3 Things That Your Credit Union Should Keep an Eye On

With the caveat that yours truly is having a tough time figuring out what is really important these days –  after all, why celebrate the fact that 50 years after Title IX, over nine million people watched a championship women’s college basketball game with some of the most incredible shooting you are going to see anywhere, when we can obsess over the proper limits of competitive trash-talking – the last month has seen three intriguing developments that are worth keeping an eye on, irrespective of the size of your credit union.

Is a Severance Gag Order Legal/?

I’ve heard a lot of talk in credit union land about the Federal Trade Commission’s proposal to do away with non-compete agreements. Meanwhile, back at the ranch, another erstwhile HR practice has already been curtailed. Earlier this year, the National Labor Relations Board (NLRB) reversed a 2020 decision of the Trump era board and severely restricted language in severance agreements that prohibits ex-employees from saying disparaging things about the old boss. (McLaren Macomb and Local 40 RN Staff Council).

When it issued its initial decision, the NLRB argued that it was doing nothing more than returning the law back to the way it existed before the 2020 decision. But a couple weeks ago, the NLRB’s counsel issued a memo (further clarifying the reach and importance of its reversal).  Most importantly, in response to being asked whether any non-disparagement provisions in a severance agreement were legal, the counsel noted that “it is critical to remember that public statements by employees about the workplace are central to the exercise of employees’ rights under the Act.” The counsel went on to explain that non-disparagement clauses banning “maliciously untrue statements” might survive legal review. And in yet one more twist of the knife for employers, this new standard applies retroactively. This case is the latest example of why it is best to keep your HR attorney on speed dial and your employee policies in pencil.  Yours truly would suggest making sure you review your severance clauses next time you’re going to let someone go.

Are Interest Escrow Requirements Preempted?

As early as 1991, the NCUA joined with the other federal financial regulators in ruling that state laws mandating that mortgage escrows earn a minimum amount of interest, are preempted under federal banking law. Now that interest rates are back in the news, there is renewed interest in these laws. In fact, today, there are approximately a dozen minimum interest escrow laws on the books.

Whether these laws remain preempted is an issue that has now divided the Ninth Circuit, which has upheld a California Law applied to federal banks (see Lusnak v. Bank of Am., N.A.) and the Second Circuit, which has held that a New York Law continues to be preempted. At issue is Title X of Dodd Frank titled “Preservation of State Law.” In this section, Congress was trying to scale back judicial and regulatory rulings under the National Bank Act, which provided strong preemption rights for federally chartered banks. Cantero v. Bank of America is the highest-profile opportunity the court has to address this issue. The court has not yet decided whether it will hear the case, but on March 27 it signaled its interest by asking the Solicitor General to weigh in on whether it should take it.

Captain Obvious here, but if the court moves forward, there is a lot of income at stake for larger institutions that engage in mortgage lending.

Accounting for Delinquent Loans Post Credit Deterioration

There is a reason why I did not take over my father’s accounting practice. Suffice it to say that from a very young age, it was apparent that me and spreadsheets just didn’t get along. Nevertheless, the Financial Accounting Standards Board is currently in the process of proposing what this non-accountant suggests is a commonsense change to the way delinquencies are accounted for following a merger or the purchase of a pool of assets that includes delinquent loans.

At a very high level, CECL has introduced financial institutions to the concept of Purchased Credit Delinquencies (PCD). Let’s say your credit union is the surviving entity in a merger; let’s assume that the credit union you acquired does not have many delinquent loans. Nevertheless, under existing CECL standards, you will have to evaluate the likelihood that some of those loans will ultimately become delinquent and account for that loss in your reserves. In contrast, let’s say the credit union down the street acquires a poorly performing financial institution with lots of delinquent home equities. Under existing CECL standards, that credit union can assume that the loan quality has already been reflected in the purchase price of the acquired credit union.  As a result, the delinquent loans do not have to be accounted for in that credit union’s reserves.

Critics of this anomaly argue that the existing standards have the effect of overvaluing poorly performing loans and undervaluing a strong loan portfolio. The board recently announced that it will be coming out with a comment period to consider changes that would address this situation.

On that note, enjoy the rest of your week and remember, always take time to see the forest through the trees when it comes to running your financial institution.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.