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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!

Accounting For The Next Financial Crisis

As I pointed out in a previous blog post, even though my father was able to get five kids through college and give himself the flexibility to play the occasional weekday game of tennis by starting his own accounting firm, it became painfully obvious at a very young age that his older son would not be following in his footsteps.  So, it is with that caveat that I am here to tell you that one of the most troubling issues on the regulatory horizon for credit unions has to do with changes proposed by the Financial Accounting Standards Board (FASB) which would make financial institutions anticipate and more quickly reflect investment losses on their balance sheets.

Under existing accounting standards, financial institutions must generally reflect investment losses on their balance sheets once they are incurred.  Under FASB proposal, 2012-260, this standard would be changed so that financial institutions would have to account for expected financial losses.  The distinction is between reflecting a loss that is going to happen and one that may happen given current economic conditions.

The rationale behind the change is a sound one as applied to financial institutions whose balance sheets are confusing to even the most sophisticated investors.  The intent behind the shift is to put investors in a better position to react to changes in a corporation’s financial condition before trouble strikes.  For example, in an analysis of the failure of small community banks and recent testimony before Congress, the GAO pointed out that existing accounting standards did not adequately capture the fact that community banks were aggressively moving into the commercial real estate market.  It opined that “loan loss allowances were not adequate to absorb the wave of credit losses that occurred when the financial crisis began, in part because current accounting standards for loan loss provisions require banks to estimate loan losses using an incurred loss model” as opposed to one that forces banks to more quickly recognize likely investment losses.

The vast majority of credit unions do not hold the type of sophisticated investments that cannot be adequately accounted for under existing accounting standards.  Application of a new forward looking standard will force them to adopt a whole new approach to accounting standards and ultimately reserve more capital even though the money could be better spent making prudent loans to their members and helping revitalize local communities. (Notice the slight dig against community banks, Keith?)  In addition, as cooperatives we do not have investors buying and selling shares based on a minute-by-minute analysis of the economy.  The overriding importance of accounting standards as applied to credit unions is that they adequately allow examiners to quickly and accurately assess a credit union’s safety and soundness.  The existing incurred loss model is more than sufficient to do that given the relatively low risk and static nature of most credit union investments.

Credit unions ultimately want to be treated as fairly as their financial institution counterparts by both regulators and legislators.  Sometimes in order for that goal to be achieved, regulators have to recognize that the unique structure of credit unions makes it impossible for them to be fairly subjected to a proposed regulation or accounting requirement.  If this proposal is finalized as currently written, it is time for NCUA to consider raising the threshold below which credit unions do not have to comply with GAAP standards.

What’s Next For Fannie, Freddie and Credit Unions?

As the pace begins to pick up in Congressional efforts to re-examine the tax code, credit unions are understandably nervous about even the whiff of legislation to do away with their tax exemption.  But another issue, on which they need to be ready to mobilize, is reform of the housing market.

According to today’s Wall Street Journal, a bipartisan group of Senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner is working on a proposal that would replace Fannie and Freddie with an entity that would act as a public guarantor of mortgage-backed securities.  I’ve commented in other posts about similar proposals that have been made by housing specialists.  The basic idea is that instead of having Fannie and Freddie buying mortgages from credit unions and banks, which they then package as securities, a public guarantee corporation would insure mortgage-backed securities against default in return for those securities meeting baseline underwriting standards.  It would not be in the business of buying mortgages.  Advocates of this approach argue that it would get the GSEs with their now explicit government backing out of the business of buying mortgages and competing against the private sector for securitization.  In addition, by guaranteeing mortgage-backed securities against default, the legislation would take its aim at one of the primary culprits behind the Great Recession.

Now for the bad news.  Credit unions need a secondary market in which to sell their mortgages.  Therefore, it is absolutely crucial that whatever structure ultimately is proposed by Senators includes a mechanism for mandating that securitizers not be able to discriminate in deciding what mortgages to buy.  This brings me to a second idea.  According to the same article in today’s journal, a second group of Senators led by Rhode Island’s Jack Reed, is floating a proposal that would reform Fannie and Freddie but not do away with them completely.  Whatever proposal is ultimately put out there by the Senate will have to overcome the opposition of House Republicans who honestly believe that but for Fannie and Freddie there would not have been a housing crisis.

I’ve learned my lesson over the almost two years that I have been writing this blog, and I am giving up predicting if and when Congress will ever take up housing reform.  But, if press reports are accurate, the process is finally moving forward, albeit at a snail’s pace.  I would like to see more of a discussion within the industry about what type of Fannie/Freddy world best protects the interest of credit unions and their members.

It was nice to see you all at the Sagamore.  Now get back to work!

End Of The World As We Know It?

In poker, as in life, you can do more harm than good by over-reacting to the worst case scenario.  For instance, if you fold every time someone raises, then you’re never going to be in the game for the big money.  Imagine if the Tom Brady, the Patriot’s quarterback, reacted to the news that his team had recruited Tim Tebow by demanding to be traded.  What does this have to do with credit unions?

Well, yesterday the Senate Finance Committee released a paper outlining possible tax reforms and not surprisingly one of the suggested reform options is the elimination or narrowing of the credit union tax exemption.  So first, let’s not over-react.  According to the Senate Finance Committee’s website, this tax reform options paper includes “ideas from across the spectrum and, as such, do[es] not necessarily have the endorsement of the Chairman or Ranking Member.”   In addition, let’s keep in mind that it would be difficult to find any proposal reconsidering the government’s tax policy over the last fifty years that doesn’t at least broach the subject of the credit union tax exemption.

But yesterday’s report is different.  First, as CUNA has correctly pointed out, tax reform has never been this seriously considered since at least 1986.  While it is looking increasingly unlikely that Congress will be able to seriously consider fundamental tax reform this year, who knows what the political winds will bring in the coming months.

Yesterday’s option paper might also signal a more nuanced attack on the credit union tax exemption.  By suggesting that Congress should consider tightening requirements for non-profit organizations exempted from the unrelated business income tax (UBIT), we may be seeing the first salvo in an argument in which credit union critics argue that they are not pushing to get rid of the credit union tax exemption in its entirety, but simply looking to make sure that the tax exemption only applies to activities related to the core functions of credit unions.  However, as we have seen in the IRS’s unsuccessful efforts to impose UBIT taxes on state chartered credit unions, if we allow the IRS to decide which activities and services are related to helping consumers, particularly people of modest means, we might as well all start converting to banks.

On that note, I’m going to go get some breakfast with my fellow credit union conventioneers in beautiful Bolton Landing, New York.  As I believe the Romans once said, let’s drink and be merry for tomorrow we may die.

The Fairest Way To Implement Dodd-Frank

Without much fanfare, the OCC announced that it will grant two year exemptions to the nation’s seven largest banks from  a Dodd-Frank mandated requirement that large financial institutions “push out” their swap operations to non bank subsidiaries.  The idea behind the provision is that federal insurance guarantees shouldn’t be used to bail out investment banks that make bad bets on tricky derivatives.  We are told that the two year extension will facilitate the orderly implementation of this requirement.  Who wants to bet that Bank of America, Citibank et al will ever have to comply with this regulation?

Now, from what I have read on this subject there are strong arguments both for and against the provision, but frankly good and bad arguments can be made about all of the most contentious provisions of Dodd-Frank.

We are coming up on the third anniversary of its enactment and astoundingly only 38% of its provisions have been implemented.  It is becoming increasingly obvious that for the biggest and well-connected institutions — aka the institutions most responsible for necessitating financial reform in the first place — regulators will do everything they can to accommodate their wishes.  As the former Inspector General of the TARP program commented when hearing about the latest regulatory capitulation “regulators continue to kowtow to the financial interest of the largest banks rather than inconvenience them.”

Of course this isn’t fair.  Credit unions have less than six months now to comply with mortgage and servicing requirements that will have a profound impact on the way they provide home loans to their members, even though they are not responsible for these onerous mandates.

I have a solution.  Let’s pass a simple amendment to Dodd-Frank providing that no provision or regulatory requirement of the act shall take effect until all of its requirements are imposed on the ten largest financial institutions in the country.

This simple amendment would tie the regulatory burden of credit unions to the lobbying efforts of our nation’s financial giants.  We would get no worse a deal than that negotiated by J.P Morgan’s government representatives.  It would also put Congress in the uncomfortable position of actually having to push for Dodd-Frank to be implemented.

Of course this would never happen.  Instead, the way Dodd-Frank is taking effect Congress and the President can say they reformed Wall Street; Wall Street gets to carry on as usual and when consumers complain about the lack of Wall Street reform, Congress can blame regulators on the one hand while continuing to take campaign contributions from the very banks fighting Dodd-Frank with the other.

Three years ago, I had no patience for armchair extremists who saw conspiracies behind every rock of our political system.  But when I compare the enormity of the problems exposed by our financial crisis with the paucity of fundamental reforms, it is getting harder and harder to brush aside the reactionaries.  It is pathetic to see credit unions burdened with regulations that they didn’t need in the first place while the institutions that truly need reigning in effectively choose the mandates with which they will comply and continue to conduct themselves in a manner worthy of Russian oligarchs who know that they can get away with anything they want, just so long as they keep the political overseers happy.

 

What To Do When The Ex-Con Wants A Job

With the announcement that it is suing two companies for policies that discriminate against the hiring of felons, the Equal Employment Opportunity Commission (EEOC) is sending a message loud and clear that it is dead serious about putting teeth into its guidance released last April stressing that employers can not categorically refuse to hire someone simply because a criminal background check reveals they have been convicted of a crime.

The EEOC’s stance poses unique challenges for credit unions.  On the one hand, the EEOC is signaling that it is taking a hard line on employment policies that cast too wide a net in excluding individuals convicted of crimes from employment, at least in those cases where the job they are seeking is not impacted by their past criminal conduct.  On the other hand, 12 U.S.C. 1785 (d) prohibits credit unions from hiring any person “who has been convicted of any criminal offense involving dishonesty or breach of trust” or who has entered a “pre-trial diversion program” in connection with a prosecution of such an offense.  This categorical ban lasts for 10 years; however, credit unions may apply to the NCUA for a waiver.  It also does not apply to “deminimous” offenses.  In its guidance the EEOC concedes that employers complying with federal mandates in refusing to hire an individual or keep her employed are not violating discrimination law.  However, it is also quick to point out that policies that go beyond what is mandated by federal law could run afoul of discrimination prohibitions.  For example, your credit union could not categorically ban an applicant convicted of a crime in the last 20 years.

So what is a credit union to do?  The best way of trying to meet these employment demands is to establish policies and procedures where each individual applicant will be judged on the specific facts of his or her circumstances.  So, for example, before simply refusing to hire someone who has been convicted of a bannable crime, you should give the applicant an opportunity to explain the facts and circumstances surrounding the offense and determine whether this is someone for whom the credit union should apply for an NCUA waiver.

If this sounds complicated, it is.  So, take the time to call in your HR Director and put a call in to your attorney responsible for handling HR issues.  Now I am going to get on my soapbox for a second.  If anyone from NCUA should happen to read this blog post, it would be extremely helpful if the agency would issue an updated guidance explaining how NCUA’s interpretation of its employment prohibition can best be implemented in light of the EEOC’s policy guidance.

On that note, get to work!

Overdraft Protection And Regulatory Overkill

Late yesterday, the CFPB unveiled a report on overdraft fees.  Although it hasn’t yet proposed any regulations on this matter, you know where this is headed with the certainty of a Met fan watching his team’s relentless assault on 100 losses this season:  they’re both inevitable.   In fact, no area of regulation better exemplifies why the CFPB and modern day consumer advocates are so misguided in their approach to regulatory oversight.

First, some good news.  The CFPB acknowledged that the opt in requirements mandated since 2010 had made a material difference in reducing unwanted overdraft protection on the part of consumers.  Second, the report provides additional evidence of what financial institutions have known for a long time, that overdraft protections are disproportionately used by a relative handful of consumers.  I would argue that most of these people are making a rational choice to give themselves protection against bouncing their mortgage payment because they don’t have the time or inclination to balance their checkbook.

So, does that mean we can move on to another regulation, confident that the money and time we have invested in complying with these regulations has been well-spent?  Of course not.  The CFPB remains concerned with the wide variance of members who have opted in to overdraft protections on a financial institution to financial institution basis.  As it surmises in its conclusion, the wide variance in opt in rates most likely reflects differences in marketing approaches to maximize fees paid.  The inevitable solution will, of course, be well-designed, easy to read disclosures, which I wouldn’t be so opposed to if I thought the people most likely to avail themselves of overdraft protection were the type of people to read and act on disclosures in the first place.

To me, no area of regulatory concern better epitomizes what’s wrong with the approach of the CFPB and consumer advocates in general when it comes to regulation.  Cass Sunstein (formerly President Obama’s regulation czar, and author of Nudge, the best explanation of the intellectual framework animating the CFPB’s work) explains in an essay in Foreign Affairs that the modern day consumer nudgers ”recognize the importance of freedom of choice” but — and there’s always a but –” people may err and that in some cases most of us could use a little help.”  In other words, it’s the role of government to not only recognize when people are acting stupidly, but to mitigate that poor judgment by having apolitical regulators guide them towards the right choices.

For credit unions, this means that every regulation is a first draft to be refined until enough members act the way rational people would act.  It’s a beneficent view of government’s role that has a certain facial appeal until you realize that the underlying assumption is that you can fool all the people all the time and that only government stands in the way.  No thank you.

Do We Spy On Our Members?

The news reports over the last few days detailing the extensive nature of the government’s data collection efforts make this as good a time as any to broach a question that’s been bugging me for a long time now.  Does the government have too much power to compel financial institutions – both credit unions and banks — to disclose personal financial information about their members and customers?  Increasingly, I think the answer is yes.

First, does the ability of the federal government to track financial activity through suspicious activity reports (SARS) help thwart terrorism?  Absolutely, but as anyone involved with the financial industry knows, the information collected extends well beyond terrorism or, for that matter, any activity that could pose a direct and imminent threat to citizens.  Elliot Spitzer maybe guilty of incredible hubris and extremely bad judgment, but is he a terrorist, drug dealer or money launderer?  Remember that the government only discovered Client No. 9 because of a SARS.

And the truth is that every year, financial institutions are coerced into filing more and more SARs involving potential criminal activity using a standard that would get a prosecutor laughed out of court if he tried to use it to subpoena someone’s bank documents.  How are you coerced?  Well, the way the regulatory scheme is set up, if there is any doubt at all as to whether or not you should file a SAR, the safe thing to do is to file it.  The member can’t sue you and how many of you have been criticized by your examiner for filing too many SARs as opposed to too few?

“What’s the big deal?”, you say, my members aren’t criminals and they don’t find out about SAR filings anyway.  Okay, fair enough, so starting tomorrow I want you to post the following sign in your credit union lobby:

1) pursuant to federal law, [i]f a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily . . . reports a suspicious transaction to a government agency–

a) no one from the financial institution may legally inform you that such report has been made or why it was made; and

b) no government official or affiliated individual may inform you that you’ve been the subject of a SARs report, and

c) the financial institution has complete immunity for filing a SARs but may be subject to regulatory sanctions for choosing not to do so.

Call me old-fashioned, but I believe in protecting my privacy and that what I do with my money is my own business.  For too long now, Congress has paid lip service to protecting financial privacy concerns in public while creating an ever widening back door to access financial data.  There may be some crimes or activities that justify these intrusions, but right now there are inadequate safeguards for people like myself who think that it should be difficult for the government to find out what I am up to.