Groundbreaking legislation. Political intrigue. Indecipherable regulations. If you get chills of excitement just thinking about these topics, this is the blog for you! Henry Meier is taking on the latest laws, regulations and political issues that impact New York credit unions, so read often and join the conversation!
This week, Apple Pay went live. You all should know about it by now, but Apple Pay permits consumers to pay for goods at participating retailers with the wave of an iPhone. As readers of this blog will know, I am a big fan of Apple and its technology, but I am also concerned that if Apple Pay is successful it could exacerbate a financial system of haves and have nots. Most notably, only a handful of the nations largest banks and its largest credit union were selected to unveil the technology.
So I was pleased this morning when I saw news that Visa is working with hundreds of financial institutions to enable them to accept the technology in the coming weeks. I was especially pleased when I spotted a fair number of credit unions on the list. I applaud them for this foresight and I certainly hope to see more and more credit unions joining in the coming months. I understand that this is not a win-win situation. Apple is taking a cut of transactions that members would probably have used debit cards for anyway. But times change and pretty soon no one will be using plastic. The technology makes it obsolete.
Could You Survive An Economic Doomsday?
The Fed released the scenarios it will use to stress test the ability of the nation’s largest banks to withstand economic Armageddon. Specifically, bank holding companies with $50 billion or more in assets are required to test how they would withstand a multi-year contraction and state member banks with consolidated assets of $10 billion or more must also conduct stress test.
In this year’s “severely adverse scenario” (I love bureaucratese) U.S. corporations experience “increases in financial distresses that are even larger than would be expected in a severe recession, together with a widening in corporate bond spreads and the decline in equity prices.” But wait, there’s more. The price of oil goes up to $110 per barrel and the unemployment rate increases by 4%. Fortunately, these are not predictions, simply worst case scenarios intended to assess the resilience of our financial system.
On that cheery note, have a great weekend.
Although the finalization of QRM regulations on Tuesday garnered all of the media attention the week’s news that will have the biggest impact on your credit union is yesterday’s announcement by the Clearing House that it is committed to “a multi-year effort to build a real-time payment system to better meet consumers’ and businesses’ expectations in an increasingly digital economy.” The Clearing House is an association composed of the world’s largest banks; they own the world and process a good chunk of its payments. Considering the size and reach of these banks, whatever platform they develop will become the standard for all financial institutions.
Just how big a deal is this? For one thing their commitment to modernization is Spot-on. the payments system is woefully out of date. Its legal framework is derived from a time when there were no computers let alone smartphones. As a result the financial industry is still quibbling over midnight deadlines and signature recognition while Wall Street completes trades between anonymous counterparties in nano-seconds and college kids transfer funds between each other with the touch of a smart phone. The system is woefully antiquated and out of touch with consumer expectations.
The announcement also shows just how quickly banking is getting away from banks and by extension credit unions. According to this morning’s press reports (see the links at the bottom of the blog) just two years ago the Clearinghouse was instrumental in killing a proposal to develop a real-time payments system. In the last two years Apple, GoBank and Wal-Mart just to name a few have shown just how easy it is to empower the consumer to expect seamless real-time financial transactions. The same consumer that can waive a smart phone to buy lunch isn’t going to tolerate a system where money is “provisionally credited” to his or her account. And don’t overlook the bitcoin. It’s demonized as if it’s a technological Ebola virus but it demonstrates that it is possible to exchange a currency without the use of a bank or credit union.
Where does all this leave credit unions? I honestly don’t know but I wish the industry was giving more thought to what it expects out of the payment system of the future. A changing payments system will mean technology upgrades, new legal obligations and regulations. Credit unions are stakeholders in the system and its time for credit unions of all shapes and sizes to jointly develop industry specific principals for what a new payments system will look like. Now is the time to think and think quickly.
Yesterday, the FDIC became the first agency to finalize qualified residential mortgage regulations mandated by Section 941 of the Dodd-Frank Act. To understand how big a deal this is, think of those ridiculous Hollywood disaster movies where Earth narrowly avoids a speeding meteor the size of the Empire State Building that will end life as we know it. Yesterday’s announcement will have no direct impact on credit unions. In fact, the NCUA is the only financial regulator not required to join in issuing QRM regulations because credit unions don’t issue asset-backed securities. Nevertheless, yesterday’s actions have important consequences for any institution providing mortgages.
Here is some background. The CFPB was responsible for regulations defining qualified mortgages (QM). These are the regulations that have already taken affect. This blog discusses Qualified Residential Mortgages (QRM).
One of the major causes of the mortgage meltdown was an explosion of mortgage-backed securities. Banks and mortgage companies lowered lending standards in part because of the insatiable appetite of Wall Street for mortgages. Investment banks would package mortgages into securities, which were sold with painful consequences for many investors including the failed Corporates. Critics of the system argued that securitizers, generally the investment banks that created these bonds, needed to have a financial stake in the bonds that they were selling.
Section 941 of the Dodd-Frank Act responded to this concern by establishing minimum risk retention requirements for issuers of mortgage-backed securities. Specifically, securitizers are required to retain at least 5% of any asset-back security they issue. But an important exception was made. Joint regulations were to be issued by the federal banking agencies, HUD and the FHFA defining what constitutes a qualified residential mortgage within 270 days of Dodd-Frank’s enactment (so much for deadlines). The definition is crucial because the 5% risk retention requirement does not apply to mortgage-backed securities comprised of QRMs. Congress also mandated that the QRM definition could be no broader than the CFPB’s definition of a qualified mortgage (QM).
Here comes the speeding meteorite part of today’s blog. The regulators responded to their mandate by proposing that QRM mortgages be required to have a maximum loan-to-value ratio of 80%. Imagine a world in which only mortgage applicants with at least 20% to put down on a home could qualify for a mortgage. Level-headed people responded to this suggestion by proclaiming “the death of the American Dream.”
Yesterday’s actions officially put an end to this game of chicken with the trade-off that the CFPB is even more powerful than ever before. Why? At the end of the day, the regulators decided that a QRM is any mortgage that meets the Bureau’s definition of a qualified mortgage. This means that if you want the ability to sell your mortgages to a secondary market participant, your mortgages must meet either the CFPB’s qualified mortgage standards or be eligible for sale to the GSEs. Remember that you don’t have to underwrite to QM standards so long as you can document why a member has the ability to repay her mortgage loan and you are willing to retain the mortgage.
One editorial comment. The regulators did the right thing yesterday, but yesterday’s announcement is another example of how Dodd-Frank does precious little to address the underlying causes of the Great Recession. If you want to avoid reckless underwriting in the future, then by definition that means imposing more stringent underwriting standards.
Sometimes people there is no way to make this stuff interesting but you should pay attention nevertheless,
Reg. Relief on Privacy Notices
Our good friends at the Bureau That Never Sleeps (The CFPB) finalized regulations giving financial institutions greater flexibility when providing members those meaningless privacy notices required under federal law.
Your credit union is required to send out annual privacy notices informing members of their privacy rights in relation to the sharing of information with third parties. These notices can be confusing to members and worthless since they have to be sent out even when there have been no changes to a credit union’s third party relationships or privacy obligations. The CFPB has finalized regulations permitting you to post the required notices online in lieu of mailing them provided certain conditions are met.
It’s a win-win. Members get less confusing junk mail and credit unions get to save time money and a whole bunch of trees. Here is a link to the final regulation… On the downside, with the nights now getting cold I personally find that snail mail is a great way to spark a fire.
There are requirements to satisfy before you can begin online posting so read the regulation before you put away the stamps.
When is a restructuring a Troubled Debt Restructuring for accounting purposes? That is the question or at least the question that has vexed NCUA and other regulators since 2012. On the one hand they want to encourage institutions to provide a lifeline to members who can stay above water with a little help; on the other hand they don’t want to encourage credit unions to rearrange the deck chairs on the titanic.
As explained in a 2012 Supervisory Guidance” The credit union must provide the examiner an analysis to support its determination the extension, renewal, deferral or rewrite is, or is not, a TDR. The credit union must provide a well-documented analysis that illustrates (1) whether the borrower is experiencing financial difficulty and (2) whether the credit union granted a concession it would not otherwise consider except for the borrower’s financial difficulty. The credit union’s conclusion and rationale must be clearly stated in supporting documents.”
If this sounds like a highly subjective standard it is. The key take away is that your TDR determinations should be made in a systematic way. (By the way I love the fact that accountants are perceived as buttoned down, straight-laced Black-And-White guys and gals while attorneys get pegged as the rule benders. Accounting lends itself to more creative interpretation than a Picasso painting).
A September 30th Accounting Bulletin released by the NCUA provides further TDR clarification. The good news is that just because a loan workout has been classified as a TDR doesn’t mean it must remain so Specifically if a TDR is restructured and, “If at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted by the institution to the borrower” the loan no longer has to be treated as a TDR.
Here is a link to the bulletin and a useful Supervisor Guidance
http://www.ncua.gov/Legal/GuidesEtc/AccountingBulletins/ACCTBUL14-01.pdfHere is the link to the bulletin
When a President has to react to a serious problem but doesn’t know what more he can do to solve it he appoints a “Czar” as in a “Drug Czar” or “Ebola Czar.“ When a President has ideas about how to solve a problem but can’t get anyone to agree to his solution, he holds a summit.
The President is a smart guy who knows that cybersecurity is a major issue about which Congress has failed to act. Last year, 100 million consumers were victims of data breaches. So this past Friday, the President announced that he would be hosting a cybersecurity summit.
While the bully pulpit only goes so far, the actions announced by the President and major retailers on Friday underscore that, for card issuing credit unions, October 2015 looms as one of the biggest compliance deadlines. As you probably already know, October 2015 is when that liability shifts for card issuers and merchants accepting Visa and MasterCard that don’t have chip-and-pin technology.
Starting in October of 2015 a merchant with a payment terminal that doesn’t use chip-and-pin technology will be liable for the costs of any unauthorized Point of Sale transactions involving a member with a chip-and-pin card. Conversely, if a card issuer can’t process EMV transactions, it is on the hook for the liability. The shift was first unveiled in 2012 to give everyone more than adequate time to adopt the new technology but, until recently, I was skeptical of just how important the deadline would be. Making the shift costs money. Issuing chip embedded plastic isn’t cheap compared to the erstwhile magnetic strip and retrofitting payment terminals isn’t cheap for merchants.
But the days of mutually assured indifference are over. Speaking before employees at the CFPB on Friday, the President unveiled an Executive Order mandating that credit cards and credit-card readers issued by the United States government come equipped with chip-and-pin technology starting next year. The President also announced that he was ordering federal law enforcement to share more information with the private sector when they discover identity theft rings.
Finally, the President announced that “a group of retailers that include some of our largest — Home Depot, Target, Walgreens, Walmart — and representing more than 15,000 stores across the country, all of them are pledging to adopt chip-and-pin technology by the beginning of next year.”
Now, I have said it before and I will say it again. Industry-wide adoption of chip-and -pin is no panacea. The technology is already old and does nothing to prevent online fraud. But the events of Friday underscore that it is time to get moving on adopting this technology if you haven’t done so already.
Here are some links for additional information:
Is the Bankruptcy Code to blame for difficulties students experience modifying their private student loan obligations? That is the implicit question posed by the CFPB in its annual report analyzing the student loan industry. According to the report, which summarizes data from complaints received by the CFPB over the previous year, students seeking repayment options for private student loans are facing many of the same obstacles homeowners face after falling behind on their mortgages.
According to the report, since the Bureau began accepting private student loan complaints in 2012, the most common complaint comes from borrowers seeking to avoid default when they face financial hardship. According to the Bureau, its findings suggest that lenders and servicers “have yet to address the need for loan workout in a fulsome manner.”
What would the CFPB do? In 2005, one of the changes made to the bankruptcy code was to make private student loans non-dischargeable in bankruptcy. At the time of this change, similar protections had already been granted to federally subsidized student loans. The CFPB is recommending that Congress revisit the PSL exemption “to determine whether the special bankruptcy protection afforded to lenders should be limited to those who offer certain loan modification options.” Remember, the CFPB has already put in place a regulatory framework mandating that lenders work in good faith with homeowners who are struggling to make their mortgage payments.
The nation’s rising level of student loan debt is a serious and growing problem. As I’ve pointed out in a previous blog, there is even growing evidence that student debt is holding back the housing recovery by making it more difficult for people to afford their first house. What concerns me about the CFPB’s recommendation is that it adds fodder to an increasingly ideological and divisive debate about the root causes of student debt.
Let’s look at issues surrounding education finance. But let’s not analyze the issue in isolation. College tuition has skyrocketed and shows no signs of letting up. Looking at the amount of debt being amassed in this country to get an education and focusing exclusively on lenders is tantamount to blaming the woes of the NY Jets on their quarterback, Geno Smith: it might be comforting, but there are some issues for which there are no easy solutions.
Well I’m off to enjoy my morning yogurt. It’s going to taste extra good now that Governor Cuomo has signed legislation naming it the official state snack.
In today’s blog I come not to criticize the CFPB, but to praise it.
Earlier this week, it proposed further amendments to its Integrated Disclosure requirements that take effect August 2015. These Dodd-Frank mandated amendments replace the erstwhile Good Faith Estimate with a Loan Estimate. The amendments proposed this week are not big deals. They are tweaks that won’t keep you from cursing Dodd- Frank; but the very fact that the amendments are being proposed speaks volumes about the good side of the CFPB.
Does the CFPB have too much power? You bet It does. Does the Bureau That Never Sleeps pay too little attention to the burdens it is imposing on industry? Absolutely. But a good regulator is like a good umpire: You might disagree with the dimensions of his strike zone but a good umpire like a good regulator approaches regulations and their enforcement in a consistent manner so that everyone knows when they have missed the strike zone. By this standard, the CFPB is doing a great job.
Under the integrated disclosure requirements that take effect in August 2015-remember, they combine the separate disclosures currently mandated under TILA and RESPA-lenders are permitted to redisclose Loan Estimates when a mortgage interest rate is locked. For the redisclosure to be valid, the regulation currently provides that it has to be made “on the day the interest rate is locked.”
When the integrated mortgage proposal was put forward the rate-lock provision did not get all that much attention; the Bureau assumed that requiring same day redisclosure was not a big deal for lenders because they knew the rate they were going to charge. The CFPB could have obstinately refused to reconsider the regulation after it issued them in final form. Instead, it continued to listen to affected industry participants, was convinced that the requirement would be more difficult for lenders to comply with than it originally assumed and is now proposing to amend the final regulation to authorize a revised Loan Estimate to be issued no later than the next business day after the rate is locked.
A second proposed revision announced this week is targeted towards new construction loans. It permits creditors who reasonably expect settlements to occur more than 60 calendar days after initial disclosures have been issued to state on Loan Estimates that they may issue new disclosures.
The political environment is so weighed down with justified cynicism that the CFPB often catches the institutions it regulates off guard by remaining true to its mission. Before it changes a regulation its primary question is: will the change benefit, or at least not diminish, consumer protections? For example, in the preamble to these proposed amendments the CFPB argues that giving lenders until the next business day to redisclose loan estimates will benefit consumers by giving them more time to accept loan offers.
Then there is the intangible benefit of dealing with a regulator that writes and explains regulations more clearly than any other. You may not agree with its mortgage regulations but it has provided material designed to help even the smallest lender comply with them.
I apologize but I am still thinking about the Kansas City Royals crashing into over and under walls to make catches and I can’t get baseball metaphors out of my head. The bottom line is that the CFPB has a consistent strike zone. Its overriding mission is to protect consumers. When commenting on one of its proposals, it is incumbent on industry participants to quantify regulatory burdens with concrete operational examples and to suggest alternatives that will not diminish consumer protections. I will continue to disagree with the parameters of the Bureau’s strike zone but also give it much-deserved credit for the consistency and diligence with which it is carrying out its mission. Here is a link to the proposal which also includes other technical changes..