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!
How much is cyber theft costing us? The question is crucial because, to simple country lawyers like me, we are facing the electronic equivalent of a man-made Ebola virus. Is it possible that fraud is a manageable cost of doing business? I don’t think so, but I’m afraid many policy makers, merchants and large financial institutions might.
One place to look for the answer is in the Fed’s biannual report on the cost of debit card interchange costs mandated by the Durbin Amendment. The latest installment was issued September 18th. Fraud resulted in $1.57 billion in losses in 2013. Furthermore: “. . . the majority of fraud losses were absorbed by issuers and merchants (61 percent and 36 percent respectively); cardholders absorbed only 3 percent of losses.”
Most importantly, the cost of fraud is rising. “Although overall fraud losses as a percentage of transaction value did not change much between 2011 and 2013, there were substantial changes in the incidence of fraud, as well as in average losses per fraudulent transaction.”
But since overall transaction costs are going down, the Fed won’t be proposing a change to the existing cap, which is currently 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, for institutions that take mandated fraud prevention measures.
Something doesn’t quite past the smell test. In the same week, Home Depot concludes that a mere 56 million consumers had their credit and debit card information stolen by malware imbedded onto its card readers, the Federal Reserve concludes that there is no need to recommend raising the cap on interchange fees for institutions with $10 billion or more in assets. We may have one of those situations where economists can tell us the price of fraud but not its true cost. Remember the cap just applies to institutions with $10 billion or more in assets.
Why should credit unions care? Because, while cyber fraud may be an acceptable cost of doing business for the big guys who can absorb the costs, it’s not for your smaller institution. Furthermore, the Fed can’t monetize consumer anger and mistrust. Your average consumer is going to get fed up sooner or later. They will turn to the larger, more sophisticated institutions that they believe are better able to protect them – a trend that will be accelerated by our good friends at Apple.
I was surprise by how much attention news that New York’s Office Of Court Administration has finalized new debt collection requirements got in yesterday’s papers. I was also kind of embarrassed that I missed all these articles, since I try to bring you the news and information most relevant to your work day. So with an embarrassed “My bad” here is what you need to know about New York’s new debt collection procedures.
Most importantly the new requirements only apply to a narrow but important part of debt collection process. Specifically it applies to creditors seeking default judgments on delinquent open-ended consumer loans pursuant to New York’s CPLR 3215. They do not apply to medical services, student loans, auto loans or retail installment contracts. The way this regulation is drafted it’s possible that courts will expand the type of debt excluded from the new requirements as they begin to interpret the requirements
If a debtor simply refuses to pay a debt, can’t pay a debt or has gone AWOL and the credit union sues her the first step is filing a summons and complaint putting the debtor on notice that they are being sued for the money. Often debtors don’t respond and the next step in the process is to go to court and get a “default judgment”- basically a legal ruling that the debtor owes the credit union. These new requirements are in response to concerns that default judgments are being granted based on inaccurate or incomplete information.
Starting on October 1st, “Original creditors”-that’s you- will have to submit two affidavits when seeking default judgments. The first must be sworn to by someone with knowledge of the facts surrounding the delinquency-i.e. that an open-ended consumer loan was entered into for “X” amount and is now in default. Credit unions should use the “original debtor” affidavit included in the link to the regulations I am providing at the end of this analysis. You will also have to file an additional affidavit attesting to the fact that the statute of limitations has not run out for collecting the debt. These affidavits can’t be combined.
If you sell your debt to third parties, or put third-party collectors in charge of delinquencies headed for court these third parties are required to fill out different affidavits and the effective date for these requirements vary. Give your debt collector a call and make sure he knows about these requirements and how he plans to comply with them…
Here is a link to the regulation and a previous blog I did on the proposal
No news is good news from the Fed
No big news came at of the two day meeting of the Fed’s Open Market Committee and that means that the Grand Mufti’s of the economy have concluded that, since the economy is not going gangbusters, they don’t expect the type of surprises that could cause a sudden spike in interest rates no matter what NCUA is saying.
The Fed is reducing to $5 billion its purchases of mortgage backed securities. At the same time it led its statement on the meeting with its assessment that “economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant under utilization of labor resources.” This is Fed speak for holding the line against interest rate rises anytime soon. There are still lots of room for economic growth before inflation kicks in.
For those of you who like watching the inside baseball a fissure is officially out in the open. Recently installed Vice Chairman Stanley Fisher voted against the Board’s statement on future economic growth. He believes that “the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation.”
Here is the statement.
As Long Island goes so goes the state
Former Assemblyman and longtime state political observer Jerry Kramer has a nice analysis of the outsized part Long Islanders will play in determining if Republicans maintain a piece of control over the Legislature’s Senate Chamber this November or are relegated to the sidelines of state Government . All nine Long Island seats are controlled by Republicans but with two open seats and other competitive races Long Island is no longer a bastion of suburban Republicans. it’s anyone’s guess what the Long Island delegation is going to look like when the Senate shows up in January.
Here is the article.
Yesterday, the Senate Banking Committee held a hearing ostensibly dedicated to examining the burdens faced by small financial institutions, including credit unions, and what can be done to help them. I say ostensibly because any discussion of helping small credit unions inevitably and understandably morphs in to a discussion of the role of regulations in general and the need for mandate relief for all credit unions. For instance, I know Risk-Based Capital Reform is a major issue, but it simply isn’t that important to a $20 million, single SEG credit union. Still, it featured prominently in yesterday’s testimony.
The reality is that while proclaiming support for small credit unions, the small family farm and the independently owned bookstore around the corner has an emotional appeal, the real question isn’t so much what we can do to save small financial institutions but why we should bother making the effort in the first place. Once we answer that question, then there are actually practical steps we can take to protect viable small credit unions from extinction.
First, let’s define our terms. Up until about a year ago, a credit union was classified as complex by NCUA if it had $10 million or more in assets. To it’s credit, NCUA has now raised its threshold to $50 million with the result that a majority of credit unions are now considered small, at least by one regulatory measure. NCUA’s action shows how difficult it is to define a small credit union. Nevertheless, we all know what it is when we see one. To their protectors, small credit unions are the institutions that remain truest to the credit union ideals. By not growing, they literally do know most of their members and this personal relationship infuses them with a cooperative spirit that you won’t find, the argument goes, as institutions get larger.
While there is some truth to this critique, the reality is that credit unions can remain true to the movement’s ideals while growing to meet member needs. Economy of scale enables lenders to provide cheaper products and larger credit unions have, in the aggregate, demonstrated a greater willingness to work with members during the Great Recession than have their banking counterparts.
Critics of smaller institutions, or at least those that are indifferent to their fate, point out that as all industries mature, they consolidate. From a purely economic standpoint it makes perfect sense to have fewer credit unions while the industry as a whole serves more members than ever before; but this hands-off approach to credit union development also misses a crucial point. It is one thing for institutions to merge because there aren’t enough members, it is quite another for institutions to merge because no one has been trained to take over as CEO. Similarly, today’s small credit union is tomorrow’s large one. According to NCUA statistics, 538 credit unions surpassed $50 million in assets over the last decade.
The best way to help smaller credit unions is to start making a distinction between those that are growing, those that are small but can continue to prosper, and those that are doing nothing more than living off past capital accumulation. For the first two categories, we should work to establish networks of individuals who are intrigued by the opportunity to run a credit union irrespective of its asset size. On a practical level, this means turning over the reigns to younger professionals who can make up with enthusiasm and ambition what they lack in expertise. It also means championing greater charter flexibility so there is a middle ground between maintaining a SEG based existence and converting to a community charter.
Finally, smaller credit unions have to do more to pool their resources. A good example of this approach is the sharing of compliance resources among several credit unions. For me, the bottom line is this: whether a credit union is big or small, it shouldn’t be forced out of business where there is still a demonstrable need for its services.
Your average member isn’t humming “Happy Days Are Here Again” even though the economy is doing much better on paper.
One of the reasons is the increasingly widespread use of stock repurchases. Corporations buy back their own shares, often taking advantage of low interest rates to borrow the purchase money. Stock repurchases provide one more talking point the next time you talk to your local legislator about why credit unions are important sources of localized economic development or, try to explain to your neighbor what a cooperative is before their eyes glaze over and they edge toward other more interesting conversations at the neighborhood party. Incidentally Banks have not been immune from this trend.
The WSJ is reporting this morning that corporations used 31% of their second quarter cash flow on stock repurchases. This week’s Economist takes a look at the trend and dubs it “Corporate Crack” contending that it may be of short-sighted benefit to investors by creating another financial bubble.
Why should you care? For one thing every dollar spent on a share buyback is money not spent investing in new infrastructure or new employees. Corporate America is sitting on more than $1 trillion in cash and the economy really won’t heat up untill it starts spending it. As former Reagan White House Budget Director David Stockman commented in a blog post this past July:
“During the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned—including the huge gains from restructurings, downsizing and job terminations—was flushed right back into the Wall Street casino.”
The trend also underscores why the cooperative financial structure is so important. I like to tell people that credit unions are the last remaining true community banks, I’m no wide-eyed idealist: the simple truth is that credit unions make money by lending it out or investing it. There is no share price to worry about . In contrast, that so-called community bank down the street is probably owned by an increasingly large Bank Holding Corporation thinking of new and creative ways to prop up its share price. So long as the share price and economic growth align this is fine but as Wall Street gets more and more skilled at creating its own economic reality no one can be sure this is really the case.
News of the weird
I had to do a triple take as I was going over some clips last night and read that the National Association of Realtors is getting a proverbial “seatt at the table” as the FAA crafts rules regulating the use of drones. It appears that in a profession dominated by ultra aggressive sales people always looking for a competitive edge some realtors have turned to unmanned aircraft to get a birds-eye view of the latest property for sale. I guess the smell of freshly baked bread to coverup the smell wafting up from the basement just doesn’t cut it anymore
It’s been about a week now since Apple engaged in what’s become the adult version of Christmas Eve when it previewed its newest must-have gadgets. You undoubtedly have heard by now that Apple will be unveiling a mobile payment system with enhanced security features. Its modest goal is to make plastic payments obsolete and it has already signed up the largest banks in the Country and Navy Federal Credit Union. These institutions have agreed to give Apple a piece of every iPay, sorry, I mean Apple Pay transaction.
If you think that mobile payments will continue to be a small part of the transactions market, or if you think that several competing platforms will be sufficient to meet the payment needs of your members, then you will disagree with everything I am about to say. If, on the other hand, you believe, as I do, that an 800 pound gorilla with the potential of upending traditional banking models has just entered the room, then you should keep on reading. Here are some of the biggest challenges that Apple’s entry into mobile payment presents to your credit union.
- The credit union industry is not exactly fast on its feet, but my guess is on a practical level you will have to decide quickly if you want your members to be able to access Apple Pay with their debit and credit cards. (All those people who pre-ordered their IPhones are going to be mighty upset if they realize they can’t use Apple Pay) If you answer yes, remember that this is going to cost money. If you answer no, then you run the risk of members establishing alternative financial relationships with those institutions that sign up.
- On the bright side, Apple may have the leverage to prod merchants into upgrading their systems. As I understand the technology, merchants will have to equip their stores to handle Apple Pay transactions. As the merchants do so, perhaps they will bite the bullet and retrofit their machines for EMV cards, as well.
- In a best case scenario, Apple increases your credit union income by expanding the use of mobile payment as people use their cell phones to pay for transactions they would have paid for with cash. In a worst case scenario, people will use their cell phones for purchases they would have made with plastic. Over time, those extra fees you are paying to Apple will really begin to eat in to your credit union’s bottom line. Think of it this way, just a few years ago, credit unions fought to protect the right of smaller institutions to be exempt from a debit card interchange cap. Now those same institutions are going to have pay more money to Apple or run the risk of sitting on the sidelines during a mobile payment boom. How many record companies are out there today that don’t provide access to iTunes?
In an article in the CUTimes this morning MasterCard reassured credit unions that credit unions have a place with Mastercard and Apple. The statement kind of reminds me of the GM who tells everyone that the coaches’ job is safe: If it was really safe the GM wouldn’t have to say anything.
One of my favorite lines about business is that the most successful companies aren’t the ones that build better mousetraps but the ones that know how to sell the better mousetraps. The financial industry breathed a collective sign of relief last week because Apple decided not to compete against VISA and MasterCard at this point but instead chose to integrate its own payment system onto existing platforms. But let’s not overlook the fact that the same company that bankrupted Kodak has as its goal to be the pre-eminent processor of all consumer payments. My worst case scenario is that the credit union and community bank branch is as obsolete 10 years from now as film is today.
As readers of this blog know, last Fall a federal district court in Manhattan ruled that New York’s law banning merchants from imposing surcharges on credit card purchases violated the First Amendment of the Constitution. An appeal of that decision is currently pending. (In the interest of full disclosure, the Association has filed a friend of the court brief urging the Second Circuit to side with New York’s Attorney General and reverse this ruling).
New York isn’t the only state where laws prohibiting credit card surcharges are being challenged. As the Second Circuit prepares to decide whether New York law violates the Constitution, a recent decision in Florida upheld a Florida statute that also caps credit card surcharges. The decision underscores that, although surcharge litigation may have started in New York, it won’t end there. The Second Circuit decision will set precedent for other states where this issue will be litigated. In addition, the surcharge litigation deals with issues beyond the propriety of surcharges. The litigation will help delineate the boundary between the protections guaranteed by the First Amendment and the rights of regulators and legislators to place restrictions on how information is presented to consumers.
On the off chance that you haven’t been paying much attention to the issue, here is a quick recap. Section 518 of NYs General Business Law prohibits merchants from imposing surcharges on credit card purchases. At the same time, it permits merchants to offer cash discounts. In Expressions Hair Design v. Schneiderman, 975 F. Supp. 2d 430, 435-36 (S.D.N.Y. 2013), Judge Radcliff held that the distinction prohibited merchants from informing customers about the true cost of credit. In addition, he argued that the surcharge prohibition made all consumers pay for the increased cost of credit transactions by making it impossible to restrict the extra charge to customers paying with credit cards.
But, most importantly, the Judge concluded that:
Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 cash but charges $102 when the purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that the vendor is adding a 2% surcharge because the credit card companies charge the vendor a 2% ‘swipe fee.’ But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with section 518 is achieved…. this virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional.
Conversely, one could argue that there are fundamental differences between prohibiting surcharges, as New York and other states do, and allowing merchants to surcharge credit card purchases without restriction. After all, in Australia where surcharge bans were eliminated, consumers are now demanding that they be re-imposed. Furthermore, legislators and regulators place restrictions on how information is presented to consumers all the time. If restrictions such as New York’s run afoul of the Constitution then an important tool for consumer regulation is being removed.
Which brings us to the impetus for today’s blog. Recently, a Florida court upheld Florida’s surcharge ban against claims that it violated the Constitution.
This statute is no more a First Amendment violation than are the Truth-in-Lending Act, which restricts how a lender can pitch its interest rates, and the Fair Debt Collection Practices Act, which restricts how a creditor can present its claim for repayment. A whole host of statutes impose similar restrictions on the relationships between businesses and their customers, and many implicate communications.
The Florida case is Dana’s Railroad Supply, et al V. Pamela Jo Bondi (CASE NO. 4:14cv134-RH/CAS).
The fact that two courts came to such different conclusions underscores that the issues raised in these cases are going to be litigated for years to come as higher courts try to reach a consensus on if and when surcharge bans violate the Constitution.
On that note, have a great weekend, even if you, like me, feel an obligation to watch the Giants game.
Since I didn’t do a blog yesterday, I have too much to talk about today. So, with the caveat that you may see me expand on anyone of these subjects in the future, here are some tidbits to consider as you start your credit union day.
Greetings Congressman Nussle — I’m sure CUNA is relieved to know that I think they did a great job in hiring former Republican Congressman and Budget Director Jim Nussle. First, the political winds are blowing to the right and if the industry is to get big-ticket items done on a national level it needs a guy who can get Republicans listening. Plus, Nussle knows the budget as well as anyone, and given his bona fides as an advocate of deficit reduction he is well positioned to swat away tiresome complaints about the credit union tax exemption and keep Congress focused on issues that help credit unions help members. Welcome to the fight.
How much should foreclosure’s cost? Earlier this week, Benjamin Lawsky, the Superintendent of the DFS, sent a letter to Melvin Watt, the head of the FHFA urging him to quash a proposal for Fannie Mae and Freddie Mac to charge more for buying NY mortgages. Specifically, the FHFA is considering increasing the guarantee fee “g Fees” GSE charge on New York mortgages as well as those of four other states by 25 basis points to account for increased foreclosure costs. The other impacted states would be Connecticut, Florida and New Jersey. The DFS argues that the FHFA is relying on data that negatively skew the cost of foreclosing in New York and that, by penalizing New York and others, it is penalizing states for providing enhanced protections for homeowners. Here is the thing: the GSEs have a point, as well-intentioned as some of NYs foreclosure laws are, every new procedural hurdle or mediation delay makes owning a house more expensive for everyone. There are real costs involved in keeping someone in a house they can’t afford. Conversely, is it fair to make New York homeowners, the vast majority of whom won’t default, pay an increased burden? The real solution is for the Legislature to reexamine some of the protections it has put in place and see what steps can be taken to make the foreclosure process more efficient. I’m not holding my breath. Here is a link to the letter: http://www.dfs.ny.gov/about/press2014/pr140909-ltr.pdf.
The CFPB announced inflation adjusted thresholds after which Regulation Z will not apply to consumer transactions. Specifically, the Bureau that never sleeps announced, “[t]ruth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $54,600 or less in 2015 – an increase of $1,100 from 2014. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.“ Here is a link to the announcement:
Here is an earlier blog I did on the topic:
Judging by the interest generated by this topic at yesterday’s Legal and Compliance Conference, many of you are aware that even if your credit union is not unionized, your employers have a right to use social media to complain about workplace conditions where such employees are deemed to be taking taking concerted actions against work place conditions. Just how broadly this right can be interpreted is underscored by this blog post from Bond, Shoenick & King. It summarizes a recent administrative ruling by the NLRB in which it held that restaurant employees were wrongly terminated after complaining about sloppy paperwork by the owners that cost employees increased taxes. referring to your boss as an “Ass” on Facebook is not grounds for dismissal so long as other employees join in your complaints For more information on just how much employees can bad mouth their employers with impunity, here is the post.
Lost in all the hype about the new Apple product roll out was the tidbit that banks have agreed to pay Apple a fee for every transaction made on its Mobile Systems program. Apple’s technology may not be game changing, but its potential to change the payment system model is. The details are still sketchy. More on this in the future.