Posts filed under ‘General’

Should We Care About Small Credit Unions

Yesterday, the Senate Banking Committee held a hearing ostensibly dedicated to examining the burdens faced by small financial institutions, including credit unions, and what can be done to help them.  I say ostensibly because any discussion of helping small credit unions inevitably and understandably morphs in to a discussion of the role of regulations in general and the need for mandate relief for all credit unions.  For instance, I know Risk-Based Capital Reform is a major issue, but it simply isn’t that important to a $20 million, single SEG credit union.  Still, it featured prominently in yesterday’s testimony.

The reality is that while proclaiming support for small credit unions, the small family farm and the independently owned bookstore around the corner has an emotional appeal, the real question isn’t so much what we can do to save small financial institutions but why we should bother making the effort in the first place. Once we answer that question, then there are actually practical steps we can take to protect viable small credit unions from extinction.

First, let’s define our terms.  Up until about a year ago, a credit union was classified as complex by NCUA if it had $10 million or more in assets.  To it’s credit, NCUA has now raised its threshold to $50 million with the result that a majority of credit unions are now considered small, at least by one regulatory measure.  NCUA’s action shows how difficult it is to define a small credit union.   Nevertheless, we all know what it is when we see one.  To their protectors, small credit unions are the institutions that remain truest to the credit union ideals.  By not growing, they literally do know most of their members and this personal relationship infuses them with a cooperative spirit that you won’t find, the argument goes, as institutions get larger.

While there is some truth to this critique, the reality is that credit unions can remain true to the movement’s ideals while growing to meet member needs.  Economy of scale enables lenders to provide cheaper products and larger credit unions have, in the aggregate, demonstrated a greater willingness to work with members during the Great Recession than have their banking counterparts.

Critics of smaller institutions, or at least those that are indifferent to their fate, point out that as all industries mature, they consolidate.  From a purely economic standpoint it makes perfect sense to have fewer credit unions while the industry as a whole serves more members than ever before; but this hands-off approach to credit union development also misses a crucial point.  It is one thing for institutions to merge because there aren’t enough members, it is quite another for institutions to merge because no one has been trained to take over as CEO.  Similarly, today’s small credit union is tomorrow’s large one.  According to NCUA statistics, 538 credit unions surpassed $50 million in assets over the last decade.

The best way to help smaller credit unions is to start making a distinction between those that are growing, those that are small but can continue to prosper, and those that are doing nothing more than living off past capital accumulation.  For the first two categories, we should work to establish networks of individuals who are intrigued by the opportunity to run a credit union irrespective of its asset size.  On a practical level, this means turning over the reigns to younger professionals who can make up with enthusiasm and ambition what they lack in expertise.  It also means championing greater charter flexibility so there is a middle ground between maintaining a SEG based existence and converting to a community charter.

Finally, smaller credit unions have to do more to pool their resources. A good example of this approach is the sharing of compliance resources among several credit unions. For me, the bottom line is this: whether a credit union is big or small, it shouldn’t be forced out of business where there is still a demonstrable need for its services.

September 17, 2014 at 9:00 am 1 comment

On corporate crack and the credit union difference

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

September 16, 2014 at 8:58 am Leave a comment

Why Apple Pay is a Game Changer

It’s been about a week now since Apple engaged in what’s become the adult version of Christmas Eve when it previewed its newest must-have gadgets.  You undoubtedly have heard by now that Apple will be unveiling a mobile payment system with enhanced security features.  Its modest goal is to make plastic payments obsolete and it has already signed up the largest banks in the Country and Navy Federal Credit Union.  These institutions have agreed to give Apple a piece of every iPay, sorry, I mean Apple Pay transaction.

If you think that mobile payments will continue to be a small part of the transactions market, or if you think that several competing platforms will be sufficient to meet the payment needs of your members, then you will disagree with everything I am about to say.  If, on the other hand, you believe, as I do, that an 800 pound gorilla with the potential of upending traditional banking models has just entered the room, then you should keep on reading.  Here are some of the biggest challenges that Apple’s entry into mobile payment presents to your credit union.

  • The credit union industry is not exactly fast on its feet, but my guess is on a practical level you will have to decide quickly if you want your members to be able to access Apple Pay with their debit and credit cards. (All those people who pre-ordered their IPhones are going to be mighty upset if they realize they can’t use Apple Pay)  If you answer yes, remember that this is going to cost money.  If you answer no, then you run the risk of members establishing alternative financial relationships with those institutions that sign up.
  • On the bright side, Apple may have the leverage to prod merchants into upgrading their systems.  As I understand the technology, merchants will have to equip their stores to handle Apple Pay transactions.  As the merchants do so, perhaps they will bite the bullet and retrofit their machines for EMV cards, as well.
  • In a best case scenario, Apple increases your credit union income by expanding the use of mobile payment as people use their cell phones to pay for transactions they would have paid for with cash.  In a worst case scenario, people will  use their cell phones for purchases they would have made with plastic.  Over time, those extra fees you are paying to Apple will really begin to eat in to your credit union’s bottom line.  Think of it this way, just a few years ago, credit unions fought to protect the right of smaller institutions to be exempt from a debit card interchange cap.  Now those same institutions are going to have pay more money to Apple or run the risk of sitting on the sidelines during a mobile payment boom.  How many record companies are out there today that don’t provide access to iTunes?

In an article in the CUTimes this morning MasterCard reassured credit unions that credit unions have a place with Mastercard and Apple.  The statement kind of reminds me of the GM who tells everyone that the  coaches’ job is safe: If it was really safe the GM wouldn’t have to say anything.

 One of my favorite lines about business is that the most successful companies aren’t the ones that build better mousetraps but the ones that know how to sell the better mousetraps.  The financial industry breathed a collective sign of relief last week because Apple decided not to compete against VISA and MasterCard at this point but instead chose to integrate its own payment system onto existing platforms.  But let’s not overlook the fact that the same company that bankrupted Kodak has as its goal to be the pre-eminent processor of all consumer payments.  My worst case scenario is that the credit union and community bank branch is as obsolete 10 years from now as film is today.

September 15, 2014 at 8:38 am Leave a comment

Middle Class Squeeze

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.

September 4, 2014 at 8:15 am Leave a comment

Are CFPB’s Performance Reviews “Acceptable?”

Yesterday, the CFPB, which prides itself on being a statistics-driven, cutting edge agency of the 21st Century, announced a new rating system for its employees which deemphasizes statistics.  For several months now, the CFPB has been dogged by increasingly strident accusations that its managers engaged in discriminatory practices.  These accusations were bolstered by an internal report highlighted in yesterday’s CU Times showing statistical disparities based on race in the performance review process.  For example, 20.3 percent of white employees received the highest rating (a 5 on a 1-5 scale), while only 10.5% of African-American employees received this rating.  The CFPB is responding to this “proof” of racial disparity by implementing a pass-fail system of employee evaluations, doing away with those troublesome numbers.  Instead, employees will retroactively be classified as either solid performers or unacceptable ones. 

CFPB’s retreat speaks volumes about statistics and their limits.  Disparity impact analysis, where regulators and litigators argue that a facially neutral lending policy can be proven to discriminate against individuals based on statistical analysis, is predicated on the assumption that statistics don’t lie.  Advocates of this approach argue that at some point statistical disparities demonstrate that even facially neutral policies reflect discriminatory undertones and/or practices. 

On the other end of the spectrum, on which I would place myself, are those who take a jaundiced view of disparate impact analysis.  Statistics only tell a fraction of the story.  For instance, the CFPB’s statistical chart can’t tell you about how often an employee had to be pushed to get his work done.  Similarly, statistics alone can’t capture the full extent of negotiations that went on between a mortgage originator and a consumer who happened to be African-American.  Nevertheless, the explosion of data makes it more, not less, likely that statistics will be used to judge the effectiveness of anti-discrimination laws.  This is why I find the CFPB’s response so telling.  Rather than defend its evaluations, it implicitly assumes that its managers must be racially biased.  Remember, these are the same people who will ultimately be reviewing lending trends and using increased HMDA data to spot discrimination.   

The pre-eminence of disparate analysis is going to have real life consequences.  For instance, the reality is that as lenders heighten their underwriting standards to make sure that they can document why a borrower can repay a mortgage loan or decide to only make so-called qualified mortgages, these decisions will have a disproportionately negative impact on minority groups that, in the aggregate, have less income. 

What will be the response of legislators and regulators?  Will they look at these statistics and realize that they reflect deep-seated, complex problems that simply can’t be assumed to only reflect racial animus?  Or will they do what the CFPB has done and simply water down evaluation standards so that the difficult issues raised can be “solved” instead of addressed.   

August 28, 2014 at 8:43 am 1 comment

No Silver Bullet For Data Protection

On Friday, the Department of Homeland Security issued an advisory urging organizations, “regardless of size,” to “proactively check” for possible infection of their point of sale technology by a data theft virus which steals debit and credit card information as purchases are being made. The catch is that the computer virus that Homeland Security wants merchants to look for has been compromising purchases since at least October 2013 with the result that an estimated 1,000 businesses have been compromised. Brace for phone calls from concerned members and the expense of replacing cards…again!

The latest developments in the data theft wars mean that Target was just the canary in the coal mine and de facto scape goat for failing to recognize that its Point Of Sale equipment had been compromised during the holiday rush. Now, let’s hope that policy makers and industry leaders don’t make the mistake of thinking that a single technology can prevent systemic breaches from happening again. But I have my doubts.

A lot of analysts were quoted over the weekend as hoping that the latest disclosures will be the straw that broke the camel’s back and force merchants of all sizes to convert to payment processors that accept so-called EMV or chip technology. The basic idea is that chip enabled cards combined with PIN verification provide dynamic protection of payment information.  In contrast, that strip on the back of the credit and debit card contains static information and firewalls. Once it is breached, it can be used over and over again by anyone with the ability to replicate the magnetic strip.

A typical quote I read over the weekend was this one in the Times: “The weakness is the magnetic stripe,” said Avivah Litan, a security analyst for Gartner Research. “I can buy a mag stripe reader on eBay and easily read all the data from your credit card. It’s an antiquated technology from the ’60s.”

To be sure, EMV technology is long overdue but it is no panacea in part because it has already been around so long. Magnetic cards have been around since the ‘60s, but chip technology has been around since the ‘90’s. Two decades is like a million dog years when it comes to technology. And the cracks in the wall are beginning to show. As this post for the excellent FICO blog demonstrates, cyber theft is creeping back up in Europe again after dramatically declining with the introduction of EMV technology.

In addition, card theft is just one component of cybercrime. As retail migrates to cyberspace, passwords are becoming as good as gold as I pointed out in this blog about a huge criminal operation intent on stealing as many passwords as possible.

My point is that there is no silver bullet technology. EMV technology makes sense but if it comes at the expense of another generation of merchant inaction, it’s not a price worth paying. At the risk of being redundant to my faithful readers, we need: a true national commitment to fighting cybercrime both in terms of increased government spending on a robust security infrastructure and laws that make merchants responsible for using reasonable care to prevent and deter data breaches. This standard will force merchants to change security protocols as the technology does or face the consequences.    

August 25, 2014 at 8:56 am Leave a comment

Separating Fact From Fiction On Auto Loans

I had a longer commute than usual into work today (if I wanted to spend an hour and a half in the car on a Monday morning I would live in Long Island and not in suburban Albany, thank you), but it helped me decide what I should do my blog on this morning.  Actually, the latest commercial from upstate’s ubiquitous car dealer bragging about how he once got credit for a dead person clinched it for me. 

As I pointed out in a previous blog, there has been increasing concern that subprime auto lending is the next mortgage crisis in waiting.  The argument goes that with larger banks increasingly securitizing auto loans, dealerships and banks, credit unions and financers they work with have a huge incentive to qualify even the most irresponsible borrowers. 

Is the perception reality?  An analysis performed by the Federal Reserve Bank of New York answers the question with a qualified yes.  Looking at data from the Fed’s Quarterly Report on Household Debt and Credit, researchers point out that there has actually been a smaller percentage of auto loans being originated for borrowers with credit scores below 620.  Currently, these borrowers represent 23% of all originated car loans, which is actually lower than the 25% to 30% witnessed in the years prior to 2007.  So, is the conventional wisdom wrong?  Not really.  According to the researchers “the dollar value of originations to people with credit scores below 660 has roughly doubled since 2009.”  What’s more, this gain in origination value reflects an increase in the average size of loans being made to these borrowers.  In other words, larger loans are being made to people with bad credit and financial institutions are more than willing to spread out the length of repayments.

However, it’s important to differentiate between banks and credit unions — which the analysis groups together — and auto finance companies.  Since the recession “ended” in 2009, finance companies have been the ones most aggressively catering to subprime borrowers while banks and credit unions have been lending to these borrowers at rates lower than historical trends.  Interestingly, the report indicates that the auto loan 30-day delinquency rate for banks and credit unions has been about 1% in recent years, but about 2.5% for finance companies.  Two take-aways from this report: one, it underscores the fact that Dodd-Frank missed the mark when it tied the hands of the CFPB to regulate car buying activity to the same extent it can regulate other consumer lending.  It also serves as a warning that examiners should not let media reports about a new subprime lending bubble drive them into placing more scrutiny on credit union car lending than is actually justified by the numbers. 

August 18, 2014 at 8:53 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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