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!
That is my most important takeaway from the FDIC’s biannual survey of unbanked and under-banked households that was released yesterday. If you are interested in getting these potential members into your branches-as credit unions you have an ethical and legal obligation to try to do so-you better find a way of competing with the prepaid card.
“The survey results suggest that sizeable proportions of unbanked households and, to a lesser degree, under-banked households, relied on prepaid cards for many of the same purposes that households associate with checking accounts” Its authors conclude.
According to the report 7% of US households are unbanked but a staggering 20 percent of households are under-banked meaning they have an account but have obtained services from nonbank alternative financial service providers in the last 12 months. The unbanked rate is down from 8.2%.
The survey reveals that nearly 8% of all households use prepaid cards and 22.3% of unbanked households have used prepaid cards in the last year. Clearly this is a growing market and it’s going to get bigger but the report underscores just how difficult it is to break into this market. On the one hand almost half of unbanked prepaid card users plan to open up an account in the next year but here is the catch: Only 10% of all households obtained their prepaid cards from branches and among the unbanked, where distrust of banks is higher, only 4% do. It will be interesting to see how many of the unbanked really do open up accounts. I have my doubts because as prepaid cards offer more of the conveniences and consumer protections of traditional accounts many people won’t see the need to make that first visit to the bank or credit union.
I have always been squeamish about prepaid cards because people at the bottom rung of the financial climb need to open up accounts to climb to financial security. But prepaid cards are here to stay and if these survey results are accurate offering them may be a great way of exposing the unbanked to your credit union. Based on this survey if I was putting together a prepaid marketing plan here are the key points that I would want to get across to consumers looking for a Prepaid Card: Credit Unions are (1)Trusted partners that can (2) Offer you the convenience of prepaid cards and are (3) backed up with the safety and security that comes from belonging to a financial institution protected by your friends and neighbors.
The report is a great resource. Here is a link.
RIP Quantitative Easing
With the Fed’s announcement yesterday that it was no longer going to make additional purchases of long term treasury bonds and mortgage backed securities it means that the most aggressive long-term intervention by the Fed into the broader economy will be coming to an end almost. Remember that the Fed will still be rolling over its existing bond purchases so it will be continuing to exercise downward pressure on long-term interest rates. Yesterday’s FOMC statement also indicates that the fed is not concerned that the recent downturn in the global economy, which played such a big part in Wall Street’s recent gyrations, fundamentally alters the outlook for US economic growth. If the conventional wisdom is correct expect short-term rates to rise the middle of next year.
They Might Be Giants
With their third world series win in five years the Giants must now be considered the most dominant team in baseball. They can’t be considered one of baseball’s great flukes anymore. They win when it matters the most.
I like it when good teams consistently win championships because championships should be difficult to win. The Royals lost this year but their lose will make their eventual World Series victory that much sweeter. My only question is: Why is it that when the Yankees win four World Series in the 90’s with strong starters, dominant relievers and a solid lineup of great defensive players its considered bad for baseballs, but everyone celebrates the resurgence of the game when the Giants win with the same formula?
My friend Chris Pajak, who handles the HR consulting for the Association, has had the good fortune to work across from my office for the last several years, but the honor has not been all his. From listening to Chris respond to a wide variety of HR questions ranging from the thought-provoking to the down-right bizarre, I have been able to keep my finger on the pulse of trending HR issues.
Recently, he got a question about what steps an employer could take to monitor the health of an employee who had just returned from a trip to Africa? It’s a darn good question. Yesterday, the Bond, Schoeneck and King law firm released an excellent Q and A on employment issues related to Ebola. Rather than give my own two cents on an extremely fluid and complicated area, I am going to suggest you take a few minutes to read their post this morning.
However, I can’t resist just one editorial comment. When it comes to Ebola, let’s use some common sense. Don’t get caught up in the idiotic media frenzy. You have a hell of lot better chance of dying from the Flu than from Ebola. On that happy note, drink and be merry. . .
Imagine if every decision you make could be scrutinized not just by your supervisor but by any stranger with an interest in knowing what you are doing. These strangers would not only be able to look at what decisions you made but the information you analyzed to make it. If they had the time, they could compare the decisions you made to the decisions made by your counterpart down the street. Would this type of scrutiny influence your decision-making process for the better? Would you be more cautious or more aggressive? Would you feel as if your privacy had been violated?
If you do mortgage underwriting for a living, these are not hypothetical questions. Tomorrow is the last day to submit comments on the CFPB’s proposal amending Regulation C. Regulation C requires all financial institutions with $43 million or more in assets to record key mortgage application information in a LAR. The information is available to the public and regulators. If the CFPB goes forward with its plans, we are about to make a dramatic shift in banking. You will be making your underwriting decisions in a fish bowl. Look at your underwriting file, strip away the applicant names and social security numbers and you pretty much have your new LAR. Think I’m exaggerating? I lost count, but I believe there are 25 additional data points that the CFPB is proposing to collect, the majority of which aren’t mandated by Congress but proposed by the Bureau that Never Sleeps. The drive for transparency could help bring about a more mature debate about this nation’s housing policies but, ultimately, it will provide more data for opposing sides to cherry pick and limit your business judgment along the way.
First, some clarification with apologies to those of you for whom this is basic stuff. HMDA was passed in 1975 for the purpose of giving the public, regulators, and policy makers access to data about banking activity in urban areas. Congress was investing big money into urban revitalization efforts and highly suspicious of bank red lining activities. By making sure that larger banks reported information about their lending decisions, Congress could see what impact its policies were having on banking commitments and whether more need to be done. The statute was never applied to all financial institutions and wasn’t intended to enable the tracking of individual loans. Information is broken down by census tract, which is more than sufficient to identify distinct lending patterns, particularly in urban areas. Today, unless you make the aforementioned $43 million dollars you don’t have to comply with Regulation C. Furthermore, the Bureau is proposing a threshold of 25 mortgages below which financial institutions wouldn’t have to comply with Regulation C, regardless of their size.
What regulators and, to a lesser extent, Congress are seeking with these proposed regulations is something quite different. Mortgages would be reported by property address as opposed to census tract and the Bureau wants to be able to track all loans at every stage of the lending process. Both an applicant’s credit score and the “scoring system” used by the financial institution in making the lending decision will be reported, and the reasons for a denial would be included in the LAR. (Currently, members have a right to know the reasons a loan is denied but it isn’t included in data collected and ultimately aggregated under HMDA). These are just a few examples of a much more expansive list. The majority of this information is not required by Congress, but by the CFPB.
What’s wrong with a little underwriting sunshine? First, as one commenter has already pointed out to the CFPB, the information it is seeking is so detailed that private information is at risk of being exposed to the general public. Considering that the Bureau has already been criticized for its data protection safeguards, this is not a minor concern.
But let’s look at the big picture. There has always been distrust between banks and poor people, particularly minorities and immigrant groups. Credit unions are able to bridge that divide and banks have made tremendous strides in ending biased lending practices, but the distrust is still there and it profoundly impacts policy. Banks used to be accused of redlining — refusing to lend to people in certain areas because of its racial makeup. Today the industry is accused – I believe unfairly — of exacerbating the Mortgage Meltdown by lending to those same communities but with sub- prime loans that borrowers couldn’t repay. Was there reckless underwriting? Absolutely. Are there individuals more than willing to discriminate against other individuals? Absolutely. But was the Mortgage Meltdown and subprime lending motivated by systemic racism on the part of large groups of lenders looking to rip off minorities? No.
Behind the push to expand HMDA is a belief that with enough data, housing advocates can prove that we can have a housing system that provides reasonably priced loans and a house to everyone who wants one. I believe that what more data will show is that, in an age of computer generated lending decisions, systemic racism is extremely rare.
Many of the problems that HMDA was designed to assess are still around today, but it is dangerously simplistic and counterproductive to believe that financial institutions could solve all of the nation’s housing problems if only they would implement fairer lending policies.
It’s a shame that credit unions have to get caught in the crossfire of this counterproductive, unending debate. In the meantime get ready for life in a fishbowl.
Does Uber threaten the value of Medallions?
Anyone with a medallion loan or a participation interest in one should read this article in this morning CU Times.
The state’s financial regulator has signaled two areas that will be getting special scrutiny to prevent cyber breaches like the one that compromised information involving 76 million JP Morgan Chase customers. One step is to scrutinize third party vendor relationships. The other may be mandated cyber-security programs for financial institutions.
Reuters reports that last Tuesday, DFS Superintendent Ben Lawsky sent a letter to “many banks” expressing concern about the “level of insight financial institutions have into the sufficiency of cyber-security controls of their third-party service providers.” He wants the banks to disclose any policies and procedures they have related to their third party relationships and “to outline all methods of protection used to safeguard sensitive data that is sent to, received from, or accessible to vendors.”
You should not be all that concerned about this potential mandate if you have paid attention to NCUA’s Due Diligence Guidance. To its credit, vendor management has been a key concern of NCUA for years now.
In addition to reviewing NCUA’s guidance, for my money, vendor management comes down to contract management. Your contract should:
(1) Give you the right to consult regularly with your third party vendor;
(2) Specify what security precautions the vendor will take to protect customer information and include specific documentation that such steps are being taken;
(3) Clearly outline responsibilities in the event of a security breach;
(4) Contain strong damage clauses; and
(5) Enable you to quickly get out of a contract in the event of a breach.
Finally, at least one person at your credit union should understand what the vendor is doing well enough to ask the right questions when it comes to assessing whether or not a vendor is living up to its side of the bargain. There is much more that you should ask for but by these clauses enable you to monitor your vendors as opposed to simply pass off a key part of your credit union’s operations and hope for the best.
I’m speculating a little at this point but I would expect that financial institutions will face state level mandates to have cyber-security policies and procedures in place. The State’s proposed regulations for the licensing of Bitcoin traders includes a section 200.16 that mandates that licensees implement cyber security programs. Such programs must insure the “availability and functionality” of the licensee’s electronic system and protect sensitive data stored on these systems from unauthorized access or tampering. Specific requirements include written policies and procedures to recover from a cyber-breach or breakdown and a description of how data is protected. Furthermore, each licensee must have a designated cyber security officer.
Henry, you say, this is all very interesting but my credit union has about as much interest in trading Bitcoins as the President does in the Republicans taking over the U.S. Senate. Ah, but here’s the catch. In a speech on October 14th, the Superintendent conceded to critics of the proposed Bitcoin regulation that the proposed cyber-security rules imposed stiffer requirements on licensees than are imposed on financial institutions. But, he said this “is primarily because we are actually considering using them as models for our regulated banks and insurance companies.” This is a not-too-subtle indication that a cyber-security mandate is coming sometime soon.
Incidentally, the impetus for today’s blog came from a friend as I was watching Real Madrid demolish Barcelona in soccer this past Saturday. Even if you don’t like this sport, you should all visit Wolff’s Biergarten in downtown Albany at least once during a major soccer event. Not only does the crowd make you feel like you are actually at the game, but if you are lucky enough to bump into me, you can actually talk cyber-security. Dare to dream, have a nice day.
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.