud service that\’s in, that really is a key issue. It certainly is viewed, obviously, we\’re talking about NCUA. But this is a huge issue for institutions, there\’s actually going, um, if you have had trouble sleeping one night, you can take a look at a report that was done by the Treasury Department. And they put that, they\’ve had a report, holding some of the largest banks in the country, saying that we don\’t have enough oversight over some of the biggest cloud players. So really, right now, it\’s a contractual issue. It is one of those things that I think you might see addressed at some point in federal legislation. And what I like to see is baseline vendor standards that we don\’t have to negotiate for. And then that could apply not only to medium sized vendors, but frankly, all vendors in, believe it or not, Amazon Web Services, Amazon Cloud Services is a huge vendor for us, we\’re all dependent on. So, in the short term, contracts, in the long term is something that I think should be and hopefully will be addressed in legislation.

Sarah Cooke 13:44

And so speaking of technical, technological evolution, you also were speaking, a minute ago, I guess we were speaking before we started recording about Navy Federal, and their situation with the elderly and financial fraud case, the use of electronic funds transfer to shift money into fraudulent accounts. And then now, you know, the electronic transfer Transfer Act, you were saying, you know, was passed in the 90s, or excuse me, 70s. And, you know, it takes forever for legislation to get through and catch up to the technology. So that\’s kind of affected as well. Can you talk a little bit about that?

Henry Meier 14:32

Yeah, it goes back to the whole issue of more generally, I think you\’re gonna see the issue rise up, particularly with elderly because their stories are so I\’m saying when you hear someone risking and losing their license, I get that, okay. You\’re also seeing the Attorney General of New York State take an interest in these type of cases as well. And the basic idea is the Electronic Fund Transfer Act when you think about when it was created, you had this system where, okay, I\’m gonna give him a debit card. And you\’re going to be able to walk into, to this kiosk and take money out. And basically, I have the ability to cap the amount of money, you can take take out at the credit union. Now, we have a system where members have access to fund transfer and online banking, and to services that would have been core internal banking services that now are open to the public. And as a result, what you\’re seeing is the ability of members to sit by a computer and transfer 10s of 1000s, hundreds of 1,000s of dollars and businesses to do it. The Electronic Fund Transfer Act, its strict liability provisions were designed for a world in which first of all, there wasn\’t that much of a scope of liability. It wasn\’t that way. Second of all, it was understood that the only means of accessing those funds with that card, so it\’s really easy to say, well, he stole my card or she stole my card, and somehow got my password. Okay, now, there are a multitude of ways that you can engage in electronic fund transfers. Okay. So how do we draw that line? And at what point are we going to pose strict liability as opposed to traditional liability where we say, no, no, no, I\’m afraid this happened to your member, but they\’ll remember you did not keep up your end of the bargain. And that is good, is what you\’re seeing in all this litigation. I really think that our practical level following the law, as you get more and more sympathetic client, excuse me, plaintiffs as you get that grandma, grandmother who\’s lost life savings, it\’s going to be that much more difficult for courts to say, you know, I understand what what it it bad that it happened to you. But it\’s not the credit union\’s responsibility, I mean, bad things happen to good people. That\’s going to be an issue, though, that you\’re going to see more and more of it. And in the absence of any update of the of these laws by Congress, it\’s going to get more and more tricky, from a legal standpoint, to figure out, Where is the credit union\’s responsibilities with regard to these type of transactions. Another great example that has to do with that, with Venmo. And those types of services, okay, think about that. Someone is willingly giving them, giving a third party the debit card, or credit card for the purpose of facilitating transactions. This is not what was intended, or thought of, conceived of when The Electronic Fund Transfer Act was was created. Nevertheless, when these we have this whole litigation taking place. And fortunately, so far, it\’s been painful for credit unions and banks. But the litigation is she, someone used my Venmo account, and then they\’re taking more money than I would have anticipated or that I should have taken. So I should be you should to be on the hook for that, because that\’s an electronic fund transfer? Well, the question is, yes, but you gave that third party access to your debit card. So I\’m… They are highly now in technical legal issues, but they have found operational consequences for credit unions. And one of the issues is going to be as the scope of liability increases, is this going to be another thing that makes it more and more difficult for small to medium sized credit unions to avoid cost effectively?

Sarah Cooke 18:51

Yeah, absolutely. I imagine that could get some serious hits there. When a credit union has refunded a few people who were defrauded, you know, on Zell, or whatever. But that is something you got to watch very carefully, because it could it could snowball, for sure.

Henry Meier 19:13

Now, all the all these new areas they raise issues with regard to ranging from the cost of insurance to, to, to the cost of the technology you need to invest into the cost of the additional staff. So, unfortunately, everything we\’re talking about here is if you want to look at the really big picture, getting another reason why it\’s getting more and more difficult for small to medium sized per years to avoid cost effectively. Right,

Sarah Cooke 19:46

right. And you see their non interest income getting chopped away, you know, over time and we\’ve got legislation from Durbin on overdrafts, that he\’s probably gonna try and get into some sort of omnibus bill, got the junk fees, quote unquote, from the CFPB. And they just announced the $8 late fee threshold, safe harbor threshold and

Henry Meier 20:16

Larger credit unions. Yeah. You know, what all this has in common is, first of all, your right, even if I agree with the policy behind it, the timing couldn\’t be worse. It\’s interesting, these institutions with the exception of the CFPB. The purpose of the FDIC, the purpose of the OCC, the purpose of the NCUA is primarily to ensure safety and soundness. And that whole concept seems to be getting, taking a backseat, when precisely at the moment when things are, when things are getting so much more expensive when we have an unsettled economic environment, this from a safety and soundness point, even even if I agreed with the underlying policy, is not the time to be going after fee income, it\’s not the time to be coming, going after a source of income, which is important to many institutions, okay. And then you will get the whole policy, then you will look at the underlying policy. And this is something I\’ve written about as well. To me, a fundamental target of any business, and I don\’t care to credit union, bank or Tesla is to figure out, how they are going to place their products in a way that attracts the most business and that in a way, in the way that is fair to the membership. And with overdraft fees, and other fees, what you\’re saying is, okay, you\’re going to be paying extra for the park service. Now my criteria is, so long as someone has the option and the ability of not taking advantage of the service for which the BT, such as if I don\’t want overdraft protection, I don\’t need to get it. And I don\’t know, as they count the slopes in the hole but doesn\’t explain that to people. That should be an option that is left to the individual credit union, which has to balance, how much it is going to charge against the need for keeping the business, keeping the business going, and more importantly, providing services in the way that their members most want it. And I\’ve never talked to several CEOs about this issue. The reality is that it\’s great to talk about horrible junk fees. These are fees that there was a demand for, okay, if you did away with overdraft fees tomorrow among many institutions, the membership would be like, I, there would be a core part of the membership for whom that\’s a central source. They want to know why you did that. So the big issue is for safety and soundness standpoint, this is not the time to be messing around with an important source of income. More importantly, though, even if everything was pristine, ultimately, institutions to be allowed to choose among themselves with their membership of subject to proper disclosures, how they are going to provide services, how

much they\’re going to cost and the membership can decide for itself whether or not it wants to take advantage of those services. And in that discussion, you excluded the CFPB. Well, when you were talking about the safety, safety and specifically I kept the CFPB slack to this extent. I say we have the CFPB primarily because of, they invite me on when they became an oversight over consumer products. Okay, we don\’t need other agencies trying to be me, try to engage in a me-tooism where we have we are all over consumer protection, section as well. Now their primary job is seeking exam that\’s that don\’t get me wrong. I\’m not letting the CFPB off the hook. But but because not from a safety standpoint, but because they are utilizing their powers in a way, which is I would argue, almost outside the authority given to them by Congress, which is a whole \’nother issue we could spend some time talking about. Yeah,

Sarah Cooke 24:33
\’Cuz there\’s a case right now, regarding the CFPB and trying to strike it down.

Henry Meier 24:41

We have this we have one of the key cases before the Supreme Court right now, which they will be a decision, is a case in which the the argument is that the CFPB\’s funding mechanism is unconstitutional. Now, as a result, you have at least one record that said that as a result of this constitutional defect, any foreign regulation, which was passed with this money, therefore was invalid. And that wouldn\’t be the armageddon. Now, based on what this what the court was saying during argument, it\’s highly unlikely that this case is going to be successful. But there was another group of cases before the Supreme Court in which they are going to be examining the extent to which agencies like the CFPB, and like the NCUA have the authority to interpret how poorly agencies have the way to interpret the regulations in a way that they think it should be interpreted. That, I know it could put some people asleep. But that is actually one of the key issues that we deal with on a daily basis. And what it would do is, depending on how the court decides that issue, we could once again place more emphasis on the legislative arm of government, because the answer could be No, no, the statute says what it says. If you want to make this change, you got to get the change, agreed to through Congress and through the state legislature. And that\’s why I enjoy doing, that\’s why I try to avoid practice, because there\’s this thought that, okay, you can be a compliance attorney, or you can be a legislative attorney, or you can be contracted to it. The reality is, in this day and age, if you\’re going to be effective in any one of those fields, you have to be cognizant of each one of the areas where more regulation is being it\’s being impacted, and being shaped. And this is, this is a great example, because depending on what the word was, with regard to the CFPB\’s power, specifically, and the power of regulators in particular, it will place more emphasis on what the legislature was doing. Hey, I lobby lobbying in New York, New York State and I still do some work, some work in New York State. My clients need to know what, what is going to be what is going on in the New York State. And that\’s true, a credit union that needs to know what is going on at the legislative level, because and you need someone, my goal is always to bring all that knowledge together and put it in one place, and to synthesize it in a way that they can use it.

Sarah Cooke 27:42

Yeah, because you can throw a bunch of money at them, or excuse me a bunch of information at them. But if it\’s just a data dump, it\’s not helpful. It\’s how can they use it? How is it going to impact that particular credit union?

Henry Meier 27:57

And one of the things I\’ve seen in the industry in the past is, and I\’m not saying this is unique to credit unions, but there is a there is a a pipe, not a pipe, but there is a way there is a tendency to segregate responsibilities, like, Okay, I\’m the compliance person. I\’m the legal person, I\’m the, I\’m the lobbyist, I\’m the operational force, okay? In reality, to most effectively help the credit union, all that has to be understood. So let\’s break down the silos and get everything into, into a coherent narrative, where everyone could see the impact of not only responding to changes in the law and regulation, but in the best case scenario, let\’s position ourselves in a way that actually, we can benefit. And to do that we have the end is silo approach to the way we look at a lot of public policies in general, and operational issues as well. It\’s

Sarah Cooke 29:12

interesting, you\’re talking about that, because I remember speaking with the CEO of a multibillion dollar credit union maybe 10 years ago now. And they didn\’t have a compliance person at all. Like they didn\’t have a lawyer on staff at all, each line of business was responsible for its own compliance. And while people don\’t necessarily have to be a lawyer to be very familiar with the compliance, it seems like in today\’s world, that just wouldn\’t fly.

Henry Meier 29:39

Well, do you want some wonderful compliance people? My thing is that we always try to make this as easy, this compliance, this is legal. That\’s, that\’s another silo that I\’ve always been interested in cutting down because it\’s a, it\’s an impossible distinction to make. I actually think both disciplines benefit from the other. I have a very good colleague who wants to work with his own lawyer, but loves to work with quick and wise people, because the compliance person, if they understand the law can translate somewhat esoteric or very complicated legal things, it issues into operational protocols that so, so that, but there\’s a there\’s a need for both them as an effect. And that\’s the key. That\’s another big silo that really has to be addressed.

Sarah Cooke 30:39
Yeah, and another expense for smaller credit unions to be able to survive too.

Henry Meier 30:43

It is. Mentally, we all have to be cognizant. It\’s difficult. It\’s another reason why it is so difficult, first small credit unions, and that\’s one of the things the NCUA has to keep in mind as well. They, if not, and I\’m gonna get beyond overdraft. Every time they pass a regulation, we\’ll come out with a guidance policy that should be you know, we have to start, we have to start more regularly making a distinction between what credit unions have to do based on their size and sophistication. And, and because the, it has to be more clear cut, then simply, well no, create your plan based on your sizes and sophistication. Because every time you come out with a regulation, it isn\’t reasonable expense. And we always try to make that distinction before between regulatory responsibilities, the safety and soundness. The old rule of thumb used to be that the smaller you are, the more we\’re going to be concerned by primarily the safety at Dallas. And in the old days, from what I\’ve been told, it wasn\’t uncommon for the examiner to be the de facto compliance person. Okay. Those days are over. And I think one of the things we all have to look at it from a regulatory and political standpoint is if we truly want small credit unions to survive, and I think it is in everyone\’s interest that they do survive. We have to start looking at how we can more aggressively make the argument that the small credit unions in particular need need, mandating. If it\’s something that is an argument that we have on the state level in the state, like New York, which is one of the more aggressive states in terms of coming up with mandates, try to make that distinction between the responsibility of even a $1 billion credit union and Citibank. Okay. On the face of it, it shouldn\’t be that difficult to make. But that\’s the problem when you have all regulatory mindset,

Sarah Cooke 33:01

which regulators are going to have. Exactly. So, talk a little bit about like, your days at the New York Credit Union Association, and what were you, what were some of the specific things that you were seeing credit unions of all sizes needing assistance with?

Henry Meier 33:24

The the one thing that is a quick vote from I think we can benefit from, we can we can all hang together, or we can all hang separately. And the reason why my gag just ended. I know it\’s not I mean, the gag came up with the Government Affairs Conference ended a few weeks ago, I always forget what the new acronym is now. But the one thing that\’s most important, the one thing that everyone can agree on, is the need to speak with one voice. They are core issues in this industry, and these core issues, best advocate for when we when we work is one thing. So I think one area where we can all work together is and should continue to work together is when it comes to court advocacy issues, such as, like giving an example on cannabis banking, is an issue where, okay, even if you don\’t have any, any desire to get involved with taking marijuana businesses, and even if you\’re small, okay, and you don\’t want to get involved, you have a real interest in knowing what the regulations are in terms of who you can deal with whether that member can even be given an account because they they want to opt in too, they are involved in the marijuana business. So, there are issues such as that. So the number one thing, would always would always be a, will always be a lobbying and regulatory advocacy. Okay. And then what generally, is the issue of making sure that credit unions are not disadvantaged by the banking industry. I mean, the reality is, I used to tell people, I used to love lobbying for the banking industry, because, excuse me, the credit unions industry, because I\’m not anti bank. I\’m just pro credit union. Okay. I like to say that, and I continue to believe that. But the reality is, as an industry, we have to make sure we don\’t bring a knife to a gunfight. The baking industry, there are lobbyists who get bonuses for, I mean the credit union tax exemption tomorrow. So another key issue that we can all agree on is the need to advocate and do what we can to demonstrate why we need tax exemption. Now, when you get into more specific areas, it does get more challenging based based on size, because the technological needs of a larger credit union, for instance, might be different than small one. That being said, I know, I sound like I\’m beating a dead horse here. But everyone has been to the issue of vendor management, and how to properly oversee and vet potential vendors. So that\’s an issue that everyone could agree on. It goes back, it goes back to the size. And then the the more general issue, which is always going to be challenging us, What is the, we are a cooperative industry. It is structured as cooperaative. So how do we, what obligations do we have to each other? In other words, like this is a bit controversial, but to the extent that we want to see small credit unions remain viable? Are there things that we all should be doing, to work together to make that, to make that a more realistic possibility? So those are the issues that I think generally, I always tried to concentrate on and really swear to God, concentrate on issues that could be, that you notice, those were the ones that were most common. And they all come down to though, recognizing, where we have common values, recognizing the need to make sure that we continue to have access, and the responsibility that comes with that, to latest regulatory innovations, and helping us helping each other out when we can. Yeah,

Sarah Cooke 37:59

yeah, absolutely. I agree. I love the cooperative spirit. And it is part of what will save smaller credit unions as long as we follow that philosophy. So I love that I almost feel like you already answered this one. But I always give my guests the opportunity to provide their final thoughts. So you want to wrap it up for us? What are your final thoughts today, Henry?

Henry Meier 38:23

Yeah. My final thoughts are that it\’s anyone who has the opportunity to work in the financial services sector. It\’s a fascinating field. Okay, it\’s a field that is impacted by technology, by business, by, by changes in people\’s thoughts and behavior towards each other, frankly, We\’re cooperative, well, people want to cooperate movement. The entity, the need for responding and recognizing change and responding to and getting ready for, it\’s going to become even more important. We actually won the entire 15 minutes without talking about AI, for instance, okay. Bottom line is this industry that\’s going to constantly be evolving, always has, and always will, but the speed of that evolution is going to be that much quicker. So we\’re all fortunate to be part of it. And the more we can work with each other and make sure we have the resources to respond quickly to those changes. And put those changes in the context of the movement, the better off we\’re going to be as a whole.

Sarah Cooke 39:39
Alrighty, so Henry, you brought up AI? What does that mean for the credit union field and the legal field for you?

Henry Meier 39:48

Oh, I think it\’s, I think it\’s, we don\’t know the full extent that it is going to have any impact, but you can already see a saving, shaping the regulatory and legal environment with regard to banking. For instance, late last year, several regulators including, including the CFPB, and the Department of Justice indicated that the use of AI for instance, doesn\’t excuse compliance with the Equal Credit Opportunity Act. Okay. So and, so is, so here\’s what I find so interesting about it in a nutshell. The whole premise of AI, one of the possibilities of AI is that computers may be able to discover as a result of sifting through huge amounts of data, correlations between one thing and some are paying back that loan that we haven\’t seen before. In other words, they might come up with these incredibly complex Dow Algos. Now, one of the core concepts of a fair lending, particularly the ECOA, is that you need to explain in common sense terms of why someone was denied a loan. Well, what are we going to do in those situations where the algorithm is so complicated, and the algorithm is constantly changing, because the AI by its very nature, is responding to changes. As it gets more information, we won\’t be able to explain precisely why in this situation someone\’s getting a loan. And in another situation, they may not. Now I have talked to people who understand the technology, much better idea. And they do say that now and we were gonna get to a point and might be already where we will be able to explain the basis for lending decisions. But it that it also depends on how responsible that person putting together the algo we\’re collecting information is going back. So from a legal perspective, that means that it\’s going to make it that much more complicated. And that was more challenging to to explain and put in place a top of fair lending, a lending program that is fair lending to copliant, fair lending compliant. On a more positive note, though, it does mean that perhaps with AI, it perhaps with its growth of it looking into data to extent that human beings just have not been able to. And perhaps there will be a way of expanding the availability of lending options for people who otherwise would not have the opportunity based on the traditional type, the hand set of criteria that has been used by backing. It is interesting, though, that you\’re seeing this new emphasis on fair lending, not only with AI, but for instance with the NCUA, one of the references they\’re going to be facing this year. Our new examiner\’s, it is to more closely scrutinized, fair lending examinations and fair lending to citizens and programs of credit unions as well as general compliance, for credit unions as well. So all of this is going to come together as the banking system becomes more dependent on technology. And as members demand quicker and quicker decisions. They\’re going to have to be, the interplay between technology and fair lending was and what can be expected of them as long as to be one of the key issues, is going to be one of the really interesting issues that we\’re going to have to look at a couple years.

Sarah Cooke 44:02
Already well since that\’s your real final thought now, thank you for for being here today. Henry.

Henry Meier 44:09

Thank you

VIDEO: Meier Talks Lawsuits And Regulations Credit Unions Must Watch! - https://thecreditunionconnection.com/henry-c-meier-discusses-lawsuits-and-regulations-credit-unions-should-keep-an-eye-on/

Indiana Supreme Court Rules That A Credit Union Must Obtain Affirmative Consent Of Members To Enforce Arbitration Clause

It just got harder for Indiana credit unions to enforce arbitration clauses against members suing them. 

It just got harder for Indiana credit unions to enforce arbitration clauses against members suing them. 

In Tonia Land vs. IU Credit Union, the Indiana Supreme Court ruled that a credit union could not enforce an arbitration clause because its members did not affirmatively consent to be bound to the provision in an amended account agreement. The decision has no binding effects outside of the Hoosier state but could provide persuasive authority for other courts analyzing the validity of arbitration clauses.

In 2019, the credit union sent its members a proposed modification to its account agreement, which authorized arbitration and prohibited class-action lawsuits. As is standard practice, the agreement gave members 30 days to opt out of the arbitration clause. 

Land did not opt out. Nevertheless, Land subsequently commenced a class-action lawsuit against the credit union, claiming that its assessment of overdraft fees violated Indiana law and the account agreement terms. The trial court agreed with the credit union and ruled that the case should be arbitrated, but on appeal, an Indiana appellate court reversed the lower court ruling. This case was appealed to the Indiana Supreme Court, which ultimately agreed that the arbitration clause was not enforceable.

Many credit unions and banks give members and customers the opportunity to opt out of arbitration clauses before they take effect. What makes this case unique is that the court made this ruling despite finding that the credit union provided reasonable notice of the amended account agreement and the steps that members had to take to opt out of the arbitration clause. It nevertheless held that the plaintiff’s consent could not be inferred from her decision to remain with the credit union. It explained that “the mere fact that an offeror states that silence will constitute acceptance does not deprive the offeree of his privilege to remain silent without accepting.” Instead, for the arbitration clause to be effective, the credit union had to prove that the plaintiff intended to accept the offer by remaining silent, which the credit union could not do. 

The court based this ruling on three primary conclusions. First, it said that nothing in the original account agreement signed by the plaintiff suggested that silence and continued use of the account would result in the acceptance of any future modification. Second, while the language permitted members to opt out of the credit union’s arbitration clause, nothing in the proposed amendments “conditioned continued use of the accounts on the acceptance” of these changes. Finally, the court held that the typical way the credit union dealt with members did not give the plaintiff any reason to think that silence would constitute acceptance. It pointed out, for example, that when she signed up for her online account, she had to affirmatively press an “accept” button.

Since the 1920s, the Federal Arbitration Act has mandated that states recognize the validity of arbitration clauses included in contracts, and the Supreme Court has ruled that this same protection extends to consumer contracts. But while federal law recognizes the validity of arbitration clauses, state law determines whether or not consumers have agreed to a contract containing an arbitration clause. 

This case is the latest to invalidate an arbitration clause on the grounds that it was not agreed to by its members. For example, Sevier County Federal Credit Union v. Branch Banking & Tr. Co ruled that an arbitration clause containing a class-action ban was not enforceable because it did not give members the opportunity to opt out of the clause without giving up membership in the credit union. In October, in Pruett vs. Westconsin Credit Union, the court of appeals in Wisconsin ruled, “in certain circumstances, failure to opt out of an arbitration provision can constitute acceptance.” In this case, however, the opt-out offer was not sufficiently clear to reasonably convey what was required for members to demonstrate consent to or rejection of the modified terms.

For credit unions in Indiana, Tonia calls into question the validity of any arbitration clause that members had to affirmatively reject. For credit unions in other states, these decisions underscore that the validity of arbitration clauses will depend on the clause’s language and the procedures used to provide members notice of the proposed changes and a  demonstration that a member has agreed to new terms. These determinations can vary widely by state and for which your credit union should obtain legal assistance. 

In the meantime, if Indiana’s ruling leaves you scratching your head, take comfort that you are not the only individual befuddled by the court’s ruling. As the dissenting judge explained when the credit union member won her appellate-level reversal, “[because] I am concerned that today’s decision could upend long-accepted business practices of companies with large customer bases in Indiana — from Netflix to Citibank and thousands of smaller institutions in between — I respectfully dissent. The IU Credit Union provided Land an opportunity to opt out without losing her banking privileges; all she had to do was send written notice within 30 days. The option was neither burdensome nor unreasonable, but the consequences of our decision today may turn out to be both.”

Indiana Supreme Court Rules That A Credit Union Must Obtain Affirmative Consent Of Members To Enforce Arbitration Clause - https://thecreditunionconnection.com/indiana-supreme-court-rules-that-a-credit-union-must-obtain-affirmative-consent-of-members-to-enforce-arbitration-clause/

Why Your Credit Union Needs To Care About Chevron Deference

The CFPB’s decision to propose new conditions on “very large” financial institutions providing overdraft services wasn’t the only big news this week

The Supreme Court heard oral arguments in a case that could, depending on how it is decided, have profound implications for the ability of federal administrative agencies, including the NCUA and the CFPB, to promulgate regulations.

Relentless, Inc. v. Dept. of Commerce is a case I have commented on frequently in the blogosphere. Ostensibly, it addresses whether federal law gives an obscure federal office the ability to make fishermen pay for the cost of monitors on their boats. But the case is really about whether the Supreme Court should jettison a 40-year-old case, Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).

Why does Chevron matter?

Chevron established a framework for how courts determine whether an agency’s regulation interpreting a federal statute should be upheld. This may seem like a classically arcane and esoteric issue, of interest only to law school professors in staff rooms during their lunch breaks, but Chevron has become an integral component of the administrative state.

Over the last 40 years Chevron has been cited in cases more than 18,000 times. For the credit union industry, it has been a key determining factor in some of its most important cases. It was why a federal court of appeals upheld the NCUA’s expansive definition of “ local community” when the banks challenged it in Am. Bankers Ass\'n v. Nat\'l Credit Union Admin., 306 F. Supp. 3d 44, 48 (D.D.C. 2018), rev\'d and remanded, 934 F.3d 649 (D.C. Cir. 2019).

Conversely, in the seminal 1998 Supreme Court case striking down NCUA’s regulation expanding the authority of credit unions to comprise multiple select employee groups, the Court concluded that NCUA was seeking to exercise its powers beyond the flexibility provided by Chevron. Nat\'l Credit Union Admin. v. First Nat. Bank & Tr. Co., 522 U.S. 479, 483, 118 S. Ct. 927, 930, 140 L. Ed. 2d 1 (1998). It has also impacted your HR practices and mortgage regulations promulgated by the CFPB. PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 112 (D.C. Cir. 2018), abrogated by Seila L. LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 207 L. Ed. 2d 494 (2020).

The argument

This week’s oral argument underscored precisely what a big deal discarding the Chevron framework could be. For example, with each new change in administration, particularly when the new president comes from the opposing party, a flurry of new regulations undo some of the most important regulations passed by the previous administration. Justice Kavanaugh argues that these dramatic changes in interpretation don’t reflect a changing view of how the statute should be interpreted from a legal standpoint. “I think they\'re doing it because they have disagreement with the policy of the prior administration, and they\'re using what Chevron gives them and what they can\'t get through Congress to do it themselves, self-help, and to do it themselves unilaterally, which is completely inconsistent with bicameralism and presentment to get your policy objectives enacted into law.”

It affects HR, too

Again, this isn’t some abstract legal argument but an issue that has practical implications for how your employees spend their days. Just last week, the US Department of Labor finalized regulations essentially reversing amendments made by the Department of Labor during the Trump Administration. The preamble contained numerous legal citations arguing that the latest amendments more closely adhered to the Fair Labor Standards Act’s treatment of independent contractors. In reality, the impetus for these changes was a policy debate over how to regulate so-called “gig economy” workers. To Chevron critics, this is precisely the debate that Congress should decide.

Eliminating Chevron could affect previous decisions

Chevron’s legacy is, however, a complicated issue, and the answer is not clear-cut. For example, Justice Barrett expressed concern about the impact a ruling to discard Chevron could have on previous decisions upholding regulations based on Chevron deference. She asked whether a decision ending Chevron “would [be] inviting a flood of litigation, even if for the moment those holdings stay intact?”

Other justices pointed out that Congress has passed laws for forty years with the knowledge that agencies with expertise in arcane areas of the law, such as the monitoring of fishing activity, will ultimately decide on how best to address ambiguities in Congress’s handiwork.

Again, this is not an abstraction. When Congress passed the Durbin Act, it tasked the Federal Reserve with the responsibility of determining what costs should be included in calculating the debit card interchange fee cap imposed on large financial institutions and implementing the network “non-exclusivity” rule  The Federal Reserve’s regulations were challenged by retailers but the regulations were upheld on appeal because the Court ruled that Durbin’s mandates were ambiguous and that it should defer to the Boards reasonable interpretation of the amendment.  NACS v. Bd. of Governors of Fed. Rsrv. Sys., 958 F. Supp. 2d 85, 86 (D.D.C. 2013), rev\'d, 746 F.3d 474 (D.C. Cir. 2014)

Is there a middle ground? Maybe, maybe not. Solicitor General Prelogar agreed with the conservative justices who argued that courts were too quick to declare that a statutory provision was ambiguous and defer to an agency interpretation. Perhaps the court could enact a higher standard for finding a statute ambiguous. But such a result is unlikely to mollify some of the court’s more conservative members. For instance, Justice Alito challenged Solicitor General Prelogar to provide a workable definition of ambiguity. He did not seem satisfied with her answer.

We will have a decision in this case by the end of this term this fall.

Why Your Credit Union Needs To Care About Chevron Deference - https://thecreditunionconnection.com/why-your-credit-union-needs-to-care-about-chevron-deference/

Get Ready for Increased NCUA Consumer Compliance Focus

Credit unions should prepare for increased scrutiny of their compliance with consumer protection laws now that ...

NCUA held its monthly board meeting this week. Credit unions should prepare for increased scrutiny of their compliance with consumer protection laws now that Chairman Harper has a Democratic ally. The Board voted unanimously to approve its 2024 Performance Plan, which aims to increase fair lending examinations to at least 60 this year. What’s more important is new board member Tanya Otsuka’s indication that she strongly supports this increased focus. She explained that “fair lending exams help ensure credit unions are fairly and equitably reaching all their members. Unfortunately, we’ve seen that redlining and lending discrimination continue to be a problem today. This will be an area of focus for me. I support a strong consumer compliance program and I’d like to work with the Board to continue to strengthen our fair lending and consumer protection efforts.” 

It’s safe to assume that NCUA’s greater emphasis on scrutinizing credit unions’ consumer compliance will indirectly impact all credit unions. Hopefully, this new emphasis does not overburden small credit unions, many of which struggle to afford the cost of complying with these regulatory mandates. In addition, it’s still a head-scratcher to me why the NCUA feels this is such an important priority when the largest credit unions are already subject to the direct supervision of the CFPB, and NCUA has produced no evidence that credit unions are systematically failing to comply with consumer protection laws. 

Other goals in the performance plan include approving at least fifteen additional “underserved area” designations and increased coordination with CDFI credit unions.

NCUA Receives Briefing On its DEIA 2024-2026 Strategic Plan 

Section 342 of the Dodd Frank Act requires agencies to annually report on their efforts to increase diversity within their workforce, the entities they regulate, and an agency’s vendor pool. The Board received a briefing on its Diversity, Equity, Inclusion and Accessibility Strategic Plan for 2024-2026. In discussing the plan, Chairman Harper underscored the importance of credit unions participating in the voluntary Diversity Self-Assessment Survey. CEOs received notice of the survey in October and can respond until February 15th. Last year, approximately 10% of credit unions responded to the survey.

Lurking in the background of any discussion of diversity initiatives is the question of how great an impact the Supreme Court’s decision in Fair Admissions v. Harvard will have on precisely these types of programs. Depending on which party wins the election, it seems inevitable that initiatives, such as NCUA’s, which emphasize encouraging greater diversity, will be questioned.

NCUA Releases Quarterly Economic Snapshot

The NCUA released its quarterly economic snapshot this week. Things have pretty much continued the way they have for the last couple of years. On a macro level, the industry is continuing its generally solid performance, but there are indications that more members are struggling to make payments. Among NCUA’s highlights:

• The delinquency rate at federally insured credit unions was 72 basis points in the third quarter of 2023, up 19 basis points from one year earlier. The net charge-off ratio was 56 basis points, up 25 basis points compared with the third quarter of 2022. 
• Insured shares and deposits rose $23 billion, or 1.4 percent, over the year ending in the third quarter of 2023, to $1.72 trillion.
• The loan-to-share ratio stood at 84.8 percent in the third quarter of 2023, up from 78.4 percent in the third quarter of 2022.

Get Ready for Increased NCUA Consumer Compliance Focus -

CFPB Overdraft Proposal Is About More Than the Fee Cap!

The expenses of offering overdraft protections would increase considerably, causing some banks and credit unions to...

As you are undoubtedly aware, this week, the CFPB proposed its long-awaited expansion of Regulation Z requirements to depository institutions, like banks and credit unions, with $10 billion or more in assets that have the audacity to profit from offering overdraft protection products. Specifically, "Very Large Institutions" imposing more than the “break-even costs” of overdraft products would be required to provide protections, such as periodic statements. The proposed regulations would, however, include a safe harbor amount yet to be determined. Credit unions charging no more than the break-even amounts, which could range anywhere from $3-$14 under the CFPB’s proposal, would not be subject to Regulation Z’s mandates. 

The CFPB estimates that the regulation could take effect as early as October 2025. While institutions with less than $10 billion can breathe a sigh of relief for now, in the preamble, the CFPB notes that it will be analyzing the impact of this regulation and could impose similar requirements on smaller banks and credit unions. 

While the fee cap has gotten most of the attention, complying with this proposal for those credit unions going to provide initial disclosures would require the development of several additional protocols which may make even the largest institutions decide that the benefits aren’t worth the costs. For example, if the credit union provides an overdraft line of credit, this line of credit will now have to be provided in a separate account. Similar requirements are imposed on debit and credit cards. 

As burdensome as this proposal is, it is doubtful that a legal challenge to the authority of the CFPB to promulgate this regulation would be successful. The CFPB notes in the preamble that as early as 1969, when Regulation Z was first promulgated, regulators considered extending Regulation Z’s protections to overdraft products, but decided not to do so as a matter of policy. Furthermore, a strong argument can be made that overdraft products are consumer loans, particularly when they include lines of credit. The CFPB will be accepting comments on this proposal until April 1, 2024. 

CFPB Overdraft Proposal Is About More Than the Fee Cap! -

What is the liability in likely cases of fraud against the elderly?

A high-profile case in which an estate is seeking millions of dollars from Navy Federal and Wells Fargo is headed for appeal...

A high-profile case in which an estate is seeking millions of dollars from Navy Federal and Wells Fargo is headed for appeal. In re Est. of Cook, No. 1:23-CV-00009, 2023 WL 3467209, at *1 (E.D. Va. May 15, 2023) involves an elderly gentleman who was conned into making a series of wire transfers totaling millions of dollars. Navy Federal Credit Union was so concerned about these transactions that it contacted Adult Protective Services (APS) and urged the member not to make them, but the gentleman refused to listen and the credit union and bank continued to execute the transfers despite the concerns.

The estate argued that Navy Federal and Wells Fargo had a duty to protect the victim in part by deciding to bring its concerns to the attention of protective services. The plaintiff also argued that the financial institutions were negligent in permitting the transactions to go forward. The court rejected both these arguments, noting that “no provision of Section [8.]4A imposes liability on a receiving bank that properly executes a duly authorized wire transfer by the sender.” Id at 2. In addition, nothing in the account language imposed this obligation on the financial institutions.

While I believe this ruling articulates settled law, this area may change gradually over time. Most notably, the federal district court in Washington, D.C. refused to dismiss a lawsuit brought against PNC Bank after it executed a series of transactions requested by an older customer who was conned into making the transfers. This court held that Article 4A, in conjunction with the account agreement, created an implied duty of ordinary care, which the bank may have breached. PNC settled this case. See Bloom v. PNC Bank, N.A., 659 F. Supp. 3d 27 (D.D.C. 2023).

What is the liability in likely cases of fraud against the elderly? -

Why your credit union needs to care about Chevron deference

Credit unions may not know of the term Chevron deference, but this critical precedent could be blown up in a current Supreme Court case. The ruling gives the NCUA and other regulators...

The CFPB’s decision to propose new conditions on “very large” financial institutions providing overdraft services wasn’t the only big news this week. 

The Supreme Court heard oral arguments in a case that could, depending on how it is decided, have profound implications for the ability of federal administrative agencies, including the NCUA and the CFPB, to promulgate regulations. 

Relentless, Inc. v. Dept. of Commerce is a case I have commented on frequently in the blogosphere. Ostensibly, it addresses whether federal law gives an obscure federal office the ability to make fishermen pay for the cost of monitors on their boats. But the case is really about whether the Supreme Court should jettison a 40-year-old case, Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). 

Why does Chevron matter?

Chevron established a framework for how courts determine whether an agency’s regulation interpreting a federal statute should be upheld. This may seem like a classically arcane and esoteric issue, of interest only to law school professors in staff rooms during their lunch breaks, but Chevron has become an integral component of the administrative state. 

Over the last 40 years Chevron has been cited in cases more than 18,000 times. For the credit union industry, it has been a key determining factor in some of its most important cases. It was why a federal court of appeals upheld the NCUA’s expansive definition of “ local community” when the banks challenged it in Am. Bankers Ass'n v. Nat'l Credit Union Admin., 306 F. Supp. 3d 44, 48 (D.D.C. 2018), rev'd and remanded, 934 F.3d 649 (D.C. Cir. 2019).

Conversely, in the seminal 1998 Supreme Court case striking down NCUA’s regulation expanding the authority of credit unions to comprise multiple select employee groups, the Court concluded that NCUA was seeking to exercise its powers beyond the flexibility provided by Chevron. Nat'l Credit Union Admin. v. First Nat. Bank & Tr. Co., 522 U.S. 479, 483, 118 S. Ct. 927, 930, 140 L. Ed. 2d 1 (1998). It has also impacted your HR practices and mortgage regulations promulgated by the CFPB. PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 112 (D.C. Cir. 2018), abrogated by Seila L. LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 207 L. Ed. 2d 494 (2020).

The argument

This week’s oral argument underscored precisely what a big deal discarding the Chevron framework could be. For example, with each new change in administration, particularly when the new president comes from the opposing party, a flurry of new regulations undo some of the most important regulations passed by the previous administration. Justice Kavanaugh argues that these dramatic changes in interpretation don’t reflect a changing view of how the statute should be interpreted from a legal standpoint. “I think they're doing it because they have disagreement with the policy of the prior administration, and they're using what Chevron gives them and what they can't get through Congress to do it themselves, self-help, and to do it themselves unilaterally, which is completely inconsistent with bicameralism and presentment to get your policy objectives enacted into law.”

Chevron affects HR, too

Again, this isn’t some abstract legal argument but an issue that has practical implications for how your employees spend their days. Just last week, the US Department of Labor finalized regulations essentially reversing amendments made by the Department of Labor during the Trump Administration. The preamble contained numerous legal citations arguing that the latest amendments more closely adhered to the Fair Labor Standards Act’s treatment of independent contractors. In reality, the impetus for these changes was a policy debate over how to regulate so-called “gig economy” workers. To Chevron critics, this is precisely the debate that Congress should decide. 

Eliminating Chevron could affect previous decisions

Chevron’s legacy is, however, a complicated issue, and the answer is not clear-cut. For example, Justice Barrett expressed concern about the impact a ruling to discard Chevron could have on previous decisions upholding regulations based on Chevron deference. She asked whether a decision ending Chevron “would [be] inviting a flood of litigation, even if for the moment those holdings stay intact?” 

Other justices pointed out that Congress has passed laws for forty years with the knowledge that agencies with expertise in arcane areas of the law, such as the monitoring of fishing activity, will ultimately decide on how best to address ambiguities in Congress’s handiwork. 

Again, this is not an abstraction. When Congress passed the Durbin Act, it tasked the Federal Reserve with the responsibility of determining what costs should be included in calculating the debit card interchange fee cap imposed on large financial institutions and implementing the network “non-exclusivity” rule  The Federal Reserve’s regulations were challenged by retailers but the regulations were upheld on appeal because the Court ruled that Durbin’s mandates were ambiguous and that it should defer to the Boards reasonable interpretation of the amendment.  NACS v. Bd. of Governors of Fed. Rsrv. Sys., 958 F. Supp. 2d 85, 86 (D.D.C. 2013), rev'd, 746 F.3d 474 (D.C. Cir. 2014)

Is there a middle ground? Maybe, maybe not. Solicitor General Prelogar agreed with the conservative justices who argued that courts were too quick to declare that a statutory provision was ambiguous and defer to an agency interpretation. Perhaps the court could enact a higher standard for finding a statute ambiguous. But such a result is unlikely to mollify some of the court’s more conservative members. For instance, Justice Alito challenged Solicitor General Prelogar to provide a workable definition of ambiguity. He did not seem satisfied with her answer. 

We will have a decision in this case by the end of this term this fall. 

Why your credit union needs to care about Chevron deference -

Oh BOI! FinCEN releases regs for credit unions to access the Beneficial Ownership Interest Database

Days before taking a long winter nap, the Financial Crimes Enforcement Network (FinCEN) released its final…

Days before taking a long winter nap, the Financial Crimes Enforcement Network (FinCEN) released its final regulationsspecifying the conditions under which credit unions and banks will be authorized to access the new Beneficial Ownership Interest (BOI) database. The regulations take effect 60 days after being posted to the Federal Register. 

In December 2021, Congress passed the Corporate Transparency Act (CTA). It had two main purposes. First, it aimed to reduce money laundering activity by mandating that corporations,limited liability corporations, and partnerships identify their beneficial owners to FinCEN. FinCEN is responsible for creating and administering a database of this information. The Act defines a beneficial owner as any individual who controls, either directly or indirectly, at least 25% of a corporation, limited liability company or “similar entity.”

A second purpose of the bill was to reduce the regulatory burden placed on financial institutions. Under a 2016 regulation, credit unions were already responsible for identifying beneficial owners. FinCEN was charged with promulgating regulations streamlining these requirements so that they are consistent with the CTA and creating a centralized database. 

The regulations passed yesterday explain the conditions under which credit unions will be authorized to receive information from the database; the safeguards they will have to enact to ensure the information they obtain is properly secured; and the penalties for violations of these provisions. 

Arguably the most important part of the regulation explains the purposes for which credit unions can seek to utilize the BOI database. Interestingly, the use of the database is not limited solely to compliance with the beneficial ownership regulations. Instead, the information may be requested to satisfy customer due diligence requirements which the regulations describe as:

any legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the United States, to comply with which it is reasonably necessary for a financial institution to obtain or verify beneficial ownership information of a legal entity customer.

Although the scope of the circumstances under which the information can be requested is broad, FinCEN reserves the right to determine the precise circumstances under which information requests will be honored. 

A major source of concern related to this this legislation has been the ability of FinCEN to safeguard the database. Afterall, it will contain the name, date of birth, current residential or business address, and a unique “FinCEN identifier” of each beneficial owner who files to start a business in the country. Institutions seeking to access the database can satisfy privacy requirements by complying with Gramm-Leach-Bliley’s requirements for the protection of personally identifiableinformation (section 501) “modified as needed to account for any unique requirements imposed” by the regulation.

Finally, a joint guidance issued by federal bank regulators, including the NCUA, noted that financial institutions are not mandated to use the BOI database, but if they do so, they will have to comply with these regulations. 

If your credit union chooses to access the database, your Bank Secrecy Act policies and procedures should be updated to specify who at your credit union will be authorized to request access to the database, the circumstances under which access will be requested, and who shall have access to the information once it is received. The importance of this last point should not be underestimated, as the information should only be used to comply with the regulation. 

Although the statute takes effect on January 1, compliance for the companies required to report to FinCEN is staggered. According to FinCEN FAQ:

A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report. A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial BOI report. This 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier. Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports with FinCEN.

Oh BOI! FinCEN releases regs for credit unions to access the Beneficial Ownership Interest Database -

What’s Happening? Regulatory Round Up from the NCUA to the OCC

The NCUA was given fuel for its third-party oversight fire when 60 credit unions were suffered digital blackouts over the last few weeks. At the same time, the agency reported credit unions' Q3 results, including increasing CDs as financial institutions scrap for deposits amid tight liquidity with interest rates not seen in years. That's good because credit unions are going to need more of an allowance for rising delinquencies and CECL expenses.

In other agency news that might touch on credit unions, the IRS is looking at expanding retirement account access to long-term, part-time employees; the CFPB is taking enforcement action against a bank over how customers opt-in to overdraft protection; and the OCC handed down guidance on Buy Now-Pay Later products.

Do You Know Who Your Vendor’s Vendors Are?

The biggest regulatory development of the week is the news that 60 small credit unions were virtually shut down for several days, as members can’t get account information as a result of a ransomware attack. According to the CU Times, while the scope of the ransomware attack or who conducted the attack isn’t fully known, it appears the attack was aimed at Ongoing Operations, a credit union information technology organization acquired by credit union Fintech Trellance in November 2022, and FedComp, a third-party vendor of Trellance. 

This is exactly the type of scenario that has concerned NCUA given its lack of oversight over third-party vendors. Expect the agency to put even more emphasis on third-party due diligence and baseline contractual provisions that seek to place requirements on third parties with whom vendors operate. 

Recently, federal banking regulators, with the exception of NCUA, finalized this guidance updating due diligence expectations for financial institutions. The guidance explains that “An evaluation of the volume and types of subcontracted activities and the degree to which the third party relies on subcontractors helps inform whether such subcontracting arrangements pose additional or heightened risk to a banking organization.”

This would not be a bad time to ask yourself if your existing due diligence and operational framework adequately protects the credit union against attacks on your vendor’s vendors. Among the questions that I would be asking are: with whom does your vendor work? Does your vendor utilize third parties to store cloud-based information? Are you sure that your data is backed up? And, does your contract provide recourse for the failure of your vendor to meet these baseline requirements?

NCUA's Third Quarter Industry Snapshot: Is the Glass Half-Empty or Half-Full for Credit Unions?

 The NCUA released its quarterly snapshot of the industry’s financial health. Not surprisingly, the industry is a reflection of trends we are seeing in the larger economy. In the aggregate, the industry remains strong but there are also warning signs for those who are inclined to worry. To me, the most intriguing findings include:

●      Members are in search of higher yields; share certificates grew $185.9 billion, or 72.0 percent, over the year to $444.2 billion.

●      Delinquencies are on the rise; The delinquency rate at federally insured credit unions was 72 basis points in the third quarter of 2023, up 19 basis points from one year earlier. The net charge-off ratio was 56 basis points, up 25 basis points compared with the third quarter of 2022.

●      CECL is having an impact; the credit union system’s provision for loan and lease losses or credit loss expense increased $5.5 billion, or 125.5 percent, to $9.9 billion at an annual rate in the first three quarters of 2023.

IRS Proposes Regulations Expanding Access to Retirement Plans for Long-Term, Part-Time Employees

With the caveat that yours truly makes absolutely no representation that he is a retirement benefits expert, I wanted to bring to your attention a regulation proposed by the IRS on November 27 to implement parts of the Retirement Enhancement Act of 2019 (SECURE Act), enacted on December 20, 2019, and the SECURE 2.0 Act of 2022. This is certainly a development of which your HR team should be aware. Taken together this legislation reduced from 1000 to 500 the number of hours an employee had to work per year to be eligible for participation in employer-sponsored retirement plans. This legislation also reduced from 3 to 2 years the number of years an employee has to be employed to be entitled to participate in these plans. These requirements start taking effect on January 1, 2024. These regulations provide answers to important questions such as exactly how part-time a long-term part-time employee is defined.

CFPB Brings Enforcement Action Against Bank Based on How New Members Opt-In to Overdraft Protection Programs

For the second time, the Bureau has brought an enforcement action against a bank for allowing customers to opt in to receiving overdraft protection without first being given written notice required under federal law. Make sure your institution isn’t making the same mistake.

To what mistake am I referring to? According to the NCUA, “under Respondent’s branch enrollment procedures, Respondent’s branch employees do not print the written overdraft notice for new customers until the end of the account-opening process. This form is entitled ‘What You Need to Know about Overdrafts,’ which is [the Bank’s] version of the Regulation E model consent form (the A-9 Form).” The bottom line: make sure you document that members are given the appropriate disclosures before they agree to overdraft protection, as opposed to simply providing them a packet of disclosures after they have signed up. 

Buy Now-Pay Later Guidance Issued By OCC

In my ever so humble opinion it is not a question of if but when your credit union will start getting involved in the buy-now-pay-later ecosystem. Generally speaking, a buy-now-pay-later loan is an installment loan made to a merchant payable in four or less payments that charges no interest and facilitates the purchase of a product. Lenders have relationships with merchants either directly or indirectly pursuant to which they purchase these loans in return for the payment of a fee by the merchant which is typically larger than an interchange fee There is a lot of evidence to suggest that credit card averse young people like this option.

Of course, these loans present unique challenges for credit unions because of field of membership restrictions, but in reality, there was little difference between the technology used to facilitate these loans and the type of platforms used to allow credit unions to purchase automobile loans. Furthermore, the recent eligible obligation amendments give credit unions the flexibility they need to take a serious look at this type of activity.

Consequently, you may want to take a look at this guidance issued by the OCC providing examples of the risks posed by BNPL products and the issues that should be taken into account for the unique features of these loans. Among the issues that should be considered are: Credit Reporting Agencies have not yet started monitoring the repayment history of BNPL borrowers, so it may be particularly challenging to develop appropriate underwriting standards; because these are short-term loans, new collection protocols-such as determining when to reach out to delinquent borrowers-need to be addressed and many of these programs involve partnering with third-party lenders for whom appropriate due diligence needs to take place.

What’s Happening? Regulatory Round Up from the NCUA to the OCC -

Get Your Call Reports in On Time or Suffer the Consequences

NCUA put credit unions on notice that it will once again start imposing penalties on credit unions that miss the deadline for submitting their quarterly call reports. Penalties have been suspended since December 2019 because of the pandemic. Just how serious is NCUA about this reimposed mandate? Well, in the press release announcing this change, NCUA said that the December 2023 call report will be in by 11:59:59 on January 30, 2024, or else.

Get Your Call Reports in On Time or Suffer the Consequences -

CFPB Has Kept Busy This Holiday Season

While most companies and government agencies are settling in for the typical holiday hibernation, the Consumer Financial Protection Bureau is keeping me and credit unions and banks on their toes! Here's what the CFPB has been up to...

CFPB to Propose Regulations Restricting Overdraft Fees

Like a boa constrictor in the Amazon rain forest, the CFPB continues to squeeze the life out of overdraft fees. According to press reports, the Bureau is shortly expected to propose Truth in Lending disclosure requirements for overdraft products. This would be a major shift in policy since regulators have previously exempted overdraft products, such as lines of credit from Reg Z’s disclosure requirements.

On the bright side, in testimony on Thursday, Bureau Director Chopra assured the assembled legislators that any proposal in this area would not impact financial institution liquidity. I’m not sure how he can be so confident, but we will have to wait and see. 

CFPB Fines BOA $12M for Failing to Record the Demographic Data of Mortgage Applicants

The CFPB announced that Bank of America had violated HMDA by willfully reporting false information about mortgage applicants. According to the CFPB, hundreds of Bank of America’s loan officers falsely reported that 100% of their mortgage applicants did not wish to report their demographic data. “In fact, loan officers were not asking applicants for demographic data but were falsely reporting that applicants were refusing to give the data.” 

While the numbers may certainly suggest that Bank of America is guilty, the fine does raise the question if there is a percentage of expected responses regarding applicant demographics below which mortgage lenders are presumptively violating HMDA. The bottom line is to make sure your loan originators are asking the appropriate questions. 

CFPB Cracks Down on Sloppy GAP Insurance Reimbursement Policies 

On November 20, the CFPB announced that it issued a $60M civil penalty against Toyota Motor Credit and ordered it to “stop its unlawful practices” related to add-on service purchases, including GAP and Credit Life and Accidental Health (CLAH) products. GAP is, of course, designed to allow a consumer to be relieved of paying the difference between the face value of a car that has been destroyed in an accident and the remaining balance outstanding on a car loan. CLAH is designed to pay the remaining balance due on a car loan if the debtor dies or becomes disabled. Both products have drawn scrutiny from regulators and class action attorneys who allege credit unions and banks make consumers overpay for these products and falsely report car loans as delinquent even though they have this coverage. For example, the Bureau said that Toyota Motor made it “unreasonably difficult for consumers to receive refunds for overpayments.”

CFPB Has Kept Busy This Holiday Season -

Where Is Your Members’ Data on the Cyber Supply Chain?

News that approximately 60 credit unions have been impacted by a cybersecurity attack on a technology provider has both immediate implications for the industry and should have larger consequences for the entire financial sector. Simply put, this incident is a smaller scale version of what could happen and probably will happen on a much larger scale, unless changes can be made to the dynamics facing the integration of technology into the financial services infrastructure.

Although precisely what happened is not yet known, what we do know based on press reports is that a ransomware attack affected a unit of Trellance, a cloud computing provider used by some credit union vendors. As a result, the impacted credit unions lost access to member account information.

As for its impact on the credit union industry, NCUA Chairman Todd Harper has been warning for months that ... Read the complete article on Credit Union Times.

Where Is Your Members’ Data on the Cyber Supply Chain? -

Does the resumption of student loan repayments impact your credit union’s Allowance for Credit Losses?

That’s a question NCUA wants all federally insured credit unions to answer now that the COVID 19 forbearance period on…

That’s a question NCUA wants all federally insured credit unions to answer now that the COVID-19 forbearance period on the payment of student loans has come to an end. It provides one of the first tests of how well prepared your credit union is to comply with the updated Current Expected Credit Losses methodology.

All but the smallest credit unions must now comply with ASU 2016-13 (fasb.org) , which determines when credit losses must be recognized for accounting purposes. CECL, of course, is a crucial concept for financial institutions that are obligated to put aside adequate funds to absorb credit losses.

Under the old methodology, credit losses did not have to be recognized until a loss was ‘probable.’ To its critics, this approach resulted in delinquencies being recognized too late in the lending process and didn’t give the public or examiners an accurate view of a financial institution’s balance sheet.

The new methodology is designed to make financial institutions account for losses earlier in the lending cycle by anticipating a loan portfolio’s ‘expected’ losses and ensuring adequate reserves are put aside to account for them. Although the precise methodology used to make this determination varies depending on a credit union’s size and loan complexity, this new standard requires credit unions and banks to make defensible assumptions about a loan portfolio’s likely performance.

This is accomplished, in part, by identifying groups of loans that share common risk characteristics. As explained by NCUA, the new accounting standards “require[s] expected losses to be evaluated on a collective, or pool, basis when financial assets share similar risk characteristics, but does not prescribe a process for segmenting financial assets for collective evaluation. Financial assets may be segmented based on one characteristic or a combination of characteristics, and management should exercise judgment when establishing appropriate segments or pools.”

In the context of student loans, for example, your credit union could identify members resuming repayment who have elevated debt-to-income levels, which put them at a higher risk of falling behind on car or credit card payments owed to the credit union.

Does the resumption of student loan repayments impact your credit union’s Allowance for Credit Losses? - https://thecreditunionconnection.com/does-the-resumption-of-student-loan-repayments-impact-your-credit-unions-allowance-for-credit-losses/

New York’s Department of financial services unveils updated Cyber Security regulations

On November 1, New York’s Department of Financial Services finalized several important amendments to its cyber security regulations (23 NYCRR 500). These changes have important implications not only for New York State chartered and licensed institutions, such as CUSO’s, but for any vendors doing business with those entities.

Since promulgating its “first in the Nation” cyber security regulations in 2017, the Department of financial services has aggressively used these regulations to impose baseline cyber security protocols on state licensed and chartered institutions. New York’s regulations do much more than simply mandate reporting of suspected cyber breaches. They require regulated entities to certify that they maintain programs designed to protect the confidentiality, integrity, and availability of the covered entity’s information systems. These programs must include periodic penetration testing and be approved at the highest levels of regulated businesses.

In the absence of comprehensive federal regulation, New York’s protocols have had a nationwide impact by providing a regulatory model for other jurisdictions to follow. The regulations also mandate that vendor contracts incorporate many of the Part 500 requirements even if vendors are headquartered outside of New York. Compliance with these regulations is a top priority for the Department of Financial Services as demonstrated by the penalties imposed on several companies for violations. In short, if you are a state-charted bank or credit union or otherwise licensed by DFS, preparing for these changes is a top priority. In addition, even if you are not subject to New York State law if you are responsible for protecting your company’s data security you should know about these important changes.

New York’s Department of financial services unveils updated Cyber Security regulations -

Why a Ruling Against the CFPB is Bad for CUs

Just like the NFL likes to kick off its season with its most dramatic rivalries, the Supreme Court likes to start terms with some of its most dramatic cases. So it is not surprising that Cmty. Fin. Servs. Ass’n of Am. v. Consumer Fin. Prot. Bureau  was argued on the first Tuesday in October. It’s a real doozy.

In case you have been out of the country and cut off from the internet for the last year, this is the case in which the Court of Appeals for the Fifth Circuit ruled that the CFPB acted consistent with its Unfair and Deceptive Acts and Practices (UDAAP) powers when it promulgated regulations curtailing payday loans but then ruled that the mechanism devised by Congress to fund the Bureau was unconstitutional, implicitly finding that all the actions ever taken by the CFPB were therefore invalid.

On occasion there is a natural desire to want to ”stick it to the Man,” especially when the Man is responsible for imposing ten years’ worth of consumer protection mandates on a credit union industry that didn’t feel it needed to be regulated into helping the consumer in the first place. But the reality is that the less the Court does to undermine the CFPB and its regulations, the better off the industry. In fact, a dramatic ruling will result in more legal and compliance risks for credit unions and a regulatory framework which provides little more flexibility than what the industry has today.

Originally published in CU Times By ALM Media

Why a Ruling Against the CFPB is Bad for CUs - Originally posted on CU Times on October 2, 2023

So, You Want to Expel Some Members?

At last week’s NCUA board meeting, the board acted very much like a parent giving their kid keys to the car for the first time.

On the one hand, everyone generally understands and supports the need to increase the ability of credit unions to expel violent, abusive and disruptive members. After all, similar powers already exist in many states and are used to ensure that staff is not mistreated or put in harm’s way.

On the other hand, the board is clearly concerned that some credit unions may use their increased powers to expel more members than they should. Consequently, as you move to implement the notice and bylaws provisions provided by the NCUA, you should be mindful of the dichotomy of the plain language of the statute and the NCUA’s interpretation of congressional intent.

President Biden signed the Credit Union Governance Modernization Act into law in March 2022. It gave the NCUA 18 months to develop regulations permitting credit unions to expel members with a simple two-thirds vote of the board of directors as opposed to requiring a special meeting of the entire membership. Congress specified four areas in which members could be expelled for cause: Causing a material loss; violations of membership agreements; causing substantial disruption of operations; and fraud, attempted fraud, other illegal behavior, or dangerous or abusive behavior, such as physical or verbal abuse of members or staff.

Crucially, the statute now permits credit unions to expel members for conduct that would have typically been dealt with through the credit union’s limitation of services policy. In last week’s meeting, the board stressed that expulsion should not be viewed as a replacement for existing limitation of services policies, but instead should be used in rare circumstances. Again, this is not something that you would necessarily infer from either the statute or a reading of the regulations without reference to the preamble.

The regulations finalized by the NCUA last week provide credit unions with a model bylaw amendment to implement the expulsion authority and a model notice for credit unions to put members on notice of these changes as required by the statute. The NCUA is allowing credit unions to incorporate the notice into their account agreements, but remember, as with any other account agreement amendment, existing members have to be made aware of these changes.

The statute does not include a baseline standard that must be satisfied in order for a member to be expelled. However, the preamble stresses:

Consistent with certain statements in the legislative history, use of the authority under the Governance Modernization Act should be rare and used only for egregious member behavior.

What type of issues does this raise for your credit union as it considers when and if to expel members, particularly when the member’s actions do not involve abusive behavior? Under the statute, credit unions can expel members for “a substantial or repeated violation.” In the final regulation, the NCUA requires credit unions to provide members a warning stating, “an initial notice is necessary to ensure members are aware that they may be expelled for repeated, non-substantial violations.” Furthermore, repeated violations must occur within a two-year period. Again, this reflects the concern of the board to ensure that credit unions maintain their cooperative member-owned ethos and provide access to members of modest means.

There is nothing unusual about individual policymakers trying to influence the way in which regulations are ultimately interpreted. At the end of the day, won’t the preamble fade into the background and the plain language of the regulation prevail? Probably not. At least in the short term, the NCUA will be actively involved in influencing how this new power is being exercised.

First, expulsion records will have to be maintained for six years, and you should assume they will be reviewed by examiners. Chairman Todd Harper also urged credit unions to periodically assess their practices to ensure they are not having a disparate impact on the membership. Most importantly, your members must be provided notice of their ability to contact the NCUA if they are being treated unfairly. Specifically, the model notice provided to members informs them that, “You may submit any complaints about your pending expulsion or expulsion to NCUA’s Consumer Assistance Center if the complaint cannot be resolved with the credit union.”

So what does all of this mean for your credit union? Utilizing this newfound authority involves much more than voting to amend your bylaws and providing notice of this policy change to your membership. Properly implemented, you should consider the circumstances under which you will use this policy and understand that, from the NCUA’s perspective, expulsion should be a last resort.

And just one more thing to keep in mind: In order to properly implement these regulations, your credit union should draft procedures to ensure that you provide adequate notice to members facing expulsion and properly conduct hearings when they are requested.

So, You Want to Expel Some Members? - Originally posted on CU Times on July 25, 2023

At Least We Have the CFPB

I usually find myself somewhat critical of the Dodd-Frank Act but I have to admit it really has shown its worth during the latest banking crisis.

For example, the “living wills” intended to create a game plan for the orderly bankruptcy of the nation’s largest banks really came in handy in preventing a frantic search for buyers of Silicon Valley Bank et al. Otherwise, we may have had to have regulators guaranteeing deposits and businesses rushing to put funds in even larger banks.

And it sure is a good thing we nationalized mortgage lending standards to ensure that reckless real estate lending could never again contribute to a banking crisis. Otherwise, First Republic Bank might have specialized in making long-term mortgage loans to the wealthy, contributing to a recklessly illiquid portfolio that exacerbated the crisis.

At least it increased collateral requirements, albeit ones that were watered down for community banks like the ones that failed. Then again, does anyone really believe that increased collateral requirements would have prevented banks from loading up their accounts with uninsured deposits? Barney Frank doesn’t. By the way, does anyone see the irony of a named sponsor of banking reform being on the board of one of the most significant bank failures since his legislation passed?

Well, at least Congress took a close look at the changes made under Gramm-Leach-Bliley, which tore down the remaining distinctions between commercial and investment banks. Otherwise, a relatively small community bank in Silicon Valley might think it’s a good business strategy to specialize in opening accounts for companies wanting to access computer-generated make-believe money, which is more unstable than most securities.

To be fair, at least the bankruptcy of Fannie and Freddie gave government the opportunity to reevaluate the need for two quasi-private entities that do essentially the same thing and which certainly played a role, albeit a somewhat understated one, in the 2008 financial crisis. If only that were true. They are both alive and well, and the FHFA under the Biden administration is aggressively using the GSEs to pursue its housing agenda.

Well, wait a second, if the Dodd-Frank Act didn’t curtail large banks from getting larger; the Main Street economy from blending ever more closely with Wall Street; and didn’t do anything to prevent bank runs, then what did it accomplish?

Unfortunately, any reader of this column knows the answer. It imposed a national framework of consumer protection oversight which has, to be fair, added protections for consumers and demystified the home-buying process but has done so by creating a huge industry of consumer protection litigation and increased compliance costs, which have contributed to driving more and more of the small guys out of business.

In fact, the more I think about it, I think that consumer advocates pulled off some of the greatest legislative trickery ever. They used a banking crisis, which had nothing to do with consumer protection, and successfully fought for the creation of a bureau that has an independent source of funding and wide latitude to interpret laws the way it feels it should be interpreted.

History won’t be a kind judge.

In 1907, JP Morgan single handedly acted as a Federal Reserve Bank to stop a bank run. What followed was a series of major banking reforms creating the Federal Reserve Banking System, imposing true firewalls between investment and commercial lending, introducing deposit insurance and creating credit unions. Fast forward 100 years, and starting in the mid-90s, we have now passed a series of laws doing away with all those reforms but placating the reform minded by creating the CFPB. The result was that Jaime Dimon played very much the same role as JP Morgan. But now, we have few meaningful institutions to prevent similar disruptions in the future. In fact, the safest thing for the American consumer to do is to put more and more of their money into the largest banks. At least they can afford to comply with the CFPB’s mandates.

At Least We Have the CFPB - First Published in Credit Union Times

Is Your Arbitration Clause Enforceable?

As I have said before, given the explosion of class-action lawsuits involving credit unions over the last 15 years, any growing credit union should consider whether to put an arbitration clause into its account agreements. Properly crafted and disclosed to their members, an arbitration clause can eliminate the risk and expense of being subjected to a potentially expensive class-action lawsuit while continuing to provide legitimately aggrieved members a mechanism for addressing their concerns with the credit union. The good news is that, as more and more credit unions join banks in adopting these clauses, the clearer the rules of the road – which brings me to the inspiration for this column.

On Thursday, a state appeals court in Colorado reversed a lower court ruling and upheld the imposition of an arbitration clause against a member who was seeking to bring a class-action lawsuit. The case I am talking about is Macasero vs. ENT Credit Union (Macasero v. ENT Credit Union :: 2023 :: Colorado Court of Appeals Decisions :: Colorado Case Law :: Colorado Law :: US Law :: Justia). In 2014, Cecilia Macasero became a member of the credit union to get a car loan. When she became a member, she agreed to accept electronic disclosures. In 2014, the account agreement she signed did not contain an arbitration clause but did include a provision explaining to members that the agreement’s terms “are subject to change at any time at the discretion of ENT.” The notice went on to explain that members would be notified of any change in terms “by utilizing your account and related services you agree to amendments of the terms of this agreement, which have been made available to you …” In 2019, the credit union updated its account agreement to include arbitration and a class action waiver. The credit union notified members by mail or email, depending on how they agreed to receive information, but both groups were put on notice in their bank statements. Our plaintiff conceded that she had received the email notification, but she said she didn’t know of the changes because she didn’t bother opening the email.

The court ruled that, regardless of whether the email was opened, the credit union had taken the necessary steps to put the member on notice that the amendments were being made and the language in the account agreement provided adequate notice that the credit union could unilaterally make changes. Furthermore, the court ruled that the email sent to members was displayed in a way that let members understand where they could get more information about these changes. As concisely summarized by the court, the plaintiff “was placed on constructive notice of the change in terms because she received the notice in the manner she had agreed upon and the notice was sufficiently clear and conspicuous, considering the party’s prior … dealings [and] that the notice was reasonably conspicuous, and the change of terms was easily accessible.” In other words, the credit union had checked all the boxes.

But don’t get too excited. The case articulates all the appropriate guide posts for you to consider in integrating arbitration clauses into your credit union’s account agreement but, yes there is always a but, how the courts will interpret a given credit union’s compliance with these criteria varies depending on where your credit union is located. One of the most important areas of disagreement between the courts is whether the original language of an account agreement is broad enough to put a member on notice that subsequent changes could include arbitration clauses. For instance, in Servier City Federal Credit Union vs. Branch Banking & Co. (Branch Banking & Trust Company v. Sevier County Schools Federal Credit Union – SCOTUSblog) the Court of Appeals for the Sixth Circuit ruled that a member who joined the credit union in 1989 wasn’t bound by a 2017 amendment to her account agreement. The court reasoned that the language in the 1989 agreement, while it reserved the right of the credit union to make changes, did not provide adequate notice that the changes could include arbitration clauses.

The court reached this conclusion even though it stipulated that “changes in the terms of this agreement may be made by the financial institution from time to time” and that such changes become automatically effective within 30 days. The court’s ruling means that, at least for those of you who live within the jurisdiction of the Sixth Circuit, affirmative consent as opposed to simply continued use is the safest way of assuring that an account agreement is binding. This decision was appealed to the Supreme Court, which unfortunately decided not to hear the case.

Another important takeaway from the Colorado case is to provide adequate notice to members by clearly articulating the changes that are being made, providing a readily accessible link with which they can get more information, and giving them the opportunity to opt out of arbitration clauses. The bottom line is that while the framework for arbitration clauses is well established, there is still considerable disagreement among courts as to how strictly to enforce notification requirements. I expect litigation in this area to continue and ultimately be settled by the Supreme Court. But in the meantime, document the notice you have given to your members, don’t hide the ball and be mindful of the requirements within your own jurisdiction.

Is Your Arbitration Clause Enforceable? - First Published in Credit Union Times

Supreme Court Takes Yet Another Case That Could Limit Agency Powers

If you think that regulatory agencies have too much power in interpreting laws, then you will be happy about what I am about to tell you. On Monday, the Supreme Court decided to hear a case next year that could dramatically limit an agency’s flexibility to interpret statutes. Between this and the Court’s decision to examine the constitutionality of the CFPB’s funding mechanism, next year is shaping up as one of the most important for credit unions to follow the Supreme Court in years.

In 1984, the Supreme Court decided Chevron USA Inc. v. Natural Resources Defense Council, Inc, in which it determined how much deference agencies should be given when interpreting and implementing ambiguous statutes. Under this framework, when a regulation is challenged, the Court must first determine whether the statute it’s interpreting is ambiguous. If so, the Court is “obligated to accept” the agency’s position so long as its interpretation is reasonable.

Credit unions have been both helped and hindered by this approach. For instance, in 1999, the Court struck down an NCUA regulation permitting common-bond credit unions to accept multiple common-bond groups. In this case, the Court rejected the NCUA’s interpretation that the Credit Union Act was ambiguous. Fast forward to 2019, however, when the Court of Appeals for the District of Columbia upheld the NCUA’s regulation adopting its expansive interpretation of what constitutes a “well-defined local community” for purposes of charter expansions (Am. Bankers Ass’n v. Nat’l Credit Union Admin, 2019; Nat’l Credit Union Admin. v. First Nat’l Bank & Trust Co, 1998). In making this ruling, the Court of Appeals decided that the term “local” was vague enough to defer to the agency’s interpretation.

These are just two examples of several to which I could point exemplifying how this seemingly arcane legal construct impacts your credit union operations. For example, if not all of your mortgage originators are classified as exempt employees, or if you ensure that your credit union extends Regulation B’s protections to potential loan applicants, you can blame Chevron deference.

So, what’s the big deal, you ask? If you’re a legal dinosaur like me – and an increasingly large number of federal judges – you are already uncomfortable with the powers exercised by agencies as opposed to Congress and the courts. Since Chevron’s adoption, critics, including Justices Gorsuch and Thomas, argue that courts have become too willing to conclude that a statute is ambiguous and defer to any agency interpretation.

This brings us to Loper Bright Enterprises v. Raimondo. In this case, the Court will consider whether the U.S. Court of Appeals for the District of Columbia properly deferred to an agency’s interpretation. Specifically, companies are challenging a regulation adopted by the National Marine Fishery Service requiring fishing companies to pay for observers who monitor compliance with fishery management plans. Loper Bright Enterprises took the aggressive step of asking the court to overrule the Chevron deference test, consigning it to the legal dustbin.

To me, this change cannot come soon enough. Every year, thousands of credit union advocates descend on Capitol Hill advocating for changes to the law. However, the way the system has evolved, they should be spending most of their time talking to unelected bureaucrats who, for better or worse, change interpretations of long-standing laws to reflect the latest administration’s preferences.

Not only does this make it more difficult for credit unions to figure out how best to comply with legal requirements; it also lets Congress off the hook. Our elected representatives can vote in favor of vaguely worded statutes proclaiming they are in favor of borrowers receiving “qualified mortgages” and outlawing “abusive and deceptive practices.” However, this leaves the heavy work of actually deciding what these terms mean to bureaucrats who are not accountable to the public in the same way as legislators. In addition, it should be a court’s job to interpret a law and an agency’s job to implement it. Instead, we have a system in which the CFPB gets to act as judge, jury and executioner.

In short, Chevron deference has outlived its usefulness. It’s time to give more responsibility back to Congress and the Courts so that regulated entities better know to whom they are accountable and under what circumstances.

Supreme Court Takes Yet Another Case That Could Limit Agency Powers - First Published in Credit Union Times

Is It Time to Get Your Head Out of the Clouds?

Henry David Thoreau famously urged us to build our castles in the sky, but always have our foundations on the ground. Personally, I think that’s a great dictum to remember as your credit union, regardless of its size, considers how best to manage the integration of technology into a cloud environment. On the one hand, cloud computing offers the promise of cost-effectively providing a host of technology for your employees and members, which can allow you to grow quicker. On the other hand, cloud computing presents unique risks and challenges of which your credit union must be aware of and, where possible, take steps to mitigate.

Because, as I like to say, I’m paid to be paranoid, I want to talk about some of the risks and how the growth of cloud computing places even more emphasis on understanding and delineating the respective legal responsibilities of your credit union and vendors.

First, let’s get our language straight. While there is no uniform definition of the cloud, here is a common contract definition that I found in the ever-helpful Law Insider Contract Database; “an Information System having the essential characteristics described in NIST SP 800-145, the NIST Definition of Cloud Computing. For the sake of this provision and clause, Cloud Computing includes Software as a Service, Platform as a Service and Infrastructure as a Service, and deployment in a Private Cloud, Community Cloud, Public Cloud or Hybrid Cloud.”

NIST refers to the National Institute of Standards and Technology, which describes the “essential characteristics of cloud computing services.” The definition also demonstrates that your institution’s interaction with the cloud can take many forms, including Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS). The industry is dominated by a handful of technology heavyweights including Amazon, Microsoft and Google.

Surveys indicate that the vast majority of financial institutions are already using at least some SaaS. But remember, you are also being impacted by the indirect use of various cloud services by your vendor, or your vendor’s vendor. In other words, your credit union is more connected to the cloud than you may realize.

So, what does this mean? In February, the Treasury Department released a report detailing the challenges that both banks and credit unions face as they migrate to cloud computing services. The concerns highlighted by the Treasury include insufficient transparency to support due diligence and monitoring by financial institutions; gaps in human capital to deploy cloud services; exposure to potential operational incidents, including those originating at a cloud service provider, and “dynamics in contract negotiations given market concentration.”

I’m always nervous to suggest reading material, but this is one government report that I think is worth taking the time to read and understand.

All of these are issues that the industry is confronting. Personnel issues are front and center as they seem to be with every other issue these days. At Thursday’s NCUA board meeting, during his semi-annual cybersecurity briefing for the board, Ernie Chambers, Critical Infrastructure Division director in the NCUA’s Office of Examination and Insurance, noted how one of the most important steps credit unions of all sizes can take to avoid misconfiguration of their systems to the cloud is to understand service contracts and service-level agreements. Misconfiguration of a credit union’s computer systems with a cloud service provider can compromise networks. Unfortunately, at that same briefing, it was also noted that credit unions, particularly small ones, are confronting a shortage of IT professionals.

For years now, the importance of due diligence when onboarding third-party providers has been drummed into credit unions. And of course, this responsibility doesn’t end once the vendor is selected. This is why your most important contracts should include a provision allowing for the auditing of vendor activities. But as the Treasury report noted, given the size and concentration of the cloud industry, meaningful audits are not a realistic option; after all, as many credit unions have learned when dealing with their core service provider, large companies are reluctant to provide too much access to their inner services. This lack of access underscores the need to gain ongoing access to documentation such as reports detailing auditor findings.

There is also a perception that information placed in the cloud is somehow inherently safer. This may or may not be true. But given the information that is being stored on these servers, it’s essential to ensure that you have notice when a cloud service has been compromised. Again, the Treasury department report suggests that cloud service providers are reluctant to provide notice of data breaches. This will come as no surprise to anyone who has dealt with major vendors following service disruptions, but it does lead your credit union with a potential blind spot when it comes to Personally Identifiable Information (PII).

Given the size of the institutions we are dealing with and the centrality of cloud computing services to our economy, clearly there has to be more robust government oversight of the major Cloud Service Providers. They are as important today as the railroads were to the growth of our economy in the 19th century or the automobile industry was in the 20th. But in the absence of government action, one of the most basic and important steps your credit union can and should take, regardless of its size, is to understand precisely how dependent the services it provides are on the cloud. Simply talking to your vendors is a good first step.

The growth of cloud computing, coupled with a lack of adequate regulations, also underscores why it is so important to not only try to negotiate fair contract arrangements but to make sure that you understand and execute on your side of the bargain. This means not only reviewing the contract but also drafting service-level agreements which specify in detail who has what responsibilities and what the consequences are going to be for nonperformance.

Don’t get me wrong, I’m not suggesting that your credit union can or should be afraid of exploring cloud based services. All I’m suggesting is a thorough understanding of how this information framework is and will continue to impact your credit union should be a major focus of your credit union’s due diligence efforts irrespective of its size.

Is It Time to Get Your Head Out of the Clouds? -

Does the Equal Credit Opportunity Act Protect Potential Borrowers?

Late last week, the CFPB finalized a major regulation implementing Section 1071 of the Dodd-Frank Act. Under this provision, the Equal Credit Opportunity Act (ECOA), which is implemented through Regulation B, was amended to mandate that the CFPB develop a framework for financial institutions to collect data on loans to minority and women-owned businesses. Think of this as extending HMDA protections and oversight to business lending for institutions that make 100 or more small business loans a year.

But even as the regulation is being finalized, a legal challenge is brewing that could sharply limit the applicability of the ECOA. The issue once again comes down to how much deference courts should give to regulators in interpreting federal statutes.

The ECOA prohibits discrimination against applicants for credit, but does not, on its face, extend to activities that have the effect of discouraging people from making applications in the first place. Nevertheless, this language has always been included in Regulation B, which states:

A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application. U.S. Code of Federal Regulations, 12 C.F.R. § 1002.4. General rules.

This is one of the basic, and I would argue one of the most important, concepts compliance officers learn. Nevertheless, as the courts become more skeptical of regulatory license when it comes to interpreting statutes, the extent to which the ECOA actually protects potential applicants is being openly questioned.

Specifically, in February a federal district court in Illinois ruled that a mortgage lender could not be penalized by the CFPB for violating the ECOA because his actions occurred before lenders had applied for a loan. In this case, the defendant ran a mortgage company in the Chicago area in which he repeatedly used racially charged language in reference to sections of the city populated primarily by minorities. He was sued by the CFPB claiming that his behavior deterred minorities from applying for loans. See Bureau of Consumer Fin. Prot. v. Townstone Fin., Inc., No. 20-cv-4176, 2023 BL 35566, at *5 (N.D. Ill. Feb. 3, 2023).

In making its ruling, the court concluded that the plain language of the ECOA clearly indicated that the statute just applied to applicants and, by implication, could not be extended through regulation to potential applicants. Crucially, this would mean that Regulation B, and its protections against actively discouraging potential applicants, cannot be enforced. In addition, this case cannot simply be dismissed as an outlier. As early as 2017, the Court of Appeals for the Fifth Circuit ruled that individuals could not sue banks for discouraging persons from applying for loans because this was a regulatory, not a statutory, prohibition. See Alexander v. AmeriPro Funding, Inc., 848 F.3d 698, 707 (5th Cir. 2017).

Now, I want to be abundantly clear: I am not suggesting that anyone engage in the type of activity described in this case or feel free to actively discourage individuals who are applying for credit. However, the issue of when the ECOA applies is, of course, vital to any institution that must comply with its provisions, especially now that it has been expanded to small business loans.

A second issue that I believe will ultimately be decided by the courts is the extent to which financial institutions can be penalized by the CFPB for failing to collect the demographic characteristics of small business borrowers. Even though Section 1071 explicitly provides that a borrower can simply refuse to provide requested demographic information, the CFPB accompanied the release of the final regulation with an enforcement guidance stressing that it would be scrutinizing lender conduct to ensure they are not effectively discouraging borrowers from providing demographic information.

If you’re thinking this is the type of regulation that will spawn a cottage industry of consultants and make it even more expensive to provide small business loans, you are correct. I’ve simply highlighted two potential issues, which are ripe for legal disputes and regulatory actions. There are undoubtedly several more chestnuts tucked away in the more than 800 pages used to introduce this new lending framework. Have fun – the clock is ticking.

Does the Equal Credit Opportunity Act Protect Potential Borrowers? - First Published in Credit Union Times

Time for a National Notarization Standard!

We learned a few good things during the pandemic. For me, right after teaching us that it makes sense to let people work from home, at least part of the time, and that “Breaking Bad” is one of the best shows of all time to binge watch, is that modernizing the notarization process by permitting notaries to remotely certify that documents are properly signed and witnessed is a great idea whose time has come. In fact, during the pandemic, virtually every state in the nation allowed some form of remote notarization.

Nevertheless, luddites remain. Just the other day, the IRS got an earful of complaints about its proposal to allow spouses to alter retirement benefits remotely, even though the proposal put forward by the IRS is more stringent than the one that was permitted during the pandemic. In addition, there are still a handful of states that don’t even allow any form of remote notarization.

This lack of uniformity makes absolutely no sense. It is a classic example of opposing change for its own sake even if it means forgoing obvious benefits. It’s time for Congress to pass a law, similar to one already passed by the House earlier this year (H.R.1059 – 118th Congress (2023-2024): SECURE Notarization Act of 2023 | Congress.gov | Library of Congress) and establish a uniform national standard for electronic notarization. Here’s why this is important.

First, while all but a handful of states now have some form of remote notarization, they don’t all use the same approach. For instance, some states use a strict Remote Online Notarization (RON) standard in which the person in need of notarization logs into an online platform and the notaries’ stamp is replaced with a unique electronic identifier. This allows the notary to confirm the authenticity of the signature in real time. In contrast, some states allow notaries to simply confirm a person’s identification over a Zoom link, stamp the document in need of notarization, and send the notarized document to the necessary parties. This is called Remote Ink Notarization (RIN). Both methods typically require the transaction to be recorded and stored.

This lack of uniformity raises questions as to the validity of transactions that take place in different states with different standards. For instance, there are some title insurance companies that won’t recognize documents notarized using the RIN technique. This shouldn’t surprise anyone who has dealt with title insurers before, who, if they had it their way, would still have mortgage documents signed in blood, sealed in wax and delivered by carrier pigeons.

Not only are title insurers uneasy about remote notarization, but so are some advocates for the elderly. For instance, one of the arguments against the IRS’s proposal is that it would make it easier for spouses to be manipulated into giving up benefits to which they should be entitled. I heard similar concerns when New York was working on its legislation codifying remote notarization. However, to date I have not seen any evidence that electronic notarization is more susceptible to being misused by fraudsters than the traditional notarization system. On the contrary, a system that mandates videotaping of notarizations is most likely more protective of consumers than the traditional system.

In addition, remote notarization actually helps people of modest means, such as that member who has to take a bus to a branch and hope that a notary is on duty, or the disabled person for whom physically getting to the credit union or bank is a hassle. Now both of these members can simply turn on the computer at the scheduled time and get the needed documents notarized.

All this goes to explain why I believe that H.R 1059 is a deceptively important bill that Congress can pass this year. The bill, which has already passed the House, would establish a national standard for remote notarization and preempt competing state laws to the extent that they would prevent properly notarized documents from being recognized in legal transactions. The bill includes a remote, online RON standard under which the notary would simultaneously certify documents using a unique, electronic identifier. This is good news for businesses and consumers and should help assuage the concerns of those who feel that the use of electronics facilitates shenanigans.

Humor me, there is actually something to be learned from the baseball season. Many baseball traditionalists feared that the game would be ruined by requiring that pitchers throw the ball, and that hitters swing at a ball within a certain amount of time. Instead of ruining the game, it is now better than ever. I can now watch an entire game without grabbing another cup of coffee that keeps me up until two in the morning. Similarly, remote notarization shouldn’t be feared. It is nothing more or less than the next logical step in the integration of technology into a more efficient banking and legal system. It is a subtle change that will make a big difference.

Time for a National Notarization Standard! - First Published in Credit Union Times

5 Things We’ve Already Learned From the SVB Bank Run

Although we are still feeling the aftershocks caused by the sudden collapse of Silicon Valley Bank in California and Signature Bank in New York, there are already lessons to learn and questions to ask as we deal with another increasingly common financial surprise.

1. Borrowing Facility Extended to Credit Unions

On Sunday evening, the Federal Reserve and the FDIC announced the creation of a new program that will allow both banks and credit unions to borrow against the par value of their investments for a period of up to one year. While the NCUA has been noticeably quiet, it’s important to know that credit unions are also eligible to participate in this program, which is apparently designed to enable financial institutions to sell collateral at a discount to meet a sudden run on deposits. Hopefully, few if any credit unions will need this help.

2. Let’s Make the Central Liquidity Fund Changes Permanent

Chairman Harper has told anyone who will listen that Congress should pass legislation making permanent recently expired changes to the NCUA’s Central Liquidity Facility. These changes made it easier for credit unions to get loans in times of economic stress and increased the amount of money that was available to help the industry. The events of the last few days have underscored that there is no good reason to deny a mature industry the ability to react to the unexpected.

3. NCUA’s Caution on Crypto Vindicated

I’ve said it before and I’ll say it again, the NCUA was right to take such a cautious approach when it came to permitting credit unions to provide services to the crypto industry.

4. Put Electronic Brakes on Bank Runs?

Whenever I think of bank runs, I think of the scene in “It’s a Wonderful Life” when Jimmy Stewart spots a crowd running toward the Bailey Saving and Loan, just as poor Jimmy and his saintly wife Donna Reed are about to leave on their honeymoon. In contrast, the modern bank run is epitomized by crashing computer networks as businesses go online to pull their funds from their accounts. What SVB’s demise has demonstrated is that modern bank runs are even quicker and more dramatic than their counterparts of the last century. We may need to consider putting automatic brakes on deposit withdrawals, the same way Wall Street automatically blocks trading if certain thresh holds are reached.

5. Who Elected the Federal Reserve?

In 1913, the Federal Reserve System was created with the esoteric but important goal of maximizing long-term economic growth by ensuring that there is adequate liquidity in the economy in times of stress. In contrast, the Fed is increasingly using its extraordinary powers in response to any economic downturn, irrespective of its severity. When the dust settles is it time to update this model? Simply put, if the American financial system is so fragile that it has to respond with emergency measures caused by the conservatorship of a large regional bank, then we need to take a holistic view of what’s wrong with our banking system as a whole. It’s bad enough that the largest banks are too big to fail, now we know that even smaller banks are too big to fail as well. Why does this matter? Because if your average consumer gets foreclosed on if he doesn’t pay his mortgage on time while some of the wealthiest people in America have the government rush in to protect their savings, then there is a question of fairness, which will only make it more difficult for people to believe in our government and economic system.

5 Things We’ve Already Learned From the SVB Bank Run - First Published in Credit Union Times

Reefer Madness

It’s becoming part of the holiday season ritual. With another Congressional cycle coming to a close, a deeply divided Congress rushes to put a spending plan in place replete with a smattering of unfinished business. Maybe this is the year that Congress finally passes legislation to allow credit unions and banks to provide banking services to marijuana related businesses and their employees in States where marijuana is legal. Common sense says it should, but experience says it won’t.

If my cynicism proves correct, Congress’ continued dithering puts even more pressure and responsibility on credit unions. The reality is that with 37 states in which marijuana is legal in some form, the question is no longer if your credit union is involved in marijuana banking, but how extensive is the involvement. The practical effect of Congress’ inaction is to make the business more expensive for smaller businesses that need capital and credit; and a compliance minefield for all but the largest and most sophisticated institutions that have the resources necessary to implement the proper framework for getting involved in an industry that remains patently illegal as a matter of federal law.

For Exhibit A of how cannabis is being integrated into the banking system, we have to look no further than the news that so-called cashless ATM transactions are no longer available for marijuana dispensaries. According to Bloomberg, this point-of-sale system allowed cannabis buyers to use a bank card instead of cash. The technology made marijuana purchases look like ATM withdraws coming from a location other than a dispensary. Needless to say, VISA put network participants on notice that it wanted the practice to stop.

All this leaves financial institutions to pick up the slack the best they can. For example, let’s say your credit union has decided that it doesn’t have the member demand or expertise to open up its accounts to marijuana businesses. It should still be asking the right questions to ensure that its members’ deposits are coming from non-cannabis sources. For instance, when it opens business accounts, is the business asked if it works with marijuana related businesses? And let’s say you open a joint account for a couple; would you be willing to give that couple a mortgage if you found out that one of them is employed in the marijuana industry? Neither of these questions have right or wrong answers. They are both a classic example of the type of issues that should ultimately be discussed by your Board so you have policies in place that are consistent with your credit union’s risk profile. But if you don’t ask these questions, you won’t even know that these issues need to be addressed in the first place.

Incidentally, whenever I research this issue, I always come across posts- typically from vendors – minimizing the legal issues involved with marijuana banking and stressing that according to FinCEN’s own statistics, there are already 553 banks and over 200 credit unions that provide marijuana services in accordance with FinCEN’s famous 2014 marijuana guidance. It’s what I call the “what’s the big deal” argument.

It’s a big deal because no matter how you slice it, there are complications that go along with providing services to an industry that remains unequivocally illegal under federal law. In fact, while the NCUA has been generally supportive of credit union efforts in this space, it has taken a tough stand against credit unions it feels are going about things the wrong way. For example, it issued a cease and desist order against Live Life Federal Credit Union in part because the credit unions’ BSA system was not sophisticated enough to appropriately comply with its obligations to monitor BSA compliance. Further, when the Fourth Corner Credit Union in Colorado was denied access to the Federal Reserve Bank of Kansas, the NCUA also denied the credit union’s participation in the Share Insurance Fund.

Where does all this leave us? With an ongoing need to protect your credit union the best you can by asking the right questions, drawing up appropriate policies, and hiring adequate staff to ensure that you have an appropriate legal framework in one of the most gray areas of the law we have seen.

Reefer Madness - First Published in Credit Union Times