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Regulatory Issues - NCUA, Las Vegas, April 16, 2019

Presentation on regulatory issues in the financial industry, covering topics such as Bank Secrecy Act, lending concentration risks, consumer compliance, CECL, information systems, liquidity, and unspoken concerns of regulators.

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Regulatory Issues - NCUA, Las Vegas, April 16, 2019

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  1. Regulatory Issues - NCUAApril 16, 2019Las Vegas, NV Presented by: Bruce A. Pearson, Senior Partner

  2. Disclaimer • These materials were prepared by the attorneys of Styskal, Wiese & Melchione, LLP. Although this presentation was prepared with care, it is not designed to be a complete or definitive analysis of the law in this area. This is a California law specific presentation. Laws in other states may vary. Moreover, this presentation was prepared with the understanding that it reflects the authors’ perception of the state of the law as of this date. Furthermore, the information contained in this presentation is not intended to constitute and should not be received as, legal advice and does not in any way create an attorney-client relationship. • If you have any questions, or require further information on these materials, please do not hesitate to call our office at: (818) 241-0103.

  3. Bank Secrecy Act • NCUA’s Stated Focus • Money Laundering • Beneficial Ownership Rule • What’s Really Going On • No Patriot/Act Fin Cen Penalties • Cannabis Concerns

  4. Bank Secrecy Act (cont.) • Your Credit Union Should Consider • How Good is Your KYC and AML Software/Vendor?? • How Much Cannabis $ is Potentially Moving Through Your Credit Union? • Cannabis Cash is Everywhere • California’s #1 Cash Crop • $15B Annually

  5. Bank Secrecy Act (cont.) • Every FI is Handling Some Cannabis Cash • Openly Serve CRBs • Look the Other Way • Personal Accounts • Dry Cleaners, Window Washers, Car Washes, Laundromats • Unknowingly Serve CRBs • What is a CRB? • County Deposits?

  6. Lending Concentration Risks • NCUA’s Stated Focus • Large loss exposure caused by concentration • NCUA Letter to CUs 10-CU-43 • What It’s Really About • The Next Recession is Here, and NCUA Will Be Out in Front of it This Time

  7. Lending Concentration Risks (cont.) • What Your Credit Union Should Look At • Indirect Loans • Dealer agreement/recourse • Non-prime portfolio • Taxi Medallions • Mortgage Portfolio • HELOC - LTVs • 1st mortgages – concentration, FICO drift

  8. Consumer Compliance • NCUA’s Stated Focus • HMDA data • Military Lending Act • ECOA/Regulation B – overdrafts • What It’s Really About • Class Action Exposure

  9. Consumer Compliance (cont.) • What Your Credit Union Should Look At • Courtesy pay disclosures/program practices • And why are they publicly available on your website?? • Repeat Presentment NSF Fees • Disclosure says “per item” or “per presentment”? • Out of network ATM Fees • Fully disclosed? • State law compliant?

  10. Consumer Compliance (cont.) • Kill switch enabled vehicles • New York law • UDAAP elsewhere? • Force placed insurance • How good is your arbitration provision?

  11. Current Expected Credit Losses (CECL) • NCUA’s Stated Focus • Analysis of How CECL Will Affect Current ALLL Funding Levels • NCUA Letter to CUs 17-CU-05 • What It’s Really About • Concerns For Smaller Credit Unions • May Have to Double Reserves in Implementation Year • May Cause Major Capital Degradation

  12. Current Expected Credit Losses (CECL) (cont.) • What Your Credit Union Should Consider • Join Industry Attempts • Push Back Effective Date • Exempt Industry • Impact of CECL Upon: • Loan Types • Borrower Demographics • Loan Demand • Use of CUSO Lending?

  13. Information Systems and Assurance • NCUA’s Stated Focus • Security, Confidentiality and Integrity of Member Information • Automated Cybersecurity Examination Toolbox (ACET) • What’s Really Going On • Concerns Over Industry Data Breaches • NCUA Lost an Unencrypted Laptop in 2017, the Industry Shall Pay

  14. Information Systems and Assurance (cont.) • What Your Credit Union Should Focus On • New Privacy Laws • GDPR • CA’s New Privacy Law • What Data Does your System (and 3rd party vendors) Store • Vendor Contracts • Data Storage Protocols and Security • Reporting Requirements • State/Federal Law Compliance • Indemnity

  15. Liquidity and Interest Rate Risks • NCUA’s Stated Focus • Liquidity in a Rising Rate Environment • What’s Really Going On • Fear Over the Theoretical “Run” On the Credit Union • Fear About Reaches For Yield in a Low Interest Cycle • Negative Spreads

  16. The Regulator’s Unspoken Concerns • NCUA is the Last “Independent” Regulator • Congressional Concerns? • Can NCUA handle an increasingly sophisticated industry? • Is there justification for a separate industry regulator? • OTS – The Canary in the Coal Mine • Executive Compensation • Mergers • Disclosure obligations • Deal killer? • Board’s Level of Understanding

  17. The Regulator’s Unspoken Concerns (cont.) • Insurance Coverage • CU Level of Understanding • Perception of coverage vs. reality • Examples • Wire Transfers • D & O • Insurance Application Issues • Prior Dishonest Acts Condition • Wall Street Mentality – Mergers • Hostile takeover approach • Buy the CEO/Management team approach

  18. The Regulator’s Unspoken Concerns (cont.) • Vendor Management – “Bad” Contracts • Receivership context • NCUA’s FIRREA powers • But … Kaiperm FCU case • Inhibits mergers • Exams - • Bank examiner privilege • 12 USC 1785j

  19. What Should The Regulators REALLY Be Worrying About?? • PACE “Loans” • Energy Efficient Home Improvements • Repaid through taxes • Super lien priority • Independent Contractor vs. Employee Classification • CA Supreme Court Decision – Dynamex • Narrows use of ICs considerably • Class Action Potential

  20. What Else Should The Regulators REALLY Be Worrying About?? (cont.) • Digital Redlining • Facebook suit • Lender’s ability to target market

  21. What Else Should The Regulators REALLY Be Worrying About?? (cont.) • Cannabis Litigation • NIMBY lawsuits against growers • Facilitator lawsuits • Regulator and bank named as defendants • Whistleblower Lawsuits • Everyone is a whistleblower • Despite recent SCOTUS decision

  22. What Else Should The Regulators REALLY Be Worrying About?? (cont.) • NCUA Protections • Examiners Guide • Broad State Law Protections • Immigration Status – Loan Decisions • Perez v. Wells Fargo • Test case by Plaintiff’s bar • Outten and Golden law firm • ECOA/Regulation B • Permits consideration of immigration status

  23. What Else Should The Regulators REALLY Be Worrying About?? (cont.) • CA State Civil Rights Act • Actual and perceived citizenship status = protected class • Damages - $4k minimum statutory damages + attorneys fees • Form 1003 implications? • Civil Asset Forfeitures • Aggressive federal and state law enforcement • DEA’s aggressive use of RICO • Revenue sharing with local law enforcement

  24. What Else Should The Regulators REALLY Be Worrying About?? (cont.) • Lien Avoidance • Know or should have known standard • Must prove a negative in court • Cannabis – state level legalization • Impact on secured lending • Help On the Way? • SCOTUS Ruling – Timbs vs. Indiana

  25. THANK YOU! QUESTIONS? Contact Us: Styskal, Wiese & Melchione, LLP 550 North Brand Boulevard, Suite 550 Glendale, CA 91203 (818) 241-0103 www.swmllp.com bruce.pearson@swmllp.com

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