Posts filed under ‘Advocacy’
Last week, NAFCU released the results of a survey indicating that 88% of respondents will reduce or discontinue originating mortgage products that don’t conform to the CFPB’s definition of a qualified mortgage. Considering that slightly more than 37% of respondents reported underwriting mortgages that would not meet QM criteria in 2012, this is potentially big news and I just hope it is based on an objective assessment of the impact that the regulations will have on lending practices and not on a misconception about what the law requires.
So before you jump on the QM bandwagon, keep these points in mind. First, a QM is granted the highest form of legal protection regulators can give it, but it is a specific type of mortgage. In contrast, the CFPB wants all mortgages to be subject to an ability to repay analysis. This is the true baseline criteria and for the vast majority of credit unions, it is a requirement that they already meet. For example, how often do you not assess an applicant’s ability to repay a mortgage before you give them one? Do you make liar loans? Or do you actually request documentation that the person you are thinking of lending tens of thousands of dollars to actually has a job? This is just one example of the type of criteria which Congress and the CFPB justifiably felt compelled to mandate as a result of the non-existent underwriting standards that triggered the Great Recession.
Here’s another question for you. How many of your mortgages go into foreclosure and, of those, are you confident that your staff and lawyers understand the foreclosure process well enough to defend these foreclosures in court? The most practical benefit of a QM mortgage is that it provides a safe harbor against a homeowner’s claim that a foreclosure action should not go forward because proper underwriting standards and legal procedures were not followed. If you know this isn’t true, then why deny making the loan to the vast majority of members who may not qualify for QM loans but whom you are confident will repay their mortgage obligations? In any event, given the atrocious length of time it takes to foreclose in New York State, this should be a last resort anyway.
One more question to ask yourself. Do you reserve the right to hold mortgages that don’t meet secondary market standards? Of course you do. Now’s not the time to stop. The reality is that the importance of Fannie Mae and Freddie Mac to credit union mortgage underwriting will diminish in coming years. Those credit unions that want to engage in mortgage lending are going to have to hold more mortgages. Does this mean that smaller credit unions will be put at a further disadvantage with regard to mortgage lending? You bet it does. But this has nothing to do with the decision of individual credit unions as to whether or not they should take on QM mortgages.
In addition, keep in mind that Fannie and Freddie are adopting some, but not all, of the QM criteria. Most importantly, they are reserving for themselves the right to establish their own debt to income ratios.
The Association’s Director of Compliance, Michael Carter, and I have come to realize that your stance on the impact that these regulations will ultimately have on credit union lending reflects whether you are listening to the underwriters or the lawyers in getting ready for the new mortgage regime. Underwriters understand that many mortgages that don’t meet QM criteria will do just fine because a member has the ability to repay the loan. Lawyers are paid to be paranoid, and ultimately the secondary market is going to want loans that meet the higher standards of legal protection. Both sides have a point and each credit union will be well advised to look at its own unique situation and adopt the approach that best fits its comfort level and commitment to its members. Don’t assume that a QM is the only type of mortgage you should be offering.
On Thursday, the National Consumer Law Center sent a letter to NCUA criticizing 9 federally chartered credit unions for engaging in pay-day lending practices. This was not the first time the Center had criticized these credit unions. Lest our enemies outside the industry get too excited about this, the NCLC stressed that the vast majority of credit unions do not offer these loans.
Some of the criticized credit unions responded by pointing out that it was a CUSO they were affiliated with that was actually making the pay-day loans. As for the other credit unions, they are exceeding the 18% interest rate cap on federal credit union loans only if the application fee charged is included in these calculations.
I find myself disagreeing a lot with the NCLC, but this is not one of those times.
Although the credit union activity was perfectly legal, it is a prime example of how credit unions can get in trouble if we abide by the letter rather than the spirit of the law. NCUA permits credit unions to make short term loans that exceed the interest rate cap. This regulation also permits credit unions to charge an application fee in the amount of up to $20. In other words, there is a way of offering pay-day loan alternatives without offering pay-day loans. To be sure, this alternative has been less than enthusiastically embraced by the industry as a whole, in part because its strictures mean that its cost outweigh its benefits for most credit unions. But the answer is not to evade the spirit of NCUA’s regulations, but rather to work within the existing regulatory structure for a change that reflects a broad-based consensus.
Some of the 9 credit unions point out that they simply referred members to CUSOs that made the offending loans. Chairwoman Matz pointed out that NCUA lacks the authority to directly regulate CUSOs. Again, this is the type of response that lawyers love but that make the public so distrustful of lawyers. If anyone could name me one person outside the credit union industry who knows what a CUSO is, I’d be more surprised than finding out that Stephen Hawkins is going to be on Dancing with the Stars. Part of your third-party due diligence obligation should be to assess the reputational risk that a CUSO’s activities cause your credit union. Explaining to a member who can’t repay a pay-day loan that the credit union told them about in the first place that the credit union isn’t the bad guy isn’t exactly the type of answer that is going to engender good will within your community.
Let’s keep in mind that there is still a proposed regulation out to give NCUA expanded authority to directly regulate CUSOs. From everything we have been told, this proposal is all but dead. However, if credit unions start hiding behind CUSOs to justify activities in which they themselves would not engage, NCUA might take another look at this whole issue. I hope not.
FCU’s authorized to do PAC payroll deductions
Last week, I scared the bejeebies out of a few people in the office when I blogged about proposed regulations by New York State’s Department of Labor that would ban employers from making payroll deductions to facilitate voluntary political contributions. I also said that we would have to get clarification on whether or not this regulation would be preempted by federal law. With a little help from our good friends at CUNA, we were sent a Federal Election Commission opinion letter clearly indicating that regulations such as New York’s would be preempted as applied to contributions made for federal political activities (FEC Advisory Opinion 1982-29). On that happy note, let’s all have a great week, shall we?
Remind me not to pick up the bill if I ever go to an ice cream parlor with Chairwoman Matz. The vanilla she likes is way too expensive for me and the vast majority of credit unions.
NCUA released its long-awaited and long overdue regulations ostensibly designed to give credit unions expanded authority to engage in limited use of derivative investments as a way of hedging interest rate risk. I say ostensibly because if the regulation goes through as proposed — assuming one is actually ever promulgated — it is designed to cater to between 75 and 150 credit unions for whom an application fee of between $25,000 and $125,000 and agreeing to policies and procedures that allow NCUA to micromanage their investment activities every step of the way are worth it. All this in return for what the regulation’s preamble repeatedly refers to as plain vanilla derivative investment authority. One has to wonder what credit unions would have to do if they wanted to buy Haagen-Dazs.
Under the proposed regulation, credit unions with $250 million or more in assets with CAMEL ratings of 1 or 2 would be eligible to apply for authority to engage in the purchase of interest rate swap and interest rate cap derivatives. These instruments are basically contracts. Interest rate swaps would allow a credit union to trade one revenue stream, let’s say a portion of its portfolio of fixed-rate mortgages, for a counter party’s agreement to provide a revenue stream of adjustable rate mortgages, for example. The interest rate cap derivative is a contract whereby the credit union gets compensated if interest rates increase beyond the level established in the contract. The downside is that credit unions basically pay a premium in return for this protection so it is possible that they would pay for protection without receiving a benefit. Credit unions could only utilize this authority to hedge against interest rate risk, meaning they couldn’t be buying these as investments.
How do you get the authority to engage in these transactions? In addition to the asset threshold and application fee, credit unions would have to be willing to implement a detailed framework for overseeing these investments. Credit unions seeking level one investment authority would have to hire personnel with at least three years of direct experience with derivatives. Credit unions seeking level two authority would need to get someone with five years of experience. Other requirements would mandate that responsibilities for overseeing derivative investments be shared among designated staff so as to ensure that one person is not the lynchpin of the entire program. Read between the lines and the cost of hedging your interest rate risk includes having resources to hire personnel primarily responsible for just these investments.
But this just scratches the surface and many of the requirements go well beyond what you would reasonably expect in such a proposal. If you think I am exaggerating, then I would point out that NCUA is going to require not only that credit unions have policies and procedures showing how derivative investment decisions are going to be made, but also that such procedures be put in flow chart form. Why? Because “a visual depiction of a credit union’s decision making process provides a credit union’s employees and examiners a useful summary of who is making and executing all the decisions and functions.” I honestly can’t wait to hear about examiners suggesting improvements to the layout of a credit union’s flow chart.
Bottom line with NCUA’s proposal is that it is a poor first draft for an institution that has gone through two notices asking for feedback on how to design a derivatives program and has had experience monitoring derivative use, albeit through a small number of credit unions, through its pilot program. Most importantly, the idea that only credit unions with $250 million or more in assets need this authority is ridiculous. The criteria shouldn’t be how great a threat a credit union potentially poses to the Share Insurance Fund but how well prepared a credit union is to manage the risk inherent in these types of investments. Second, the piecemeal pricing out of individual regulations is an awful idea whose time should never come. The application fees have gotten most of the attention, but NCUA wants credit union feedback on whether individual credit unions should pay a yearly licensing fee in return for this derivative authority.
A licensing fee! A lot of football teams impose these now on season ticket holders, but at least if you’re a season ticket holder like my brother, you get to watch live football in return. Then again, he’s a Jets fan so that’s debatable.
Derivatives are tricky and I can certainly appreciate NCUA’s desire to make sure that only competent credit unions engage in this activity. But it’s one thing to strive for safety and soundness, it’s another to purposely design a regulation so onerous that its benefits will outweigh its cost for only a handful of credit unions. Many more proposals like this one and NCUA will do a better job of splitting the industry between large and small credit unions than the bankers ever could.
If the CU Times is correct, then my very quiet campaign to be nominated to serve on the NCUA Board has failed. The Obama Administration is set to nominate Rick Metsger, a former state legislator who the Credit Union Association of Oregon once named its Legislator of the Decade.
The position has two unique roles, as I see it. One is to be an advocate for the industry as a whole. This is the fun part of the job where you get to extol the virtues of the cooperative movement, bemoan excessive regulation and pat board members on the back for their thankless service. A second less exciting but more important part of the job is to establish the framework for the appropriate oversight of the safety and soundness of the industry. So here are the three questions I would want addressed by the NCUA staff if I ever get my nomination through the vetting process.
1) What are the systemic risks facing the industry as a whole? In a recent speech, Federal Reserve Chairman Ben Bernanke talked of a shift in examiner emphasis between monitoring the operational risks of individual banks and recognizing trends that pose a risk to the banking industry as a whole. For example, the mortgage meltdown triggered the financial crisis but it was the inability of examiners to recognize the interconnectedness of banks to the mortgage industry that turned a cyclical decline in housing prices into a threat to the entire economy.
Does NCUA have an idea of what systemic risks, if any, are unique to the credit union industry? The NCUA Board throws around the term systemic risk, but it means more than just paying particularly close attention to larger institutions. It means identifying those vulnerabilities that cause a threat to all credit unions that only regulators are in a position to take action against. Remember, this is an agency that didn’t have an office of chief economist until 2010, so you to excuse me if I am a little cynical.
2) Are some credit unions too small to succeed? Are the days of the small credit union numbered? Not necessarily, but there are some baseline regulations with which all credit unions and other financial institutions should have to comply and to the extent any institution doesn’t have the resources or expertise to meet these expectations, then how should NCUA respond? On one track, more mergers seem inevitable. But NCUA can demonstrate that there is a difference between a credit union that is small for the sake of being small and a small credit union with a well-executed business strategy and growth plan. What are examiners doing to strike the right balance between the two and is it enough?
3) How much should NCUA coordinate its activities with state level examiners. The trend in recent years has been to aggressively obliterate distinctions between state and federal supervision with the result that the utility of the dual chartering system is very much in jeopardy. This makes absolutely no sense. It’s a lousy use of resources at a time when every dollar we give to regulators has to be well spent and it makes it more difficult for state chartered credit unions trying to comply with two separate assessments of how best to assure the safety and soundness of their institutions. I want to know if our newest board member is willing to explain precisely where NCUA feels the line should be drawn when overseeing activities of state chartered institutions.
Americans Continue to Pay Down Debt
The Federal Reserve Bank of New York released its quarterly survey of household debt and Americans continue to pay down their outstanding bills. Of course, this is a good news, bad news kind of thing. There can be no robust economic recovery without consumer spending, so the question is at what point do people feel it is time to start getting out the credit card again and going out to dinner? If this new-found frugality continues, at some point we are going to have to scale down our expectations for long-term economic growth.
See you tomorrow.
A report released by the Federal Reserve Bank of New York yesterday underscores that MBL reform is more than a proxy for the never ending battle between banks and credit unions: it is also a common sense proposal to increase access to capital for small businesses that continue to be choked off from growth.
According to the results of the New York FED’s small business credit survey covering New York, New Jersey and Connecticut, “the ability to access credit remains a wide-spread growth challenge for small businesses in the region even among profitable firms.” Here’s the bottom line from a policy perspective. Of the 800 small businesses surveyed, 49% cited access to capital as a barrier to growth but only one-third reported even bothering to apply for credit, apparently believing that the effort wouldn’t be worth the time. This is actually an improvement over previous surveys.
What about the bankers’ argument that they are actually ready, willing and able to make small business loans but just can’t find applicants? The success rate for small businesses applying for credit ticked up slightly in 2012 at 63% and this slight increase was primarily attributable to increased availability of lines of credit. In one of the more disturbing statistics from the report small businesses seeking loans over $100,000 had a 73% success rate; whereas those seeking loans below $100,000 had a 57% success rate.
Here’s my polemical point of the day. According to the survey, the average small business loan was $100,000. Could someone other than a banker opposed to MBL reform please explain to me why a law that defines a $50,000 loan as a business loan makes any sense? Politicians all say they want to help small business, but most of the small businesses I know of are run by one or two people and when the equipment goes down, they can’t work. A law that allows every financial institution that wants to lend out money for a new truck for the landscaper or a new mill for the lumber jack would help more than just those lending institutions. It would help our economy grow.
Suppose you have a supervisor who takes an avuncular interest in one of the up and coming employees he manages for your credit union. He likes him so much that he tries to set him up with his daughter. The employee politely refuses the offer, but the daughter ends up friending him on Facebook. She tells her father that one of the organizations the employee has liked on Facebook is dedicated to advocating for same-sex marriage.
When the supervisor, who is deeply religious, turns hostile against the employee, can the credit union be sued for discrimination, particularly in a state like New York that now bans discrimination based on sexual orientation? Yes it can be.
This hypothetical is not a hypothetical at all. A great article in this month’s Inside Counsel magazine highlighting the legal challenges faced by social media in the workplace noted a case in which the Library of Congress is being sued by an employee who claims he was discriminated against after a supervisor surmised he was gay based on his Facebook page.
Now, for the record, I don’t get Facebook and I never will. Why people want to post the minutia of their lives to scores of casual acquaintances I will never know, but the fact is they do. As reckless as I think some people are with their Facebook accounts for acting as if this information is private, employers are better off using that as their working assumption as well.
Why? The simple legal answer is by accessing someone’s Facebook page, you are put on notice regarding information that you have no right taking into consideration when dealing with an employee and the mere act of doing so may create a factual dispute in a future lawsuit. For instance, let’s say you find out that an applicant belongs to a local mosque and an equally qualified candidate belongs to the Methodist Church. No good can come from knowing any of this.
I talked about this with a friend of mine recently, who doesn’t ask for passwords but will see what he can find on an applicant’s Facebook page. His argument is that good employer due diligence includes knowing everything about a potential employee’s judgment and character: a picture of him taking a hit from a bong in his college dorm speaks volumes about both. However, a good enough interview process should give you a means to fairly assess an applicant. We’ve done this for hundreds of years after all, without Facebook.
There’s also a legislative component to this issue. An increasing number of states have either passed or are considering legislation limiting employer access to employee social media. Keeping in mind that the views I express are my own and not necessarily those of the Association, it is time for New York and maybe even the federal government to pass such legislation. As silly as it is for employees to think that they have an expectation of privacy on Facebook, the world is changing and employers need bright line rules to delineate when they cross the line between employer due diligence and voyeurism.
Payday loans are a cross between the weather and art. They’re like the weather because everyone talks about them; they’re like art because they’re ultimately impossible to define yet everyone knows it when they see it.
This was the week regulators highlighted the importance of dealing not only with payday loans, but direct deposit account loans. First, the CFPB came out with its white paper analyzing the market for these products and pointing out that its analysis applied to both banks and credit unions. Then the OCC, spurred on no doubt by the CFPB and a Wall Street Journal article reporting that a guidance was imminent, released a proposed guidance on the proper management of direct advance products. Of course, the OCC has no jurisdiction over credit unions, but given the CFPB’s interest in the issue, it’s hard to see how increasing examiner emphasis on short-term loan products won’t impact at least state chartered credit unions in states that allow payday loans. (Given New York State’s criminal usury rate of 25% and the interest rate cap imposed on federal credit unions, credit unions in New York State couldn’t offer payday loans even if they wanted to).
First some background. The OCC defines a deposit advance product as a short-term credit product offered to a consumer maintaining a deposit account, reloadable prepaid card or other similar bank related product. Banks that offer the product allow customers to take out a loan in advance of the customer’s next scheduled direct deposit. As a result, they are similar, but not identical to traditional payday loans that aren’t tied to a specific account. Nevertheless, both the OCC and the CFPB in its white paper understandably see the products as posing the same risk to consumers.
Another commonality highlighted by both the CFPB’s white paper and the OCC’s proposed guidance is that both recognize the need for short-term loan products. As explained by the CFPB, “these types of credit products can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow at a high cost.” The Bureau goes on to explain that what it is most concerned about is the long-term use of these lending products resulting in rolled over loans and higher fees.
So how do you regulate a potentially dangerous financial product that you nevertheless recognize a need for? One potential solution could be tighter underwriting standards. Both the CFPB and the OCC note that few financial institutions that offer these products do so with regard to a consumer’s ability to repay the loan. As explained in the OCC’s proposed guidance, eligibility and underwriting criteria for deposit advance loans should be “consistent with the eligibility and underwriting criteria for other bank loans.” In addition, whatever underwriting criteria is developed by a bank “the criteria should be designed to ensure that the extension of credit can be repaid according to its terms while allowing the borrower to continue to meet” typical expenses.
Federal scrutiny of payday loan practices and standards is long overdue. Given the ability of financial institutions to export payday loans into states that don’t authorize them for their own charters, only uniform national standards can regulate the payday loan market. In addition, applying ability to repay standards to payday loans is perfectly consistent with the emphasis that regulators are placing on this basic idea in other areas such as mortgages. Still, as well intended as these proposals may be, there will always be people in desperate need of money and other people willing to take advantage. In addition, applying ability to repay standards sounds good, but if these consumers could meet basic underwriting standards, they presumably wouldn’t need short-term loans in the first place.
The bottom line: there will always be short-term loans, many of which are predatory. The best thing credit unions can do is to expand their offerings of responsible, short-term lending products. They may not be immediately cost-effective, but their long-term benefit both to getting new members into our doors and underscoring the credit union difference could be of tremendous benefit to the industry.
National politics has hit a new dysfunctional low as Senators and Representatives scramble to varnish their conservative bona fides by disinviting Richard Cordray from Senate Hearings about the Consumer Finance Protection Bureau. That’s right, even though the CFPB has a statutory obligation to report to Congress, Congressman Jeb Hensarling, Chairman of the House Financial Services Committee, is refusing to invite Cordray to Congressional Hearings reviewing CFPB activities. In addition, Senate Republicans are criticizing Democrats for continuing to allow Cordray to testify at hearings. The argument is that because a federal appeals court in Washington ruled that the President acted unconstitutionally in making recess appointments to the National Labor Relations Board, the recess appointment of Mr. Cordray is also invalid. The right thing to do is apparently to pretend that he doesn’t exist.
Why is this a new low in politics? Because Washington is no longer about getting legislation passed but about vilifying the other side and even more perniciously questioning the legitimacy of those with whom you disagree. If you still want to pretend that President Obama wasn’t elected, well there’s always Internet sites ready to tell you that he’s actually a foreign-born carpet-bagger with a doctored birth certificate to boot.
When the local judge or town board member who has been serving in your community for years comes knocking at your door for your vote this November, no need to politely listen to his arguments for his re-election, simply ask what party he belongs to and if you share this party, offer your support. If you don’t, politely slam the door in his face.
Want to pretend that Congress didn’t create the CFPB? Point to a court case about the NLRB and then criticize the Bureau’s Director for carrying out the responsibilities of its director. Public policy becomes so much easier when we simply ignore the other side of the argument.
Our political system is breaking down in this country. Not because there is anything wrong with our country’s governing structure, which I still believe is one of the most brilliant creations in the history of mankind, but because the American public, aided and abetted by talk radio, the Internet and cable “news” networks, is increasingly punishing politicians who understand that the purpose of politics is to try to come to a consensus on difficult issues on which reasonable people disagree. It’s perfectly acceptable for members of the House Financial Services Committee to question Director Cordray about the impact that the court’s ruling has on his ability to lead the Bureau. It’s quite another to say that the law is so clear that Mr. Cordray is somehow an illegitimate representative of a Bureau that Congress voted to create in the first place.
The reality is that this type of poisonous dogmatic politics makes it increasingly difficult for organizations like credit unions to get a fair hearing in Washington. The more legislating isn’t about grappling with issues such as member business lending and financial reform, the less people who actually have legitimate needs to be addressed by government have a chance of making sure that government actually helps them. As long as people think that the vindication of their viewpoint is only one more election away, our country will be unable to grapple with the serious problems that need to be addressed. Something tells me that there are certain leaders in China chuckling about what they’re seeing.
Against my advice (I’m devastated), Washington State is about to become the 11th state in the nation to authorize the compensation of board members. The legislation, which passed with unanimous support and according to the CU Times is expected to be signed by the Governor, would also authorize the compensation of supervisory committee members.
The good people of Washington State did much more harm than good with this legislation. Too many more credit union victories like this one and we will all be polishing our resumes or at least explaining to people that credit unions have gone the way of other not-for-profit financial institutions that lost their exemption when Congress decided that they were too much like commercial banks.
I understand the argument for the payment of board members. It is getting more difficult to find civic-minded professionals to sit on boards where they are responsible for overseeing increasingly complicated organizations at a time when increased regulations are putting both directors and institutions under greater scrutiny. We will get a larger pool of qualified applicants, so the argument goes, by giving boards the option of compensating community members for their time and effort. To me, this argument in tantamount to saying you support Democracy but just don’t think people are talented enough to decide who gets elected. The volunteer composition of all boards is the single most important component to ensuring that the interest of the membership is what guides credit union decision making. I don’t want someone on a board who is doing it for the money or, worse yet, is doing it because he or she needs the money. I want someone on the board because they believe in what the credit union stands for and want to help out their local colleagues, association members or community.
I would put the track record of credit unions and their volunteer boards in safeguarding the financial institutions they oversee up against those of for-profit institutions any day of the week. For example, where were the directors of community banks when the ground was being laid for the Savings and Loan crisis? Those directors of Enron sure did a bang-up job, didn’t they? And the compensation of directors at some of our largest banks responsible for causing the Great Recession has actually increased in recent years.
Just about anyone in our industry can repeat by heart that credit unions don’t pay corporate taxes because they are member owned, not-for-profit cooperatives that return profits back to their members in the form of better and cheaper financial products and services. This is all correct but ultimately credit unions don’t pay taxes because Congress decided a long time ago that it didn’t make any sense to make them both pay taxes and carry out the socially important mission or providing alternatives to commercial banks and helping people of modest means.
The more we willingly do away with fundamental distinctions between ourselves and our for-profit counterparts, the more we put our industry at risk.