Posts filed under ‘General’

One more example of how the big banks threaten the economy

Before the mortgage meltdown I was a proud free market extremist who would patiently explain to a misguided dinner guest how the Free-Market was a better regulator of businesses and the financial system than government ever could be. Then I watched as the Captains of Capitalism were bailed just out as the Free Market was about to punish them for their mistakes. When it comes to Wall Street’s behemoths we have a “Heads I win tails you lose” system in which the American taxpayer\consumer is the looser. Still there are those who continue to believe that if only Government didn’t regulate Wall Street so much all would be better in the world.

If anyone still questions the need for regulation they need look no further than our present day banking system. Credit unions and smaller banks struggle to comply with a host of regulations designed in reaction to the last financial crisis while the behemoths that got us into this mess brazenly flout regulations and distort legitimate banking activities in the name of “liquidity.”

The latest example that we increasingly have a financial system that Vladimir Putin would be proud of comes courtesy of a 396 page report released yesterday by the Senate’s Permanent Subcommittee On Investigations. It investigated the purchase of physical commodities by JP Morgan Chase, Goldman Sachs and Morgan Stanley.  In a bipartisan report it concluded that Wall Street banks have become so heavily involved with the physical commodities market that their activities pose risks for the markets, consumers and the financial system.

Just how involved in the commodities market are the behemoths? According to the report

“Until recently, Morgan Stanley controlled over 55 million barrels of oil

storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JP Morgan built a copper

inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of

copper, comprising nearly 60% of the available physical copper on the world’s premier copper

trading exchange, the London Metal Exchange (LME). In 2012, Goldman owned 1.5 million

metric tons of aluminum worth $3 billion, about 25% of the entire U.S. annual consumption.

Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage

business in the United States. Those large holdings illustrate the significant increase in

participation and power of the financial holding companies active in physical commodity


That’s right, at the same time credit unions were trying to figure out how to provide Qualified Mortgages and were being badgered about building plans (apparently because examiners were certain credit unions had  top-secret plans to become landlords), these institutions were buying huge amounts of commodities and regulators were too timid to act.

This country has to do something about our financial system and quick. Whether you are a Democrat or Republican, libertarian or communist a system in which banks are too big to fail, too big to prosecute, too big to regulate and apparently too big to keep from buying and selling goods that have nothing to do with traditional banking activities is bad for a country of laws ultimately governed by its citizens as opposed to financial oligarchs.

Here is a link to the report:

If your compliance person is still struggling with the Ability to Repay and Qualified Mortgage Rules the FDIC wants to help. Yesterday it released the first of what it promises will be three videos for persons charged with complying with the mortgage regulations. I will be watching the video as soon as I am done with this blog. I really am a wild and crazy guy. Here is the link.


November 20, 2014 at 8:41 am Leave a comment

Are you asking these questions about EMV conversion?

In the immortal words of Elaine from Seinfeld is it time for you to attempt conversion?

Right now card issuers are liable for the costs of POS fraud involving both credit and debit cards. In October 2015 Visa and MasterCard shift this liability to merchants that can’t process chip based EMV transactions. This creates a huge incentive for merchants to invest in new terminals but the benefits aren’t quite as clear-cut for your credit union. After all if the vast majority of merchants can accept EMV by next October than you will be as liable  as you are right now  for card fraud.

To find out more about conversion issues yesterday I attended an excellent conference on EMV technology hosted by Covera. (Full disclosure: Covera is an affiliate of the Association).    The most important  lesson  I learned is  that, if you start planning today, credit unions have more flexibility than I thought they did in deciding when and how to make the migration to EMV. Deciding on how much of a push your credit union should make is ultimately an individual decision unique to each credit union’s circumstances. The more time you give yourself the better off you will be. Here are some of the key questions I would ask after attending the conference.

What is your timeframe for migrating to EMV? It’s going to take more than six months (optimistically) to roll out chip based cards. If you aren’t planning now than your plan is not to convert anytime soon.

How much card fraud do you have?

The switch to EMV is only helpful if data theft is an issue for your credit union. You are at no greater risk legally after October of next year if you choose not to go forward with an EMV conversion unless you think that the merchants your members shop with won’t be ready to accept EMV cards or you feel that the lack of EMV will make your CU more of a target.

Should you take a piece meal approach or integrate EMV all at once? One of the real interesting realizations for me was that credit unions have more flexibility in introducing EMV cards than the October 2015 date suggests. A credit union could start with a conversion to EMV credit cards, for example, see how the conversion goes, and then convert their debit cards.

How much money do you have to budget? These cards are estimated to be 2.5 times more expensive than traditional cards. That is a lot of money for technology that won’t prevent all fraud and that the bad guys will eventually make obsolete. In addition, there is a lot of staff training and member outreach that is involved in introducing EMV. All of this costs money.

Do you have a lot of international travelers in your field of membership? EMV technology is the industry standard in most other parts of the world.

Having read my list you may think that I am telling you not to go forward with EMV. Not at all. My Personal opinion is that consumers will eventually demand that financial institutions use the safest technology available. In addition legislators and regulators may eventually mandate that you adopt the technology whether you want to or not.

November 18, 2014 at 8:51 am Leave a comment

On flood victims and profits

Hurricane Sandy slammed into New York’s coastline on October 29, 2012 and despite the billions of dollars being spent on reconstruction there are still homeowners, some of whom undoubtedly have credit union mortgages, struggling with insurance companies to get claims resolved.

Given the scope of the storm some delays and disputes are inevitable but a disturbing article in this morning’s New York Law Journal is making me sick to my stomach. It reports that at least one engineering company hired to assess insurance claims is accused of doctoring reports in an effort to avoid compensating homeowners on legitimate claims. According   to the federal magistrate overseeing the dispute there has been “reprehensible gamesmanship by a professional engineering company that unjustly frustrated efforts by two homeowners to get fair consideration of their claims. Worse yet, evidence suggest that these unprincipled practices may be widespread.” In addition the judge concluded that an attorney for the insurance company, Wright National Flood Insurance Co, violated discovery rules by failing to disclose a draft report favorable to the homeowner’s claims.

The case which has stirred the magistrate’s ire is Deborah Raimey and Larry Raisfeld vs. National Flood Insurance Co., 14 CV 461. It involves owners of Long Beach rental property that was damaged in Hurricane Sandy. It has exposed the practice of “peer reviews.” You will see why I’m using quotes in a second.

Following the hurricane the plaintiff’s made an insurance claim with Wright National Flood Insurance Company. In a Draft report the engineer concluded:

1) The physical evidence observed at the property indicated that the subject building was structural [sic] damaged by hydrodynamic forces associated with the flood event of October 29, 2012. The hydrodynamic forces appear to have caused the foundation walls around the south-west corner of the building to collapse.

2) The extent of the overall damages of the building, its needed scope of repair combined with the age of the building and its simple structure, leads us to conclude that a repair of the building is not economically viable

However the homeowners/plaintiffs never received this report. Instead the report’s conclusions were changed after an engineer “peer reviewed the report.” Despite the fact that this second engineer never physically inspected the damaged property the final report made available to homeowners and their attorney concluded:

1) The physical evidence observed at the property indicated that the subject building was not structurally damaged by hydrodynamic forces, hydrostatic forces, scour or erosion of the supporting soils, or buoyancy forces of the floodwaters associated with the subject flood event.


2) The physical evidence observed at the subject property indicated that the uneven roof slopes, leaning exterior walls and the uneven floor surfaces within the interior of the building, were the result of long term differential movement of the building and foundation that was caused by long-term differential movement of the supporting soils at the site and long-term deflection of the building framing.

Based on these findings the insurance company decided not to pay the homeowners. Imagine if you held this mortgage?

Reasonable minds can differ. Maybe two honest engineers reached different conclusions. But the report was written by the same engineer who changed his conclusions following a phone conversation with another engineer for a company retained by the insurance company.

At the very least this case exposes conflicts of interest inherent in a system where third parties are retained by insurance companies to decide what claims should be honored. Homeowners shouldn’t have to sue to get both sides of the story. The case also underscores the difficult issues raised by discovery requests.

But what disturbs me most of all is that the case is yet another example of how this country is suffering   from a crisis in ethics coming not just from Wall Street but Main Street. People are being forced to choose between doing the honest thing, such as reporting a car defect or disclosing BSA violations, and the financially expedient thing. Every day the newspaper’s report on how someone chooses the financially expedient option.

Abraham Lincoln once said “That every man has a price and you are getting dangerously close to mine.” I wonder if the economic downturn has made people a little more willing than they use to be to put their ethics aside to keep their paychecks secure.

I routinely wonder about what makes credit unions unique and how they can communicate these unique attributes to their members and policy makers. I’m no Pollyanna but I believe that most credit unions are dedicated to treating people not just legally but fairly. Ethics count. Let’s not be one of those industries that push them aside in pursuit of higher profits.

A link to the case is available at:



November 13, 2014 at 9:46 am Leave a comment

How Smart Is Your Branch?

Any vendor that can make itself relevant to the financial services industry since 1859 is worth paying attention to because it clearly knows how to change with the times.  That’s why this post from the Motley Fool about Diebold caught my attention.  At a recent electronics conference in Sin City, Diebold unveiled its vision of the branch of the future.

Diebold envisions what it describes as a “responsive banking concept” in which tellers are eliminated and branches become smaller but much more high tech.  You can go into the branch for simple ATM transactions, or if you want to make more sophisticated transactions using virtual tellers, you can do that, as well.  Let’s say your member is interested getting a home or car loan.  Another virtual touch board would allow the member to easily communicate with a live person via two-way video.

Similarly, IBM recently announced that it was partnering with the Bank of China to create a flagship technology branch.  This branch will not be entirely virtual since members will have the ability to call over bank representatives when they need them, but the basic idea is the same:  members will use cell phones or codes to execute transactions with minimal involvement from tellers.

What intrigues me so much about these prototype branches is what they portend about the future of banking.  Even if you are an advocate of the brick-and-mortar branch, you have to recognize that the branch itself is going to become more virtual.  Tomorrow’s member is going to expect a seamless transition between the banking she conducts on her cell phone and that she carries out in her branch.

In addition, the virtual branch will make Big Data analytics an essential tool for all financial institutions. For instance, the branch being constructed by IBM allows bank executives to get real time information about what consumers are interested in.  Consumers can even be encouraged to go to less crowded branches that may be near by.  In other words, going digital will provide your marketing department with more information about your members’ needs and desires than you could ever have anticipated. The institutions that are best equipped to analyze this information and translate it into financial products and services will be the ones most prepared to prosper going forward.

Comptroller Urges Retailers to Take Responsibility for Data Breaches

The need for retailers to take on more of the burden for preventing data breaches got a high level endorsement on Friday. Speaking before an audience of community bankers, Comptroller of the Currency Thomas J. Curry pointed out that data breaches impose a particularly heavy burden on smaller financial institutions, responsible for reissuing compromised debit and credit cards. Data breaches also “demonstrate why we need to level the playing field between financial institutions and merchants. The same expectations for security of customer information and customer notification when breaches occur should apply to all institutions. And when breaches occur in merchant systems, it seems only fair to me that they should be responsible for some of the expenses that result.”

Well said.  On that note, have a great day.

November 10, 2014 at 8:28 am Leave a comment

The Day After

The biggest news from last night’s elections for New York credit unions isn’t the Republican takeover of the U.S. Senate.  Rather, it is the fact that Senate Republicans appear to have gained a slim but decisive majority in the State Senate.  If the preliminary results hold up, it appears that Senator Dean Skelos of Long Island won’t even need the five member Independent Democratic Caucus (IDC) to exercise control over New York’s Senate Chamber.

On a practical level, this means that the lines of power in Albany are clearer than they have been in years.  For decades, Republicans ruled the State Senate and acted as a counterbalance to the overwhelmingly Democratic Assembly and the occasional Democratic Governor.  In recent years, the model appeared to be changing.  Republicans only kept control by entering into a coalition with the IDC.  In addition, it appeared that Republican strong holds in Long Island and the mid-Hudson were fading away.

These long term trends may continue, but they’ve been arrested, at least for this election cycle.  Republicans cruised to victory on Long Island, picked up an open seat in the Hudson Valley (Terrence Murphy), flipped a seat in Hudson Valley (Susan Serino beat Terry Gipson), won a hotly contested capital region race (George Amedore defeated Cecilia Tkacyzk) and flipped a seat in the Rochester area (Richard Funke beat Ted O’Brien).  To me, the remarkable thing is not only that the Republicans reclaimed the Senate majority, but that it was so decisive.  In recent years, no election cycle has been complete without a drawn out legal battle.  But this year heading into a new legislative session, we have a re-elected Governor and, in all likelihood, a single majority leader.  Here is a great site recapping election results.

As for the national election results, to me the real question isn’t so much who has the majority, but what they want to do with it.  The American public has been playing ideological ping pong since the beginning of the 21st Century.  The result has been an increasingly dysfunctional Congress more interested in ideological posturing than getting anything useful accomplished.  I actually think that President Obama has more flexibility to strike deals with U.S. Senate Republicans than he would if the Democrats held on to a slim majority.  Maybe, just maybe, it is in the interest of both Congress and the President to get something accomplished.  Otherwise, we have another two years of political atrophy while the political class awaits the results of the next decisive election,.  The problem is that there are no decisive elections in American politics.

November 5, 2014 at 8:12 am Leave a comment

Don’t tax my S-Corporation!

My guess is that as soon as the elections are over and the Republicans take control of the Senate-Don’t delude yourselves Dems. this is going to happen – you will hear talk about tax reform again.

Now don’t get me wrong this is not one of those premature “Don’ Tax My Credit Union” call to Arms. The industry has more important things to do heading into a new year of legislating than man the barricades every time someone somewhere raises questions about the credit union tax exemption. But my guess is that there are enough legislators who secretly want to actually demonstrate to the American Public that they can legislate. I’m also guessing that tax reform will be a big issue over the next two years especially since the President has signaled a willingness to talk about the issue in the past and still has two years to accomplish something. So let’s have a thoughtful fact based discussion about the advantages and disadvantages of various tax policies.

A recently posted Liberty Street Blog by researchers at the New York Fed is a good place to start. 

First I  want to squelch at the earliest possible moment any talk of reforming the tax code so that fewer banks can effectively avoid paying corporate income taxes by becoming S- corporations    As this recent post by the New York Federal Reserve Liberty Street Blog points out:

“S-Corporations currently account for 3.7 percent of total banking industry assets . Excluding the fifty largest banks, S-Corporations account for a more sizable 19.9 percent of aggregate commercial bank assets. As a rule, the higher the percentage of corporate income to be distributed, the more beneficial it is to elect S-status. So the S-Corporation best benefits an existing profit-making corporation that doesn’t reinvest earnings, or cannot do so because of an accumulated earnings problem, and expects to distribute substantially all of its income to shareholders. “

I know what you are thinking. Those banks are stealing money that could be used to reduce the deficit.  Besides how many of these tax dodging banks have really done enough to deserve their tax status?

But I say   calm down and think logically. These are smaller banks and it’s not as if  they don’t pay a host of other taxes.   I Say the value of helping institutions stay in local communities is much better than having them fade away.

Besides S-Corporations have been around since the late 50’s but commercial banks weren’t eligible for the treatment until 1997. S-Corporations can have up to 175 shareholders. They are allowed to pass through income and losses to the individual shareholders. Let’s say you’re an $800 million asset community bank with healthy profits, What the S-Corp allows you to do is avoid double taxation since the shareholders but not the bank corporation will be taxed on the profit. If this sounds a lot like the tax exempt status of   credit unions it’s because it is: In fact according to the bloggers one of the arguments for expanding the S- corp. was that community banks needed a level playing field on which to compete with credit unions.

Has the S-Corp bank been worth it? I’d say so. For example according to the Blog’s authors, S-Corps are more likely to stay independent as opposed to merging with larger banks. My guess is that their favorable tax status combined with the fact that they have access to capital creates enough of an incentive for shareholders and board members to stay independent rather than give up the fight against their larger competitors.

This is worth pondering. It means that at a time when both the banking and credit union industries are struggling to keep smaller lending institutions with viable growth plans alive.  the S- Corp provides a great example of how tax exemptions, narrowly employed and coupled with the right incentives can help local financial institutions grow and serve the needs of the communities in which they are located.  Wouldn’t it be ridiculous to waste time arguing against smart tax policy? I certainly think so.

Here is the Post

November 3, 2014 at 9:26 am Leave a comment

CFPB: Bankruptcy Code Harms Student Borrowers

Is the Bankruptcy Code to blame for difficulties students experience modifying their private student loan obligations?  That is the implicit question posed by the CFPB in its annual report analyzing the student loan industry.  According to the report, which summarizes data from complaints received by the CFPB over the previous year, students seeking repayment options for private student loans are facing many of the same obstacles homeowners face after falling behind on their mortgages.

According to the report, since the Bureau began accepting private student loan complaints in 2012, the most common complaint comes from borrowers seeking to avoid default when they face financial hardship.  According to the Bureau, its findings suggest that lenders and servicers “have yet to address the need for loan workout in a fulsome manner.”

What would the CFPB do?  In 2005, one of the changes made to the bankruptcy code was to make private student loans non-dischargeable in bankruptcy.  At the time of this change, similar protections had already been granted to federally subsidized student loans.  The CFPB is recommending that Congress revisit the PSL exemption “to determine whether the special bankruptcy protection afforded to lenders should be limited to those who offer certain loan modification options.” Remember, the CFPB has already put in place a regulatory framework mandating that lenders work in good faith with homeowners who are struggling to make their mortgage payments.

The nation’s rising level of student loan debt is a serious and growing problem.  As I’ve pointed out in a previous blog, there is even growing evidence that student debt is holding back the housing recovery by making it more difficult for people to afford their first house.  What concerns me about the CFPB’s recommendation is that it adds fodder to an increasingly ideological and divisive debate about the root causes of student debt.

Let’s look at issues surrounding education finance.  But let’s not analyze the issue in isolation.  College tuition has skyrocketed and shows no signs of letting up.  Looking at the amount of debt being amassed in this country to get an education and focusing exclusively on lenders is tantamount to blaming the woes of the NY Jets on their quarterback, Geno Smith: it might be comforting, but there are some issues for which there are no easy solutions.

Well I’m off to enjoy my morning yogurt.  It’s going to taste extra good now that Governor Cuomo has signed legislation  naming it the official state snack.

October 17, 2014 at 8:24 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, Credit Union Association of New York

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