Posts filed under ‘Economy’
My good friend Otto von Bismarck once said that “the nations of the world are on a stream, which they can neither create nor direct, but upon which they can steer with more or less greater skill and success.” This quote came to mind this morning, not just because this is International Credit Union Week, but because the economic environment in which your credit union operates is increasingly impacted not just by the U.S. economy but by international events as well. If you want to know why the stock market is more inconsistent than the Giants, all you have to do is look at what’s going on in the world.
- The slow-down in the German economy is directly impacting the rates you get for your mortgages. The German economy has been the one bright spot of the Euro Zone for the last several years. It has used the pulpit given to it as a result of its economic performance to demand that other Euro Zone countries, most notably Greece, put fiscal discipline ahead of short term economic growth. It has also made German bonds an attractive option for investors looking for safe but solid returns. But recently, Germany’s run of economic good fortune seems to be coming to an end. Its exports, which have been the key to its economic growth over the last decade, are declining. What does all this mean for your credit union? Don’t expect longer term bonds to rise any time soon. A weakening German economy makes U.S. Treasuries that much more attractive. Yesterday the yield on the benchmark 10-year treasury note fell to 2.206, the lowest closing level since 2013 and the 30-year bond’s yield dropped to 2.957, which, according to Dow Jones Business News, is its lowest closing level in 17 months.
- China is still experiencing a rate of economic growth that would be the envy of any politician seeking re-election here next month, but its decline in GDP growth is already impacting countries like Germany and if its slow-down continues, China’s economic woes will take momentum from our tepid economic recovery.
- Another country to keep an eye on is Brazil. Along with India, China and Russia, it comprises the so-called Bric nations that exemplify the growth of emerging markets. However, Brazil’s economy is now in recession. Considering that, according to the Federal Reserve, 47% of total U.S. exports go to emerging markets, the slow down in these countries will impact America’s economic growth, the only question is by how much.
- Finally, the world is a lot more interconnected than it was in 1976 when a young Belgian researcher discovered of a new virus. This morning the CDC confirmed that a second health care worker contracted the Ebola virus. If the virus continues to spread, don’t underestimate the potential economic impact. For example, it is estimated that the SAR virus cost the world economy $50 billion in 2003.
Of course, it isn’t just bloggers that are paying attention to these trends. In a speech before the IMF last weekend, Stanely Fisher, the Vice Chairman of the Federal Reserve, remarked that “if foreign growth is weaker than anticipated, the consequences for the U.S. economy should lead the Fed to remove accommodation more slowly than anticipated.” In other words, the international climate is already impacting just how low short term interest rates are going to remain and for how long.
For financial industry junkies today is like a total eclipse of the sun. Third quarter earnings reports kickoff for the major banks and J.P. Morgan, Wells Fargo and CitiGroup are all announcing their earnings on the same day. (Incidentally, because of a computer glitch J.P. Morgan’s results slipped out earlier than their 7:00 AM release time and it reported positive results. What a coincidence.)
One thing for you to keep an eye on is the extent to which credit cards boost the bottom lines of these behemoths. If the conventional wisdom is correct credit cards present both a growth opportunity and a challenge for your credit union. As the WSJ explains in an article yesterday:
“The U.S. credit-card industry has found its sweet spot: a combination of moderate economic growth, low-interest rates and consumers who have struck a balance between spending more and paying their bills on time”
Even for those of us who look at the U.S. economy and see a glass half empty the facts tell you that people are once again taking out the plastic and that there may be some low hanging fruit for credit unions with the right cross-sales pitch.
The bank making the most aggressive push is Wells Fargo. As explained in this recent article in the San Francisco Business Journal , its CEO John Stumpf has groused that the bank has the largest network of branches in the country but ranks seventh among card issuers “ Of our 25 million customer households, how many do you think have a credit card?” They all do, but only 35 percent have their credit card with us.” He is out to change this.
Then there is the fact that, even though the CARD Act outlawed some of the most unseemly consumer credit practices, the low-interest rate environment more than makes up for the lost fee income. In addition, some executives sheepishly admitted to the WSJ that the legislation might actually end up being good for business since it makes it easier for people to manage their existing debt.
How does all this help credit unions? Even though the explosion of vehicle loans is getting the lion’s share of the attention credit unions have also seen solid growth in the credit card business. CUNA Mutual reported in its July Credit Union Trends Report that “ Credit union credit card loan balances are expected to grow 7% in 2014 even though some consumers are still leery of debt after the Great Recession and others are hesitant to take on higher-interest rate debt. Better pricing, easier access to credit and lower fees have boosted credit unions’ market share of the consumer installment credit market.”
Of course continued growth is predicated on the assumption that the American Consumer has climbed out of the bunker and now is confident that the worst is over. Consumer confidence is still shaky and no doubt even shakier after the market gyrations of the last few days. Still, given how low-interest rates are and the fact that the unemployment rate is falling how well you cross sell your members on credit cards will be one of the keys to your growth in the year ahead. After all if you don’t close the deal one of the behemoths probably will.
Well, it’s opening day for legal junkies. The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June. With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.
Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).
This case is important to credit unions for two reasons. First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act. Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week. However, there are several exceptions to this requirement. In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement. In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.
In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period. As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.
For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.
EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).
Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business. This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code. However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation? This is the question that the Court will grapple with in this case. It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people. What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons. Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.
Jesinoski v. Countrywide Home Loans, 13-604.
We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions. Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage. This case deals with a narrow but important question: does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction? This may not seem like a big deal, but the Circuit courts have been all over the map on this one.
Young v. United Parcel Service, 12-1226.
Federal law prohibits discrimination against employees because they are pregnant. But, are you discriminating against a pregnant employee by refusing to provide her an accommodation? In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages. This case isn’t as clear cut as it sounds. Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.
I will, of course, be keeping an eye on this and other cases in the coming months. In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.
I was surprise by how much attention news that New York’s Office Of Court Administration has finalized new debt collection requirements got in yesterday’s papers. I was also kind of embarrassed that I missed all these articles, since I try to bring you the news and information most relevant to your work day. So with an embarrassed “My bad” here is what you need to know about New York’s new debt collection procedures.
Most importantly the new requirements only apply to a narrow but important part of debt collection process. Specifically it applies to creditors seeking default judgments on delinquent open-ended consumer loans pursuant to New York’s CPLR 3215. They do not apply to medical services, student loans, auto loans or retail installment contracts. The way this regulation is drafted it’s possible that courts will expand the type of debt excluded from the new requirements as they begin to interpret the requirements
If a debtor simply refuses to pay a debt, can’t pay a debt or has gone AWOL and the credit union sues her the first step is filing a summons and complaint putting the debtor on notice that they are being sued for the money. Often debtors don’t respond and the next step in the process is to go to court and get a “default judgment”- basically a legal ruling that the debtor owes the credit union. These new requirements are in response to concerns that default judgments are being granted based on inaccurate or incomplete information.
Starting on October 1st, “Original creditors”-that’s you- will have to submit two affidavits when seeking default judgments. The first must be sworn to by someone with knowledge of the facts surrounding the delinquency-i.e. that an open-ended consumer loan was entered into for “X” amount and is now in default. Credit unions should use the “original debtor” affidavit included in the link to the regulations I am providing at the end of this analysis. You will also have to file an additional affidavit attesting to the fact that the statute of limitations has not run out for collecting the debt. These affidavits can’t be combined.
If you sell your debt to third parties, or put third-party collectors in charge of delinquencies headed for court these third parties are required to fill out different affidavits and the effective date for these requirements vary. Give your debt collector a call and make sure he knows about these requirements and how he plans to comply with them…
Here is a link to the regulation and a previous blog I did on the proposal
No news is good news from the Fed
No big news came at of the two day meeting of the Fed’s Open Market Committee and that means that the Grand Mufti’s of the economy have concluded that, since the economy is not going gangbusters, they don’t expect the type of surprises that could cause a sudden spike in interest rates no matter what NCUA is saying.
The Fed is reducing to $5 billion its purchases of mortgage backed securities. At the same time it led its statement on the meeting with its assessment that “economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant under utilization of labor resources.” This is Fed speak for holding the line against interest rate rises anytime soon. There are still lots of room for economic growth before inflation kicks in.
For those of you who like watching the inside baseball a fissure is officially out in the open. Recently installed Vice Chairman Stanley Fisher voted against the Board’s statement on future economic growth. He believes that “the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation.”
Here is the statement.
As Long Island goes so goes the state
Former Assemblyman and longtime state political observer Jerry Kramer has a nice analysis of the outsized part Long Islanders will play in determining if Republicans maintain a piece of control over the Legislature’s Senate Chamber this November or are relegated to the sidelines of state Government . All nine Long Island seats are controlled by Republicans but with two open seats and other competitive races Long Island is no longer a bastion of suburban Republicans. it’s anyone’s guess what the Long Island delegation is going to look like when the Senate shows up in January.
Here is the article.
Your average member isn’t humming “Happy Days Are Here Again” even though the economy is doing much better on paper.
One of the reasons is the increasingly widespread use of stock repurchases. Corporations buy back their own shares, often taking advantage of low interest rates to borrow the purchase money. Stock repurchases provide one more talking point the next time you talk to your local legislator about why credit unions are important sources of localized economic development or, try to explain to your neighbor what a cooperative is before their eyes glaze over and they edge toward other more interesting conversations at the neighborhood party. Incidentally Banks have not been immune from this trend.
The WSJ is reporting this morning that corporations used 31% of their second quarter cash flow on stock repurchases. This week’s Economist takes a look at the trend and dubs it “Corporate Crack” contending that it may be of short-sighted benefit to investors by creating another financial bubble.
Why should you care? For one thing every dollar spent on a share buyback is money not spent investing in new infrastructure or new employees. Corporate America is sitting on more than $1 trillion in cash and the economy really won’t heat up untill it starts spending it. As former Reagan White House Budget Director David Stockman commented in a blog post this past July:
“During the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned—including the huge gains from restructurings, downsizing and job terminations—was flushed right back into the Wall Street casino.”
The trend also underscores why the cooperative financial structure is so important. I like to tell people that credit unions are the last remaining true community banks, I’m no wide-eyed idealist: the simple truth is that credit unions make money by lending it out or investing it. There is no share price to worry about . In contrast, that so-called community bank down the street is probably owned by an increasingly large Bank Holding Corporation thinking of new and creative ways to prop up its share price. So long as the share price and economic growth align this is fine but as Wall Street gets more and more skilled at creating its own economic reality no one can be sure this is really the case.
News of the weird
I had to do a triple take as I was going over some clips last night and read that the National Association of Realtors is getting a proverbial “seatt at the table” as the FAA crafts rules regulating the use of drones. It appears that in a profession dominated by ultra aggressive sales people always looking for a competitive edge some realtors have turned to unmanned aircraft to get a birds-eye view of the latest property for sale. I guess the smell of freshly baked bread to coverup the smell wafting up from the basement just doesn’t cut it anymore
I am exaggerating slightly but I have to do something extra to get your attention after getting my post out late this morning.
Yesterday the Federal Reserve released a report detailing payment trends. When one compares how quickly and dramatically the payment system is evolving with how slowly stake holders and regulators are moving to react, it’s obvious that this is yet another area where technology has outpaced the capacity of regulators, legislators, banks and credit unions to respond to changes in the marketplace.
Why should you care? For the same reason, you should care about the potholes that you have to avoid on the way to work, or the dilapidated train tracks on which you may commute. At some point, these cross the line from being inconveniences to impacting your ability to provide the services members expect. Think of it this way: our payment system is basically a cutting edge version of the Pony Express at a time when virtual currencies, for all their defects, demonstrate that there are cost-effective ways to facilitating instantaneous clearing of payments without the intervention of third parties.
Paper checks are headed for an exhibit in the Smithsonian within a couple of decades at the latest. My five-year old didn’t know what a pay phone was when she saw one A couple of months ago and am positive that her daughter will be equally amused that people used to pay for things by promising to pay for them in writing with paper checks and popping these contracts in the mail. The report confirms that more personalized payment person-to-person payments are beginning to make a mark
One of the trends recognized “in The 2013 Federal Reserve Payments Study is the replacement of check writing as a form of noncash payments to customers’ use of alternative bill payment methods. One alternative to check writing was direct payment to the biller through ACH transactions or via general-purpose cards. Another popular alternative, online or mobile bill payments, was estimated to have 2.5 billion transactions in 2012. Online or mobile person-to-person (P2P) transfers, yet another popular alternative offered by depository institutions, totaled 138.0 million transactions in 2012.”
This is a great example of where our payment system is so out-of-date. Remember that a person paying with a mobile wallet or making a person-to-person transfer has generally not created a “check” sine the item being created was not converted from a paper check. Since 2011 the Fed has considered updating its regulations to provide that a bank receiving and electronically created item has certain warranty claims against a prior bank such as stipulating that a bank that sends an electronically created image “as if” it were a check makes the same promises or warranties that it would if the image was a check. A formal regulation was proposed late last year. To date this hasn’t been finalized. and although it a good first step is only a first step in hashing out the obligations of financial institutions that are going to play an increasingly passive role in the payments process.
Another example is Remote Deposit which is being advertised heavily these days. Do you have remote deposit or are thinking about offering it? Another issue that this regulation is seeking to address for the first time is the liability of parties where a member cashes the paper version of a check that he has also electronically deposited. There are a multitude of issues involved with this technology, and if you want an excellent overview of just how complex and far-reaching they can be get a hold of the December 13 issue of Clocks’ Bank Deposits And Payments Monthly which includes an excellent analysis by the Senior counsel for Wells Fargo. We need an ongoing and quick-moving process where stakeholders look at the most basic premises of our payments system and start from scratch. The Fed is moving in this direction but not fast enough.
One more thought when it comes to virtual currencies. It’s important that regulators not throughout the baby with the bath water. What the bitcoin demonstrates is that, if we were all creating a payment system today, it would put nothing like the one we are trying to retrofit for the 21st century. These changes are coming whether banks and credit unions want them to or not, because consumers are going to demand them. I’d rather have a better regulated modern payment system as opposed to seeing credit unions at a competitive disadvantage because they are constrained by the requirements of an antiquated one.
The links to the Reg CC proposal and the Fed Report are available right here.
This is a huge day for the Meiers and millions of other families across the country. My five year old daughter starts kindergarten today and my 11 year old begins 7th grade. So, don’t get me wrong, I am extremely excited, but forgive me for the gnawing question in the back of my mind: just how the hell am I going to pay for all this?
The USDA recently released its annual report on the cost of raising a child. Since 1960, the report has provided a crude but important snapshot of what it costs to take part in the great American middle class, Nationally, it costs $245,340 to raise a child through age 17 in a middle class household. Families in the urban Northeast incurred the highest cost at a mere $282,480. In contrast, it cost $223,610 to raise a child in the urban South. In 1960, it cost $25,229 nationally or $198,560 adjusted for inflation. This number does not take into account the cost of higher education and all those community-based extracurricular activities we sign our kids up for — soccer, swimming, dance, etc. (you get the idea).
And this statistic also assumes that my children are going to fend for themselves starting at age 18. They’ve already been told I expect them to go to college. As the report points out, this is not a minor expense. In 2013-2014, the College Board anticipates the annual average tuition and fees to be $8,893 for a public 4-year institution with in-State tuition and $30,094 at private, not-for-profit 4-year institutions with an additional $9,498 to $10,823 in room and board expenses. That’s just the average, folks. There are non-Ivy-league schools that are charging $50,000 tuition per year with a straight face.
I always laugh at parents who actually think that the way they are going to pay for college is with a sports scholarship. Statistically speaking, that’s not going to happen. By the same token, I am fooling myself if I think just getting my kids into college is good enough. As this excellent blog from the New York Federal Reserve points out, college pays off but not for everyone. So, as my daughters start school today, I hope they enjoy themselves, learn a lot, and prepare for the life competition that has, for all intents and purposes, already begun.