Posts filed under ‘Advocacy’
One of the trickiest questions facing businesses of all sizes, regulators, lawyers and policy makers is how to draw a line between encouraging the disclosure of information in an age when a smart phone gives an employee access to more information than imaginable just five years ago but the need for confidentiality is as important as ever.
Example 1: credit unions are justifiably concerned over NCUA’s decision to give the public access to a risk-based net worth calculator designed to give credit unions a snapshot of how they would fare under the agency’s proposed RBNW framework. NCUA justifies its decision to make the calculator publicly available by stressing the need to have an informed public debate on this important issue.
Given the agency’s steadfast commitment to public discourse, I find it odd that it takes the agency two weeks to make an online video of its monthly board meetings available. If you want to take a look at NCUA’s February 20th board meeting, it is available now. There are people like myself for whom real time access to NCUA’s decisions and explanations as to why they are making the proposals they are making would be invaluable.
NCUA should take its commitment to openness to the next logical level and start offering real time broadcasts of its monthly meetings. If the NCUA truly believes that the public deserves real time access to an individual credit union’s potential net worth then surely that same public deserves timely information about NCUA’s latest regulatory initiatives.
Example 2: We’ve all been there. You’re sitting around the dinner table talking to your wife about the day’s events when you realize that your kids are listening to your every word. You explain to them that there is some stuff that just stays within the family. Do you really think this warning works? I once talked to a pre-school teacher who told me that she knows more intimate details about her school kids’ parents than she would ever want.
Many of you have probably already heard about a recent case in Florida in which a father successfully sued his ex-employer claiming age discrimination. As is common in these cases, $80,000 of the settlement was contingent on the father neither “directly or indirectly” disclosing the terms of the agreement to third parties. No one bothered explaining this to the ex-employee’s 20-year old daugter, who proudly reported her father’s victory to her 1,200 Facebook friends, replete with the admonition that the ex-employer should “SUCK IT.” What I didn’t realize until I read the case was that the court’s ruling ostensibly had nothing to do with the Facebook post. The father violated the agreement as soon as he talked about the settlement with his daughter. However, on a practical level it is doubtful that the father’s indiscretion would have cost him $80,000 in the pre-Facebook era. As for the 20-year old daughter with 1,200 friends, perhaps they can offer her some extra summer jobs as she may very well be paying for her own college education from here on in.
Many of you have to sign off on confidentiality agreements either as part of your employment contracts or legal settlements. This case underscores the importance of well-drafted confidentiality clauses in the age of social media. Whereas contracts typically use somewhat generic language prohibiting both direct and indirect disclosures, I wouldn’t be surprised if lawyers start seeking greater flexibility on behalf of executives entering into contracts.
Example 3: Merchants in Texas, Florida and California recently filed lawsuits to invalidate state level laws banning surcharges on credit card purchases. A group of merchants already won a similar lawsuit invalidating New York’s credit card surcharge prohibition (518 NY General Business Law). That case is currently being appealed.
In the New York case, the plaintiffs successfully argued that the credit card surcharge prohibition violated their first amendment rights.
The great Boston Celtic Center Bill Russell once commented that fans don’t think they react. All too often I think the same can be said of our elected representatives.
If you make mortgages in New Jersey, you should take a look at .A347, which overwhelmingly passed that state’s assembly late last week. The bill is the latest attempt to deal with the serious problem of so-called zombie property. This is property which has been abandoned following the commencement of a foreclosure but for which no foreclosure has been completed. Localities not only in New Jersey but New York have been advocating for the authority to make the foreclosing lender maintain the property during the foreclosure process. Attorney General Eric Schneiderman is seeking a similar approach for New York.
The legislation passed by New Jersey’s Assembly mandates that a creditor that files a notice to foreclose on residential property that subsequently becomes vacant may force the lender to cure any violations regarding state or local housing codes. Keep in mind the views I express are mine and do not necessarily reflect those of the Association, let alone the good credit unions of New Jersey. The most troubling aspect of this approach is that the lender is being asked to take responsibility for property it does not own. Secondly, by mandating that the abandoned property be brought up to code the lender is not being required to simply maintain property but improve it. Finally, what is the NJ Legislature going to do in those situations where a home owner seeks to reclaim property for which the foreclosure process is yet to be completed.
According to the National Association of Realtors, as of 2013, there were 300,000 zombie properties across the U.S. I would bet you that those properties are disproportionately in states with drawn out foreclosure processes. Rather than make lenders responsible for property they do not own, housing advocates should take a look in the mirror and realize that so-call foreclosure protections needlessly delay the transfer of property to lenders and indirectly drive up the cost of homeownership for everyone.
My compromise position for the good people of New Jersey is to couple any requirement for lender foreclosure maintenance with an expedited foreclosure process for the affected property.
Well, it’s all but official that no major tax reform, let alone tax reform putting the credit union tax exemption at risk, will take place this year. Not only is the credit union tax exemption not to be included in draft legislation but no lesser an authority than Senate Minority Leader Mitch McConnell took tax reform off the table for this year. While this is, of course, good news, given the amount of time and energy that the industry has devoted to the issue over the last several months, the bankers have still scored a partial victory. We’re in a mid-term election year and we have yet to get serious traction on what I consider the single most important issue facing the industry: the need for secondary capital.
Why is secondary capital so important? Let me count the ways. First, it simply makes no sense for credit unions to be penalized while growing in popularity. This is precisely what happens every time a member opens an account in this low interest, moderate growth economy where it is extremely difficult to make money off other people’s money. If credit unions are going to grow then they need the ability every other financial institution has to seek out investors.
Second, any doubt as to the crucial need for secondary capital has been dispelled by the NCUA’s Risk Based Net Worth regulatory reform proposal. In its simplest form, there are two ways a credit union can improve its risk weighting. It can either reduce its assets or increase its capital. But unlike the nation’s largest banks, our largest credit unions don’t have the opportunity to seek out additional capital. In short, if NCUA’s proposal goes forward it will put the brakes on the growth of credit unions whose only sin is to be large.
I understand how divisive the secondary capital debate is within the industry. Credit unions are, at their core, mutual institutions. They have to remain that way if they are going to continue providing members a unique financial experience. But secondary capital reform can be introduced in ways that maintain the essence of the credit union movement, which is one person one vote. If an institution is willing to invest in a credit union it would only do so against the backdrop of restrictions that give it no more or less influence than any other member of a given credit union.
Let’s keep in mind that low income credit unions can already take secondary capital and no one can seriously suggest that these institutions, in the aggregate, do not advance the core missions of the credit union movement.
Tax reform is like one of those Friday the 13th movies. The villain never really dies. The industry must, of course, remain vigilant. But, we don’t want to win the battle and lose the war by letting concerns over the credit union tax exemption crowd out other important pieces of the credit union agenda.
What really caught my eye about the National Association of Realtors’ (NAR)quarterly report on the State of US Housing was not the familiar litany of excuses for why, even though optimists continue to see robust economic growth right around the corner, the housing market continues to underwhelm (the weather was bad, credit is tight and the first time homebuyer isn’t buying, yada, yada, yada). No, what really caught my eye was the Association’s assertion that spiking flood insurance premiums are beginning to take a bite out of housing.
According to NAR President Steve Brown, “Thirty percent of transactions in flood zones were cancelled or delayed in January as a result of sharply higher flood insurance rates,” he said. “Since going into effect on October 1, 2013, about 40,000 home sales were either delayed or canceled because of increases and confusion over significantly higher flood insurance rates. The volume could accelerate as the market picks up this spring.”
If part of what is going on here is political gamesmanship, it’s gamesmanship of the best kind. The Senate has already passed legislation that would delay reforms mandated by the Bigget-Waters Reform Act of 2012. One of the primary goals of the Act is to entice private insures into the flood insurance business by phasing out government subsidies that insurers argue make it impossible to accurately and cost effectively price insurance in areas where it is necessary.
While the argument appeals to the free market guy in me, members of both sides of the aisle are justifiably concerned by the evidence that without amendments to this legislation, individuals who live in areas prone to flooding will see huge spikes in their flood insurance premiums. No surprise then that Congressman Michael Grimm of Staten Island is one of the primary proponents of legislation (HR3511) to keep insurance premiums from rising. It appears that House action on the bill is imminent, but the bill has already faced unexpected delays. At the end of the day, this is one of those bills that shows that ideology won’t trump legislation to help constituents stay in their homes.
. . . . . . . . . . . . . . . . . . . .
A Failure to Communicate?
I was more than a little surprised when I read Chairman Matz’s speech before CUNA’s Government Affairs Conference yesterday. With some credit union officials describing the Risk Based Net Worth proposal as Armageddon for the industry, I figured Matz would use the opportunity to explain why NCUA feels its proposal is medicine worth taking for the industry as a whole. I was wrong.
Given the fact that the industry itself pushed for net-worth reform for several years before seeing NCUA’s proposal, the agency undoubtedly has some arguments to make in its favor. But its failure to mount any kind of a defense of its idea is becoming a real problem. The proposal itself lacks the kind of detail that credit unions deserve when their regulator puts forward a proposal of this magnitude. Matz’s silence in the face of mounting credit union concerns does nothing to address legitimate credit union jitters on this issue.
I am a transparency kind of guy, so it has taken me a while to decide whether or not NCUA did the right thing coupling its Risk Based Net Worth proposal with a calculator with which you can see how a given credit union would fair under the proposal. On the one hand, the calculator has given individual credit unions and Associations a useful and important tool with which to get a handle on a crucially important but complicated proposal. On the other hand, the proposal is just that and to put out for public viewing the consequences of a proposed rule that suggests that many credit unions are less financially secure than they were just a few weeks ago crosses the line between encouraging public debate and peddling inaccurate information in the name of openness. Put a password on the calculator and let credit unions decide for themselves how much of this information they want to make available to the public and when.
It’s strange and more than a little bit curious to see NCUA’s sudden commitment to transparency. It’s as if President Obama decided to pardon Edward Snowden so he could become the head of the National Security Agency. It wasn’t too long ago that NCUA was making all of North Carolina’s state chartered credit unions undergo separate federal examinations because one of the state’s charters had the audacity to make its CAMEL ratings available to the public. It argued than that if one credit union exposed the Holy Grail of CAMEL ratings, pretty soon other credit unions would be pressured into revealing the same information to their members. After that, the industry, followed closely by civilization, would end as we know it. Things would get so bad that the Russians, led by a Kleptocratic thug, would be allowed to hold the Winter Olympics in one of that country’s warmest locations. Okay, that last one actually happened but you get what I mean.
Perhaps NCUA understands it went a little far in its North Carolina inquisition, but I find it a little suspicious, and at the very least inconsistent, for that same regulator to suddenly put such a high premium on transparency. It wants to let any member of the public take a look at a credit unions finances and get a snapshot of how it would fair under a very rough, dangerously simplistic RBNW formula that is years from taking effect if it ever does. Never mind the fact that the information is of very limited value to the general public at this point. It seems to me that Joe Six Pack or a disgruntled member is more likely to understand a risk weighted number than a CAMEL rating. This is a great example of a little knowledge being a dangerous thing.
Ultimately, confidences belong to the party on whose behalf information is provided. That’s why a credit union should be allowed to disclose its CAMEL rating to whomever it wants. Similarly, let’s password protect the NCUA calculator and give each credit union access to its own information. That way, individual institutions could decide how best to handle the RBNW proposal and NCUA can be satisfied that it has provided industry stakeholders with a valuable tool with which to assess one of its most important proposals.
. . . . . . . . . .
With the economy still stumbling along, policy officials, including Fed Chairman Janet Yellen, have stressed that the official unemployment rate is not the only gauge to use when assessing how good a job the economy is doing absorbing people into the workforce. This is a vitally important issue because the lower unemployment the more likely the Fed is to start raising short term interest rates. To me, all you have to do is look at the nation’s historically low level of workforce participation and the number of long term unemployed to realize that this is no time to be raising interest rates. So I was surprised when I read the Fed minutes and accompanying articles pointing out that at least some members of the Open Market Committee think it is time to raise rates. What could they be thinking? A possible answer comes from this passage in the Economist:
“recent research suggests the unemployment rate is saying something important. It’s just that the message is a depressing one: America’s laborr supply may be permanently stunted. If so that would mean that the economy is operating closer to potential—using all available capital and labor—than generally thought, and that there is less downward pressure on inflation than the Fed has assumed.”
Under this depressing view, stunted economic growth is the new normal and the Fed has to be quicker to raise interest rates than would have historically been the case. If it doesn’t, then we will have a sluggish economy with high inflation.
. . . . . . . . . . . . . . . . . .
NCUA’s monthly board meeting was yesterday. Unless you’re planning to liquidate sometime soon, there’s not all that much to get excited about. Have a great weekend – remember to break out the sun screen, jump in the pool and have a barbeque, it’s going to be in the 40s.
I’ve always loved the expression that if you give a man a fish he eats for a day, but if you teach a man to fish he eats for the rest of his life. But let’s remember that no matter how good the teacher or how eager the student , if no one can afford to buy a fishing pole the best training in the world will go to waste.
Can cell phones help solve this dilemma? According to researchers at the Bill and Melinda Gates Foundation, yes. They argue in the most recent issue of Foreign Affairs that mobile phones have the potential to drive down the costs of serving the poor in developing nations; help these citizens save by ending their reliance on cash and, most intriguingly, by providing data on the unbanked and under banked that will enable financial institutions to develop products that cater to their unique needs and create underwriting models that will allow financial institutions and burgeoning financial cooperatives to lend to the poor with more confidence. Although the analysis deals with world’s poorest nations, there are lessons for both credit unions and bureaucrats seeking to serve people of modest means in this country.
According to the researchers, many of the 2.5 billon persons who live on no more than $2.00 a day have capital they would like to save but no institutions in which to deposit it. Branches are expensive and reaching out to the poor can be prohibitive. As a result, 77 percent of the world’s poor have no access to basic banking services. This means that if they have to get money to a sick relative or hope to send money earned working away from home back to their family they have to rely on someone to physically deliver their money.
It doesn’t have to be this way. The World Bank estimates that 89% of people in developing nations have access to mobile technology. Properly harnessed the sick relative can have money digitally delivered to her hospital, money from a far away job can be quickly and safely sent home and financial institutions can cost effectively offer bank accounts and other products as they gain knowledge about these new customers.
In Kenya, a mobile banking product called M-Pesa allows its members to transfer money electronically. 62 percent of Kenyans now participate in the program in comparison to the 10 percent typical of micro lending programs.
Are there lessons for this country? You bet. First, let’s keep in mind that many of the underserved in this country are going to have cell phones long before they have bank accounts.
Secondly, let’s not put regulations in the way of serving the underserved by imposing costs that don’t have to be there. As technology gets more sophisticated NCUA should continue to scale back physical branch requirements for underserved areas.
Third, technology is moving so fast that if you have a robust online presence and nothing else, you better literally get on the phone quickly. The poor person deciding which financial institution will best protect his savings and help them grow is going to choose based on the quality of a financial institution’s app.
Finally, the researchers relate how cell phones have helped spawn cooperatives of members who like to meet periodically as a way of using group pressure to impose financial discipline. My guess is that none of these savers had to have a common bond beyond a commitment to saving for the future. As technology changes the definition of community, credit unions must be given the opportunity to change, as well.
At the end of WW1 the French built the impenetrable Maginot Line, a series of defenses perfect for the trench warfare that dominated the war. Unfortunately for the French and everyone else, it wasn’t all that useful against tanks and mobile armies, so by the time WWII started the French might as well have been taking a knife to a gun fight.
There was a lot of talk in Congress last week about chip based credit card technology and whether the merchants should be forced to adopt this EMV technology. I’m all for it: even if the technology is twenty years old, it’s still better than continuing to rely on magnetic strip technology developed in the 1960’s.
Proponents of the technology point out that Point of Sale fraud dropped dramatically in Britain when it was adopted.
But yesterday, a corporation owned by the nation’s largest banks reminded us that chip based technology is no panacea. The problem, as explained in this Tech World article, is that “[w]hile EMV is great for securing card transactions at point-of-sale terminals, it is less useful for online payments and other card-not-present transactions. That is one of the major reasons why payment card fraud has migrated from point-of-sale systems to online channels in Europe and other places that have already adopted EMV.” Case in point: on-line break-ins spiked in the U.K.
To fill the gap the Clearing House Payment Company, which is owned by 22 large banks, is advocating for the increased use of token technology, which means that instead of using the same number when making online payments credit card information would be translated into unique computer generated sequences. (I know, I just made the IT people cringe, but you get the idea).
The problem with policies mandating the adoption of specific technology-like EMV- or codifying specific security standards – like the privately developed PCI standards – is that they would most likely be outdated within days of any Congressional mandates. Let’s face it, the hackers know a heck of a lot more about technology, and move a heck of a lot faster than Congress ever will. There is no Silver Bullet that is going to magically make hacking go away.
All this underscores why merchants have to have some skin in the game. If there was a legal obligation for merchants to have reasonably prudent secure data protections and procedures, then the merchants would have an incentive to make the necessary data protection investments and to upgrade these protections as technology changes. Just as banks and credit unions have been sued by account holders claiming that outdated security protocols opened the vault for electronic crooks, merchants would have to be able to defend their protections before a jury of their peers.
Remember, about a decade ago Target took a pass on adopting EMV technology for all its stores because the projected price tag of about $40 million was too high. That’s pretty much the same amount the data theft of their stores over the holiday season cost credit unions.
Yesterday, Mayor Bill De Blasio, who was busy putting the liberal back in liberal, highlighted the creation of a city ID card that could be used to, among other things, open a bank account. For those of you outside the Big Apple it is a discussion worth watching. With more than half of the Assemblymen in the State Legislature residing in the City, what NYC does may very well help shape state-wide debates.
The Mayor’s speech triggered some of my increasingly aged brain cells. For almost fifteen years immigration groups have lobbied for the acceptance of identification cards other than a drivers license. For instance, for years there was a bill debated in the State Legislature that would have required banks to accept Consular Identification Cards for members seeking to open accounts.
Now, I understand that immigration is a hot button issue. It is hard to discuss the legalities of accepting alternative forms of identification when opening bank accounts. Let’s be honest, the primary use of alternative forms of government identification is to facilitate essential services for undocumented aliens. Whether you are for or against immigration, the federal government’s unwillingness to provide definitive guidance on what types of alternative identification are acceptable is just short of an abdication of its responsibility, which puts credit unions and their banking counterparts in a no win situation.
Most importantly, section 326 of the USA Patriot Act requires banks and credit unions to establish reasonable procedures for the identification and verification of new account holders. As soon as this statute and its implementing regulations were proposed, the Treasury Department was bombarded with 24,000 comment letters relating to the question of whether the final rules precluded financial institutions from relying on certain forms of identification issued by foreign governments. The Treasury Department responded to these legitimate questions with classic bureaucratic doublespeak, that because of the “divergence of opinion, it makes little sense from a regulatory perspective to specify individual types of documents that cannot be used within the nation itself.”
Read in isolation, this not so artful dodge gives institutions the right to decide for themselves what documentation is appropriate for opening an account. In addition, City-issued cards provide credit unions a solid means of verifying a person’s identity since they would be issued by municipal officials, presumably pursuant to appropriate procedures. However, not even this is all that clear. For instance, finCEN, which oversees implementation of the Bank Secrecy Act, has opined that a bank may not open an account for a U.S. citizen who doesn’t have a tax payer identification number. At the very least, this means that from a BSA perspective a member even with proper identification is not entitled to an interest bearing account since the interest is reportable income.
To be sure, cities such as Los Angeles have developed identification cards similar to that being proposed by De Blasio, but advocates of these proposals would be well advised to couple their efforts on the local level with a push for regulators to further qualify under what circumstances individuals without more common types of identification can be accepted as members consistent with BSA requirements.
No one is going to accuse CU Times of overstatement in its article today that “Risk Based Rule Hurts MBL Biz Model.”
In putting forward this proposal, NCUA frankly acknowledges that its goal is to attack four main areas where it feels that the existing risk-based net worth framework inadequately reflects credit union risk. These four areas are delinquent loans; concentrations of MBL and real estate secured loans; equity investments; and off-balance sheet exposures.
NCUA’s decision to attack MBL concentration limits is understandably getting the most attention because it has the greatest potential of making large previously well-capitalized credit unions into undercapitalized institutions scrambling for ways to find additional capital. According to NCUA, currently MBLs comprise an aggregate of 4.8% of assets and an average of 5.14% of assets for complex credit unions with MBL loans. In contrast, 70 credit unions holding Member Business Loans have portfolios in excess of 15% of total assets.
This proposal would put the squeeze on these credit unions by increasing the asset weightings of MBLs that surpass certain concentration thresholds. For example, under the current risk based net worth weightings framework, MBLs comprising up to 15% of a credit union’s assets are given a 75% weighting. The new rule would increase this weighting to 100%. In addition, those credit unions with MBL concentrations between 15% and 25% of assets would see their risk weightings increase from 100% to 150%. Since the lwa already caps credit union’s MBL loans NCUA is going after credit unions that currently have authority to exced the MBL cap You can find more information about the regulation’s proposed MBL impact beginning on page 54 of the draft regulation.
The MBL concentration limit underscores just how crucial it is that credit unions not only question the need for any risk-based net worth changes at this time, but also take the time to show how specific changes would impact credit union operations.
If NCUA is hell-bent on making changes to risk-based net worth it is going to make them, but coming up with constructive amendments to those proposed weightings is one way in which credit unions could work to minimize the negative impact this proposal could have.
On that note, have a nice weekend. Your faithful blogger is taking tomorrow off and catching the Knicks at the World’s Most Famous Arena.
I hate the snow and I hate the cold, so it’s only logical that I ended up living in the Northeast. I would love to ignore the snow coming down faster than President Obama’s poll ratings but I know that at some point I’m going to have to fire up the snow blower and deal with the mess.
Similarly, credit unions face a systemic threat that they can’t wish away. My concern is that the threat posed by hackers is as great a risk to the viability of small credit unions as more commonly voiced concerns such as regulatory burden. The bottom line is this: larger institutions will be able to absorb the cost of inevitable cybercrime and make the investments to at least put hurdles in the way of hackers. Smaller institutions simply don’t have the means at their disposal. As members become more cognizant of these risks, their willingness to continue to use the small town institution will fade away.
Think this is just a depressing diagnosis from a snow-hating guy who has only had one cup of coffee?
It was disclosed yesterday that the Target breach continued for days after Target thought it had identified and dealt with the problem. If the technology can outfox a company as large as Target under intense public scrutiny, does your friendly neighborhood credit union really stand a chance when hackers look to exploit vulnerabilities in your IT system?
Fortunately, even without needed legislative reforms, there are some basic steps that can be taken to guard against this trend. Let’s start leveraging our IT expertise. If the industry pulls together its IT services into a single network to facilitate back office processes, this won’t prevent data breaches but it will make it cost effective for smaller institutions to invest in the type of sophisticated IT that is going to become an invaluable component of future growth.
Second, a successful IT Department is going to have to be integrated with a robust compliance program. For instance, you could have the best disclosures in the world but if they are not properly displayed on your online banking service, you haven’t accomplished a thing. So let’s start thinking seriously about pulling together compliance resources. This model has already been in use in states like Georgia where the league association hires compliance people paid for by a group of credit unions. Let’s stop being penny wise and pound foolish when it comes to basic investments in technological infrastructure and let’s start truly cooperating when it comes to developing the type of back-office infrastructure that can benefit all credit unions. Think of it as a corporate system for the 21st Century.