Posts filed under ‘Advocacy’
The Wall Street Journal reports this morning that community banks are slowly fading away. In an excellent analysis of the trend, the paper reports that the number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression. The number of banks has now shrunk to 6,891 and with the exception of one brave — or some may argue, delusioned — group of investors, no one is applying to form new community banks these days.
I’m not highlighting these statistics to disparage community banks. Rather, I’m posting them because the trend highlighted by the article is so similar to that taking place in the credit union industry. For instance, the decline in bank numbers from their peak of 18,000 “has come almost entirely in the form of exits by banks with less than $100 million in assets. . . with the bulk occurring as a result of mergers, consolidations or failures.”
The credit union industry has long recognized that the small institution is fading away. The trend is impossible to miss. But it is one thing to spot a trend, it’s quite another to come to a consensus about what, if anything, to do about it.
Simply put, how much should the industry really care that small credit unions are fading away? I argued in a recent blog for CU Insight (shameless plug) that the decreasing number of credit unions is, in part, a reflection of regulatory overkill. But, the regulatory burden is growing and likely to continue to do so. Only large and growing credit unions are going to have the economy of scale necessary to absorb these costs.
The Wall Street Journal also notes that small banks are the most sensitive to interest rate squeezes. Again, I certainly sympathize with smaller institutions, but unless the economy makes a miraculous recovery, banking margins are going to be squeezed well into the future.
This raises one more question. Is there something that small institutions provide that larger institutions, be they credit unions or banks, simply won’t? Increasingly, I believe the answer is yes, but consumers are unwilling to pay for the better service or home-town feel that can only come from smaller institutions. To me, if I have to choose between a teller’s friendly smile and a convenient online bill payment, I’ll take convenience, especially if I haven’t had my second cup of coffee.
One more thought, with all the hurdles facing both community banks and credit unions, why in God’s name do banks waste so much of their lobbying time trying to destroy credit unions? Looking at these numbers, any community banker who believes that the key to the survival of this industry lies in altering the tax status of credit unions is about as misguided as White House officials extolling the virtues of their improved health care website. There’s so much more that needs to be done. . .
. . .Yesterday evening, the Moreland Commission begun by Governor Cuomo in July to investigate political corruption in the Empire State released a preliminary report. The executive summary recommends various campaign finance reforms, but also takes pains to stress that investigations of political corruption including possible allegations of criminal wrongdoing are ongoing.
Much of what the CFPB has done so far is mandated by Congress. We will start to see just how far reaching its powers are when it comes to promulgating changes to regulations that aren’t mandated by Congress but harm the Bureau’s sensibilities. I’m concerned that the Bureau is asking itself how a statute would have been implemented had it only been around.
Which brings us to the CFPB’s request for information about debt collection practices under the Fair Debt Collection Practices Act (FDCPA) in a wide-ranging ANPR published in the Federal Register on November 12 (https://www.federalregister.gov/articles/2013/11/12/2013-26875/debt-collection-regulation-f). Judging by its questions and the tone of the ANPR, there is a very real risk that a new regulatory regime on debt collection practices will impose mandates similar to those already burdening mortgage servicers and originators.
Most troubling to me is how the Bureau feels that regulations have to be promulgated to curb the alleged excesses of creditors — meaning your employees who have the audacity to call up members behind on their car payments and mortgage loans. As explained by the Bureau:
Congress excluded such creditors in 1977 because it concluded that the risk of reputational harm would be sufficient to deter creditors from engaging in harmful debt collection practices.[FN51] However, experience since passage of the FDCPA suggests that first-party collections are in fact a significant concern in their own right. For instance, the FTC receives tens of thousands of debt collection complaints each year concerning creditors.[FN52] The Bureau likewise has brought a debt collection enforcement action against a creditor,[FN53] and it recently issued a supervisory bulletin emphasizing that collectors, including creditors, need to ensure that they are not engaging in unfair, deceptive, or abusive, acts and practices. . .
What kind of regulations would creditors face? Judging by the questions posed in the ANPR, virtually everything is on the table ranging from the federal registering of debt collectors to enhanced notice requirements for the debtors.
All this has been proposed in the name of protecting people who have steadfastly refused to repay their debts. Furthermore, with or without regulations, pop FDCPA into any legal database and you quickly find out that there is no shortage of lawyers willing to extend protections to debtors who are wronged by an overly aggressive debt collector.
We are just in the preliminary stages of the regulatory process and I know you have a million other thing to do. But, please do yourself a favor and weigh in on the ANPR both to educate the CFPB about how credit union creditors don’t need more regulations and how this is no time to be imposing a whole new regulatory regime on financial institutions.
I recently wrote a blog expressing concerns about proposals placing an affirmative obligation on the part of credit unions to report suspected elder abuse. As pernicious as this problem is, the best way to attack it is to ensure that the law provides adequate protection for those who suspect foul play as opposed to putting more pressure on our front line staff to recognize and act on evidence of suspected abuse.
One solution, as highlighted in a recent discussion at the Association’s Legal and Compliance Conference, is to file a SAR. Judging by the statistics, this is becoming an increasingly common practice and provides maximum protection to the credit union reporting the suspected abuse. The problem is that an awful lot of damage can be done between the time a SAR is filed and if and when it is acted on. Fortunately, existing law provides another narrow, but important protection, at least in New York State.
Merrill Lynch Pierce Fenner & Smith, Inc. suspected that one of its account holders suffered from dementia. It even had a letter from her doctor stating that within a month of granting the power of attorney, she lacked the legal capacity to understand what she was doing when she created the document to help manage her affairs. Merrill Lynch refused to honor the delegation of agency power which was granted to an agent in December of 2010 and instead a proceeding was commenced under New York’s General Obligation Law under Section 5-1504(2) and 5-1510(2)(i) to compel acceptance. The use of the law in this situation puts the onus on a court to ultimately decide if the power of attorney should be recognized.
As a result, a credit union with doubts as to whether or not a power of attorney should be honored has the authority to commence a special proceeding. This isn’t as complicated as it sounds. Special proceedings are more analogous to arbitrations than they are a trial. The resolution of the Merrill Lynch case shows how difficult some of these decisions can be. The judge ruled that the account holder had the capacity to enter into the power of attorney. He noted that even when a member has dementia, depending on how advanced the condition is, a person may still have capacity to make binding power of attorney decisions.
Ultimately, these are difficult, fact sensitive decisions. Expanded use of quick legal proceedings, a willingness to file SARs when appropriate, and, as I argued previously, statutory language that maximizes protection for institutions that report suspected abuse provide a framework for clamping down on elder abuse.
Lottery Bill Sent To Governor
Legislation to permit credit unions to offer lottery savings accounts (S.5145/A.7341) has been sent to the Governor. The legislation, for which the Association advocated, will allow credit unions in New York to follow the lead of those in other states to encourage savings by tying raffle prizes to the opening of savings accounts. The Governor has ten days to act on the bill.
Last I talked about the Heartland litigation, it was to bemoan the dismissal of the lawsuit which a group of credit unions and banks brought against the payment processor after hackers were able to pull off one of the biggest data thefts in history. Recently, the Court of Appeals for the Fifth Circuit revived the lawsuit, or at least put it back on life support. It is allowing financial institutions to go forward with their claim that Heartland should be responsible for the extent to which its negligence in protecting the data cost financial institutions money. While it is far from clear that the case will ultimately result in a settlement — it could still be dismissed on other grounds — the ruling demonstrates a common sense approach that can be taken to holding merchants and the parties with whom they contract to process their payments accountable. The credit union industry has a huge stake in ensuring that this actually comes to fruition.
Contrary to popular belief, the law restricts negligence actions that one company can bring against another company for causing purely economic harm, although this varies widely depending on the state in which you live. The basic idea is that companies should protect themselves from other companies’ misdeeds with well drafted contracts that specify each others obligations and the damages that will be paid when one party fails to live up to them. The problem is that given how interconnected today’s economy is, there are an increasing number of actions taken by a company in one state that could cause foreseeable harm to a business in another even though they have no contractual relationship. For example, your credit union never had a contract with Heartland. But as a result of their data breach, your credit union may have been on the hook for the cost of replacing the compromised debit and credit cards, not to mention the indirect cost of being the public face of a problem for which you aren’t responsible.
The Heartland case is going forward because the court ruled that, in a narrow set of circumstances, New Jersey law permits companies to bring claims for purely economic loss suffered by one company as the result of another’s actions even without a contract. What we need is a national law that authorizes causes of action against merchants and payment processors for the foreseeable damages they caused as a result of their negligent handling of personal data such as debit and credit card information. This is the only way to ensure that merchants have some skin in the game when it comes to making the investments necessary to protect against data theft. Right now, if I was a merchant the cost-benefit analysis would lead me to conclude that data theft is something for the other guy to worry about.
Well, we are the other guy and I hope that credit unions and banks can jointly push for common sense reforms that put the cost and obligation of preventing data breaches on the parties most responsible for them. Right now, that simply isn’t the case.
When you’re done reading my blog this morning, you should check out this blog from the Financial Brand reporting the results of a comprehensive survey on consumer attitudes toward banking services. In one sense, it confirms the obvious: consumers don’t like fees. But it also underscores what I think is a fundamental failing of credit union branding.
First, according to the survey, 36% of people are “on the verge” of switching financial institutions because they don’t like the fees. In contrast, only 10% of consumers said they would switch financial institutions because of customer service. One final note that I think is worth considering is that, on average, people estimate that they spend five hours a month on banking activities. Incidentally, 8% of respondents said they spent at least 11 hours a month on these activities. I have no idea what they’re doing in all that time, but suffice it to say they have more time and money than I do or don’t have a computer.
Which brings me to the credit union side of the story. If you talk to any credit union person and ask them why credit unions attract members, we always say low fees and great customer service in a cooperative environment. This is an important message to get out to law makers since our tax exempt status is what ensures that all that can be true. But to really grow an individual credit union, I’m not at all convinced that emphasizing the cooperative credit union structure is the best way to draw in John Q. Public. For one thing, when he or she is floating around the Internet late at night, the first thing they’re going to look at is the fees.
Second, while our existing members love us, emphasizing the “union” part of our institutions actually has a huge downside. Whereas everyone knows they can walk into any bank and get a loan if they qualify, many people, if they know anything about credit unions at all, believe that they somehow don’t qualify for membership. I’ve said it before, I guarantee you I am not the only person in the credit union industry who has been asked at a dinner party if you have to belong to a union to belong to a credit union.
Don’t get me wrong, customer service is vitally important, but all you have to do is walk in to your local warehouse retailer to realize that people are willing to give up service — and I mean any service — for better prices. Plus, I like my dentist a lot, she knows I hate going there and she gives me all the Novocaine I ask for, but her service doesn’t make up for the fact that there’s a million things I’d rather be doing than having someone poking at my gums with a sharp metal instrument and then criticizing me when they start to bleed. For most people, banking is never going to be fun, no matter how great the service.
So, what does all this mean? For my money, the best credit union advertising campaigns are the ones that don’t use the word credit union or dwell on our cooperative structure and if they do, they emphasize that credit union equals lower costs and yes, better service.
On that note, have a nice weekend.
In a recent blog post for CU Insight, former CUNA CEO Dan Mica argued that in addition to credit unions’ tax exempt status and consolidation, cybersecurity ranked as a major threat to credit unions. As Mica explained “there is certainly a tipping point in safety and soundness where the regulators and public will not allow a credit union to continue to operate if security is a continual problem.”
Not that a highly paid, DC super lobbyist needs my vote of confidence, but amen brother! Credit unions need to confront cybersecurity on the legislative, legal and regulatory front if they are going to keep costs manageable for all but the largest of our institutions. On the regulatory front, the National Institute of Standards and Technology (NIST) recently issued a discussion draft laying out a suggested framework for all industries and businesses to follow in assessing threats to their computer systems. For example, the draft identifies key areas of a business that need to be protected and suggests that every business grade itself on how well it is protecting these core functions. It reminds me an awful lot of the type of matrix that credit unions have adopted in assessing their BSA vulnerabilities and I wouldn’t be surprised if we see regulators imposing an IT analysis framework on all financial institutions.
One of the reasons why the NIST framework might take on significance is because Congress remains unable to agree on cybersecurity legislation. For my money, one of the top legislative priorities of credit unions has to be the expansion of liability to major retailers whose mismanagement of credit and debit card information creates so much of the financial costs associated with data theft in the first place. I know I am preaching to the choir on this one, but we have to be able to place the costs of data theft on the parties most responsible for letting it happen and existing law on both the state and federal level doesn’t allow courts to do that, at least as between card issuers and retailers.
The combined legal, regulatory and reputational risks are particularly acute for smaller credit unions. Irrespective of the size of your credit union, if you are on a computer network, then your credit union is a potential portal for cyber thieves. As a result, no credit union — no matter how small — will be exempt from the costs and obligations of cybersecurity requirements. Now’s the time for Congress and legislators to makes sure that the costs are apportioned reasonably across all business sectors and that regulators balance the need for increased scrutiny against the cost of compliance.
Don’t take my word for it. According to an excellent analysis released by researchers at the Federal Reserve Bank of Cleveland yesterday, recent declines in small business lending not only reflect the continued impact of the Great Recession, but “also. . . longer-term trends in financial markets. Banks have been exiting the small business loan market for over a decade. This realignment has led to a decline in the share of small business loans in banks’ portfolios.” According to the researchers, the fraction of small business loans of $1 million or less in banks’ portfolios has dropped from 51% in 1998 to 29% today.
What do they think is behind this systemic decline? First, consolidation has reduced the number of small banks but more provocatively, they suggest that increased competition in the banking sector has made banks concentrate on attracting bigger, more profitable loans at the expense of small business loans. To steal a line from investment banking, it takes just as much time to put together a small deal as a big one.
Whenever credit unions put on a serious press for increasing the MBL cap, they are inevitably confronted with the testimony of an earnest mid-Western community banker whose family has sponsored the local Little League team in Pleasantville for the last five generations. He explains to Congressmen that he would love to offer more small business loans, but that small businesses simply aren’t asking for them. The MBL cap, he argues, won’t increase the number of business loans but simply add to the competitive pressures of God-fearing, tax-paying community bankers, who, by the way, are represented by one of the most politically connected lobbying groups in DC.
According to the researchers, the community bankers have the story half right. There has been a decline in demand for small business loans as a result of a dramatic decrease in the number of small businesses. The Great Recession did a number on the small entrepreneur. However, even allowing for this fact, the researchers argue “lenders see small businesses as less attractive and more risky borrowers than they used to be. Fewer small business owners have the cash flow, credit scores, or collateral that lenders are looking for.”
Now I am not trying to give banks a tough time for cutting back on small business lending. A lot of this simply reflects basic economic reality. But this is precisely why Congress should allow credit unions to make MBL loans free of the fear of running up against an arbitrary cap. Small businesses specifically, and the American economy writ large, need a larger pool of potential lenders. MBL reform is a simple, cost-effective way of achieving this goal.
On that note, have a great weekend. I am sure you are all excited that the English Premier League is starting up again. Seriously, you should give it a shot, contrary to popular belief soccer isn’t boring, it just looks that way.
The vast majority of the banking world including Europe has now shifted to using credit cards which encode data in computer chips as opposed to magnetic strips. This technology is called EMV (Europay, MasterCard and VISA). The results are impressive. A recent report by a banking security agency for the European Union reported a nearly 6% drop in card-related theft. Furthermore, the report noted that the adoption of chip technology has only increased the attraction of the U.S. market to data thieves. They aren’t stupid and when the largest credit market in the world uses outdated technology to protect against fraud you know where they are going to set their sights.
But the attraction of this technology goes far beyond its ability to deter data theft. We are all hearing correctly that smart phone technology is here to stay. The use of the EMV-chips helps facilitate smart phone transactions. The same technology that allows someone to waive their cellphone instead of insert their debit card to pay for a transaction is facilitated by EMV-chips. Furthermore, EMV has become the international norm. Financial institutions are beginning to hear complaints from customers traveling overseas that their credit cards aren’t being processed properly. It is no coincidence that the United Nations Federal Credit Union is among the largest proponents of this technology. It makes sense to do what the rest of the world is doing. Most importantly, by 2015 both VISA and MasterCard will begin shifting liability from acquiring banks to merchants who don’t adopt EMV-equipped Point-Of-Sale terminals. However, the first implementation deadline set by VISA and MasterCard requiring acquirers and processors to have integrated EMV technology by April 2013 has come and gone and obviously much more needs to be done.
So, why hasn’t EMV taken off in America and can more be done to facilitate the transfer? The answer to the first question lies in a classic economic conundrum. For chip-based technology to work, all those point-of-sale terminals into which your current debit and credit cards are inserted have to be retrofitted to accept it. That’s billions of dollars to the merchants. That’s an awfully big investment and there is no guarantee that the acquiring bank will have the technology to process the transaction. For one thing, it is estimated that shifting to EMV technology will cost banks billions of dollars and this is before they start retrofitting ATMs for the chip cards. In addition, EMV-based debit and credit cards cost more to make and replace. In other words, you have a classic chicken versus egg dilemma: no one denies that chip technology is superior to the use of magnetic strips; but given the cost of investing in the new technology, no one wants to be the one to take the first leap.
Then there is the problem with regulations courtesy of the Durbin Amendment. This is simply not a good time to be introducing new fraud prevention technology. Since the Amendment we all hate caps the cost of fraud that financial institutions can have merchants absorb, it simply makes no sense, the argument goes, to invest in EMV. So what’s to be done? I hate to suggest regulations, but as we debate data protection issues and the best way to protect people’s privacy perhaps it is time for the Federal Reserve to learn from that erstwhile institution, the Central Bank of the Philipines. Yesterday, it announced that it was mandating that its financial institutions have chip technology in place by 2017. Given the importance of chip-based technology to the consumer payment system it is time for Congress and/or the Federal Reserve to consider imposing a similar mandate on both merchants and financial institutions in the United States. Unless everyone has to bite the bullet. I don’t see sufficient incentives for the large-scale adoption of EMV technology for the next several years. This is a long time to wait for technology that would help prevent a lot of fraud.
New York Attorney General Eric Schneiderman yesterday filed a lawsuit in State Supreme Court in Manhattan against Western Sky Financial and a subsidiary seeking to block it from offering payday loans. The Attorney General argues that the company is violating New York’s usury laws, which cap loan interest at 16% when offered by non-bank lenders. All interest rates are capped at 25% in New York State.
The catch is that Western Sky Financial is located on tribal land in South Dakota and contends that it is not subject to either New York’s laws or its jurisdiction. According to the AG, through the Internet it has made a total of almost 18,000 loans to New Yorkers who now owe almost $185 million to the company.
In a separate action last week, New York’s Department of Financial Services issued a cease and desist order against 35 payday lenders including Western Sky. The DFS also wrote a letter to NACHA criticizing the electronics payment network for being unable to block payday loans. Under existing NACHA regulations, it is the responsibility of the originating financial institution to ensure that payments are lawful before sending them on to the receiving depository financial institution (RDFI). At least some credit unions have received a letter from the DFS inquiring about the way they process payments and deposits through the NACHA system.
This dispute shows no signs of resolution. The use of Indian Reservations is just an extreme example of the jurisdictional issues involved when institutions from other states seek to export high-interest loans into a state like New York that has usury limits. My guess is that our good friends from the CFPB will soon be joining the fray. This is ultimately a national problem that can best be dealt with on a national level.