Posts filed under ‘Advocacy’
Verizon came out with its annual report detailing compliance with voluntary Payment Card Industry(PCI) standards intended to make sure that merchants and financial service providers take steps to prevent data theft. The results are depressing with only 11 percent of surveyed companies fully PCI compliant. Despite the fact that PCI has been around for almost a decade the report concludes that the vast majority of organizations lack the ability to have a sustainable PCI protocol
In addition the report uses its bluntest language to date in acknowledging that many merchants aren’t doing enough to protect against data theft. Specifically the report acknowledges the complaints of critics who complain that only the largest merchants have to submit detailed annual compliance reports under the PCI protocols. As a result “while most merchants are striving to comply with (PCI compliance) in good faith” the lack of validation of these efforts “can be a problem.”
The system just isn’t working either because data theft is just too big a problem, or because voluntary compliance just doesn’t work or a combination of both.
Critics of congressional action on data protection correctly point out that codifying specific requirements could result in a system that doesn’t evolve quick enough to address emerging challenges. Conversely this report makes clear that voluntary efforts don’t go far enough. Merchants must be compelled to implement policies and procedures to identify and prevent data theft Just like credit unions. These policies would only have to be commensurate with a merchant’s size and sophistication.
There is no panacea but commonsense federal action would certainly be a step in the right direction.
Here is a copy of the report.
The incremental but inevitable evolution of banking away from the traditional branch model took another important step yesterday with the announcement that American Express will now be offering its Serve, prepaid, reloadable plastic card at WalMart stores nationwide. This means that people will be able to walk up to cash registers at WalMart and reload cards from which many basic banking services can be performed. They can do all these banking services without ever having to bother going into a credit union and American Express has so far introduced a model with surprisingly low fees compared to prepaid card competitors and many bank accounts.
News like this combined with the announcement that Facebook is moving more aggressively into electronic fund transfers demonstrates that traditional retail businesses as well as cutting edge, high tech companies have looked at the traditional financial services model and decided that there is a much better way of doing business. American Express is positioning its existing prepaid card, BlueBird, as the card for the “unhappily banked” and positioning its Serve card as the financial choice of the “unbanked.”
What makes AmEx’s announcement all the more important for credit unions is that it is coupling the expansion of its prepaid card network with an advertising campaign directed precisely at the type of people that credit unions have traditionally sought to serve. According to its press release, you will soon be seeing documentary style commercials in which American Express chronicles the travails of “a handful of hopeful Americans as they navigate their way through an antiquated financial system that can inhibit, rather than help people’s ability to access, move and manage money as well as save for the future.”
The tone of the commercial I watched on YouTube demonstrates just how far behind the times credit unions are when it comes to explaining why they are relevant to consumers. Why is American Express, once the unabashed embodiment of establishment stuffy, better able to articulate the angst felt by many middle and working class Americans and demonstrate how its financial offerings can help meet their needs while credit unions remain wedded to vacuous platitudes?
If I sound frustrated it is because I am, but only because I still think there is time for credit unions to position themselves in this new environment. For instance, prepaid cards might be convenient but a debit card offers a heck of a lot more convenience and safety. In addition, while I can see the convenience of prepaid cards for the parent sending their kid off to college, what concerns me about these products is that they encourage precisely those people who most need to establish credit to stay out of the traditional financial system. No one with financial difficulty is going to better their condition by living paycheck to paycheck.
American Express’s foray into prepaid cards demonstrates that there is still a huge market of unbanked consumers in desperate need of reasonably priced financial products. Credit unions are the most logical place for these consumers to go but unless the industry starts doing a better job of explaining how its services are better suited for them and updating its products to reflect the changing times, we risk losing one of the primary reasons for our existence.
I’m exaggerating only slightly this morning. In written testimony before the House Financial Services Committee yesterday NCUA General Counsel Michael McKenna stated that 70% of NCUA’s final rules over the last two years have provided regulatory relief or greater clarity without imposing new compliance costs. That’s a relief, here I thought credit unions were being overburdened by excessive regulation. I guess all those credit unions that have hired additional compliance staff over the last few years can rest easy.
As both NAFCU and CUNA were quick to point out, when it comes to assessing the impact of regulations, it’s not so much the quantity but the quality of the regulations that has to be assessed. In truth, the whole premise of yesterday’s hearing was a little silly. Regulators are responsible for regulating and they wouldn’t be doing their job if the industries they oversee reported to Congress that they loved the job they are doing. Instead of holding hearings, Congress should remind itself that regulations are, by definition, the outgrowth of laws it passes. Since that is unlikely to happen, however, NCUA can’t simply point to statistics to get around the fact that credit unions face burdens today that they didn’t have to deal with five years ago. For example, in recent years, NCUA has:
- blurred the distinction between federal and state oversight of credit unions by passing regulations giving it more direct control over state chartered credit unions;
- clamped down on CUSOs by making them report more information directly to the NCUA;
- and, of course, joined other regulators in imposing numerous regulatory requirements, euphemistically referred to as guidance, on credit unions. For example, just last week NCUA joined other regulators in emphasizing the need for small and mid-sized credit unions to take steps to guard against theft of debit card information.
(Incidentally, regulators try to have it both ways when it comes to issuing “Guidance”. On the one hand, they’re never referred to as regulations, but on the other examiners consider them just as binding on an institution as a promulgated rule).
Now, to be fair to NCUA, the agency has taken steps to minimize the regulatory burden by, for example, raising to $50 million the threshold for what is considered a complex credit union. In addition, NCUA’s regulatory streamlining of the Low Income Credit Union designation process was a master stroke in using regulatory powers to benefit the industry. Think about it. Without getting a bill passed, NCUA gave thousands of credit unions the opportunity to seek out secondary capital and take in member business loans without having to be concerned about a cap.
In the end, what is really going on here can’t be quantified. On the one hand, at its best NCUA has demonstrated a recognition that, given the huge divergence in the size and sophistication of credit unions, regulators should strive to avoid one-size fits all requirements. On the other hand, at its worst, NCUA myopically views almost everything through the lens of the Share Insurance Fund with the result that it demonstrates a cavalier disregard of the right of state chartered credit unions to be regulated primarily by state regulators and often seeks to impose safety and soundness requirements that impinge on the right of credit unions to run their credit unions in the way that best benefits their members.
As faithful readers of this blog will know, I occasionally feel the need to remind people that the opinions expressed are mine, and mine alone, although you, of course, are welcome to agree with me.
Both NCUA and credit unions are making serious mistakes in the march toward a more sophisticated risk-based capital scheme for credit unions with at least $50 million in assets. Another time I will talk about NCUA’s mistakes, but today I think it is time to take the industry to task. Most importantly, the industry can’t have it both ways when it comes to risk-based capital. For at least a decade, it has been pushing NCUA to adopt a risk-based capital formula arguing that a capital framework more in line with that of banks will free up capital at well run credit unions and ultimately help more members. This sounds great, but it is flawed for two reasons.
First, NCUA has always said that with any risk-based capital proposal there are not only going to be winners, but losers. If the industry wants capital reform but continues to insist that NCUA’s proposal is fatally flawed, then it has an obligation to come up with a workable alternative. However, my guess is that anything resembling industry consensus on what an alternative proposal would look like is impossible to obtain. For instance, if you think the proposal places too much emphasis on concentration risk, does that mean you’re in favor of increasing risk ratings across the board? And if you don’t think concentration risk should be dealt with by imposing higher risk ratings on mortgages and MBLs, then how else should NCUA account for concerns that too much concentration of any given asset poses a greater systemic risk to the industry? There is no win-win here; there are winners and there are losers.
Which leads us to the second, more fundamental problem with the industry’s position on risk-based capital. The simple truth is that despite the glorification of the BASEL framework, there is absolutely no indication that risk-based capital regimes actually work. remember that some of the largest banks that failed over the past five years were subject to BASEL requirements. In fact, as summarized in a recently released analysis from George Mason University “since 1991 the Federal Reserve has employed a risk-based measure of bank capital as its primary tool for regulating risk. However, RBC regulations are easily exploited and susceptible to regulatory arbitrage. Evidence indicates that such regulations have increased individual bank risk as well as systemic risk in the banking system.” Also, read the excellent quotes in the CU Times provided by Chip Filson, who is doing a great job leading the charge against a risk-based capital regime.
The myth of risk-based capital is underscored by NCUA’s proposal. Risk rating is complicated but at its core it is nothing more than a policy judgement on the part of regulators about which assets pose the greatest relative risk to safety and soundness. The problem is that such policy judgements are inevitably based on preventing the last financial crisis from occurring again. In reality, whether the next financial crisis occurs in five or fifty years, no one knows which assets truly pose the greatest risk to the safety and soundness of this industry.
Against this backdrop of uncertainty, it makes more sense to maintain general capital requirements than it does to provide regulators, financial institutions and the general public with false assurances that institutions are well capitalized. In short, if it was up to me, we would scrap NCUA’s proposal all together not because the proposal is so flawed, but because risk-based capital doesn’t work as advertised.
One charge that makes the Lords of Finance angrier than Chris Brown in an anger management class is the suggestion that Too-Big-to-Fail (TBTF) banks enjoy an unfair advantage over their smaller financial counterparts because they can make more aggressive loans and investments secure in the knowledge that in a worse case scenario, they will be bailed out by the American taxpayer.
The latest evidence for this hypothesis was released recently by that bastion of left-wing extremism – the Federal Reserve Bank of New York. Specifically, a paper by two of its researchers concludes that “Too-Big-to-Fail banks engage in riskier activities by taking advantage of the likelihood that they’ll receive government aid.”
In previous work, the same researchers demonstrated that T-B-T-F Banks have lower borrowing costs because people know that, the protestations of the political class notwithstanding, if these mega-behemoths can’t pay their bills the federal government will.
It’s one thing to have advantages because of your economy of scale – Capitalism is supposed to work that way – it’s quite another to be so big that the free market can’t discipline a bank’s conduct and the political class is too dependent on campaign contributions and too nervous about tanking the economy to step into the breach by building real firewalls.
Credit unions should be calling for the breakup of the banks too, not because there is any chance of this happening anytime soon, but because it underscores how hypocritical it is for the banking industry to call for the end of the credit union tax exemption while getting as much if not more government protection as any industry in America.
A less dramatic but also informative piece of research comes from the CFPB, which released a report on Wednesday analyzing a year’s worth of data on payday loans. The findings are hardly surprising but they provide a good indication of where the Bureau is headed as it gets ready to propose national payday lending regulations.
Most importantly, the Bureau confirmed that payday loans are typically not used as an isolated financial tool to help consumers through unexpected rough spots, but rather can best be seen as high-priced, medium-term loans that are great at getting people further in debt. According to the Bureau’s research, 82% of all payday loans are renewed within 14 days.
As Director Richard Cordray concluded in a speech accompanying the report’s release:
“Our research confirms that too many borrowers get caught up in the debt traps these products can become. The stress of having to re-borrow the same dollars after already paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”
The question is what can be done about it? Even if the Bureau has the authority to establish national payday lending standards that apply not only to states but to Indian reservations, the reality is that loan sharking is the world’s second oldest profession. If payday loans are made too restrictive they simply won’t be cost-effective enough for many credit unions or other lending institutions to offer; if the restrictions are too lenient then we could end up with a classic race to the bottom with institutions having to choose between foregoing needed revenue and taking a stand against loans that are in no consumer’s long-term interest.
Let’s continue to outlaw these predatory loans but recognize that for better or worse people need short-term loan options. A good place to start would be with NCUA’s own “short-term, small-amount lending program.” I would love to see the program fine-tuned to attract more credit unions.
Credit unions scored a major victory on Friday when a federal appeals court in Washington reversed the decision of a district court and upheld regulations promulgated by the Federal Reserve Board to implement the dreaded Durbin Amendment. The victory means that debit card issuing credit unions don’t have to spend this morning shopping around for additional payment networks. It also means that you don’t have to worry about even lower debit interchange fees for larger institutions indirectly impacting your bottom line.
As many of you no doubt recall, the Durbin Amendment has two major components. First, it calls on the Federal Reserve Board to limit debit interchange fees that could be collected by institutions with $10 billion or more in assets to an amount that is proportional to the cost incurred by the issuer with respect to a transaction. It also prohibited limiting the number of payment card networks on which debit cards can be processed to one network. The Federal Reserve interpreted these statutory mandates with regulations mandating that card issuers offer at least one PIN-network and one unaffiliated signature debit card network. The Board also capped debit interchange fees for larger institutions at approximately $0.24 per transaction.
In a somewhat amusing twist of fate, many of our merchant friends ended up losing money as a result of the new regulations. They went to court and in one of the most sarcastic decisions you are ever going to read, a federal district court in Washington concluded that the Federal Reserve misread the clear intention of the statute and ordered the Federal Reserve to go back to the drawing board and devise a debit card cap which included a narrower definition of transaction costs. In addition, the judge ordered issuers to provide merchants with two networks for PIN-based debit transactions and two networks for signature-based debit transactions.
I’ll spare you the gory details of the Appellate Court’s analysis, which hinged, among other things, on the difference between “which” and “that,” but the bottom line is that whereas the District Court saw the Durbin Amendment as a clearly drafted legislative mandate, the Appellate Court saw that it was a poorly drafted 11th hour amendment to Dodd-Frank. As a result, the Fed was justified in interpreting the statute more liberally than the merchants would have liked.
NCUA Board Meeting
I didn’t get to blog as often as I normally do last week, but since we’re on the topic of Legislative interpretation, I want to make one comment about last week’s NCUA monthly board meeting. At the meeting, the Board proposed joint regulations establishing a framework for the regulation of appraisal management companies. This joint regulation is mandated by Dodd-Frank.
Appraisal management companies are those that serve as intermediaries for appraisers and lenders. Interestingly, while the NCUA issued the proposal, Chairman Matz complained that NCUA is “unable to enforce it,” According to the Chairman, “NCUA remains the only financial services regulator lacking the necessary authority to examine vendors for safety and soundness in compliance with laws and regulations.”
This is an important admission on the part of NCUA since many of us have been criticizing it for seeking to exercise oversight over third party vendors without jurisdiction.
As those of you with young children no doubt appreciate, with babysitters more costly than loan sharks and a night at the movies requiring a home equity loan, this is a key time of year for my wife and I as the Oscar nominees hit the pay-per-view circuit. On Saturday night, we watched American Hustle and all I have to say is Twelve Years a Slave better be a pretty good movie because American Hustle is one of the best movies I’ve seen in years. In fact, it is the best movie of its genre since The Sting starring Robert Redford and Paul Newman.
On that note, have a pleasant day.
A recent survey compiled by George Mason University provides the most detailed evidence I’ve seen of how much increased compliance responsibilities are imposing financial burdens on small lending institutions. Although the survey just included banks with assets of $10 billion or less, the results are consistent with what we’ve all been hearing anecdotally about the impact Dodd-Frank is having on credit union budgets.
For example, in the aftermath of Dodd-Frank, most of these banks have:
- hired an additional compliance person;
- changed their mortgage lending offerings as a result of QM regulations in the case of 60% of respondents; and
- experienced an increase in their annual compliance cost at a rate of at least 5% since 2010.
Another statistic that I found interesting was that 65% of the respondents feel that Dodd-Frank is now more burdensome to comply with than the dreaded Bank Secrecy Act.
What can we make of these survey results beyond the fact that it is a great time to be in compliance? The researchers point out that increased compliance costs are an inevitable result of Dodd-Frank. Even though the statute was intended to address practices of larger banks, small banks can’t spread out the cost of new compliance mandates over as many employees. I know many of you did not go into the business to deal with compliance officers all day and you view the increased regulatory burden as a distraction from the core goals of your credit union.
Conversely, since I started working with compliance issues about seven years ago, I have always been of the opinion that some credit unions have underinvested in compliance. To the extent that Dodd-Frank has forced those credit unions to devote more staff and time to compliance, this is not a bad thing.. the better your compliance staff the more efficient your operations will be and that will positively impact your bottom line.
This one goes in the will miracles never cease category.
The moribund debate about the future of the U.S. housing market was jolted to life yesterday when the U.S. Senate Banking committee announced agreement on bi-partisan legislation to reconstruct the housing industry. There is no issue pending on the legislative horizon that could have a more direct impact on credit unions.
First, a refresher on where we stand with housing reform. Historically, Fannie and Freddie have performed two major functions for credit unions. They ensure that there is a market for selling their mortgages and, since Fannie and Freddie bundle these mortgages into securities, they help keep these mortgages competitively priced Ironically, since the mortgage meltdown, to which Fannie and Freddie contributed, the housing market has become more not less dependent on these GSEs. For example, under Dodd-Frank, a qualified mortgage includes any mortgage that these entities are willing to purchase. This is a huge help for credit unions since Fannie and Freddie are willing to purchase mortgages that exceed the debt-to-income cap otherwise required for qualified mortgages. However, this QM exemption lasts only as long as do Fannie and Freddie.
In yesterday’s announcement, the Senators said that the bi-partisan effort will be based on legislation previously introduced, S.1217. As outlined in the press release, the Senate’s proposal scraps Fannie and Freddie and replaces them with a privately funded securitization platform, In addition, the agreement announced yesterday would create “a mutual cooperative jointly owned by small lenders to ensure that lenders of all sizes have direct access to the secondary market so community banks and credit unions are not at the mercy of their larger competitors when Fannie Mae and Freddie Mac are dissolved.”
It’s an extremely encouraging sign and a credit to our lobbyist in D.C. that the concerns of credit unions are mentioned so prominently in the press release, but the devil is always in the details so we will have to see how this translates into legislation.
And, let’s keep in mind. even if the Senate passes housing reform this year, there’s a better chance that Russia will withdraw from Crimea than there is that the House of Representatives will go along with housing reform in an election year. The issue is extremely easy to demagogue and there are plenty of ideological purists who want to hold our for getting the federal government out of the housing market completely. This, of course, will never happen but reality doesn’t seem to matter much in Washington.
In the meantime, the cynic in me wonders if the huge amount of money being generated by Fannie and Freddie for the federal government will make it more difficult for policy-makers to scrap the existing system and implement the needed reforms. Stay tuned.
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.