Posts filed under ‘Political’
In a recent interview, President Obama suggested that what the country needs is more banking reform. Speaking on MarketPlace Radio last Wednesday, the President was asked whether Dodd-Frank had worked since mega banks are as big as ever? After going through the usual litany of Dodd-Frank accomplishments – i.e., the CFPB and so-called “living wills,” as well as increased capital requirements, the President changed his tone:
“Here’s the problem, the problem is that for 60 years, we’ve seen the financial sector grow massively. Now, it’s a great strength of our economies that we’ve got the deepest, strongest capital markets in the world, but what has also happened is that as the financial sector has grown, more and more of the revenue generated on Wall Street is based on arbitrage — trading bets — as opposed to investing in companies that actually make something and hire people. And so, what I’ve said to my economic team, is that we have to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy, but not a situation in which we continue to see a lot of these banks take big risks because the profit incentive and the bonus incentive is there for them. That is an unfinished piece of business, but that doesn’t detract from the important stabilization functions that Dodd-Frank was designed to address.”
Now, to be clear, politics being politics the White House quickly got out the word that the President’s comments didn’t mean that another push for banking reform was on its way. And there was speculation as to whether the President actually meant what he said or if his comments were simply intended to preempt criticism of Dodd-Frank in advance of its upcoming anniversary.
But the President’s comments reveal an inconvenient truth of which anyone who has tried to implement Dodd-Frank is aware: Congress and the President have done precious little to prevent another financial crisis. The too big to fail banks are still too big and with finance taking on an increasingly important role in the economy as a whole, reform of the banking system – such as reinstating boundaries between investment and commercial banking – are now all but impossible to achieve. The President had his chance, and he did not go far enough. For my money, it will go down as the greatest failure of his Presidency,
Unfortunately, credit unions are still left with the financial burden of complying with Dodd-Frank inspired mandates that are making it increasingly difficult for them to provide the types of products and services that got them into the business in the first place. In the meantime, the reality that major banks are “too big to fail” does give them a competitive advantage over their smaller counterparts. To steal a favorite political metaphor, the banks went through the car wash with the windows down and credit unions got wet.
True banking reform is not going to happen, but maybe, just maybe, with both Republicans and Democrats criticizing aspects of Dodd-Frank now’s a good time to push once again for mandate relief. At the top of my list would be an outright exemption from Dodd-Frank mortgage requirements for all credit unions. There is no evidence that credit unions caused the financial crisis, yet there is lots of evidence that Dodd-Frank is increasing costs for credit unions. There is also no good reason why credit unions should have to bear the costs for institutions that Congress doesn’t have the stomach to truly regulate.
The government reported stronger than expected job growth in June with the economy adding 280,000 new jobs. In addition, the growth was spread over a large cross-section of industries providing the best evidence yet for those of you who see the economic glass as half full. About the only negative I could find in the report is that the workforce participation rate was unchanged. People are already arguing that the jobs report is a signal that the Fed should move up its timeline for raising short term interest rates. There are some great arguments for why this approach is short sighted, but the blog has already gone on longer than I wanted.
Good luck making it through today after a nice long weekend. My advice: more coffee – lots and lots of coffee.
Yesterday, a unanimous Supreme Court ruled that President Obama exceeded his authority when he gave recess appointments to fill three vacancies on the five-member National Labor Relations Board in November 2012. The President argued that the appointments were made while the Senate was in recess. Not so, said the Court. The Court upheld the use of pro forma Senate sessions in which a single legislator gavels the Senate in and gavels out of session specifically to block the type of appointments made by the President. Let’s just say the Commander-in-Chief is having a bad week.
The ruling could have been much more significant for credit unions because Richard Cordray was also a recess appointment to head the CFPB, but since he was eventually confirmed by the Senate we don’t have to spend today figuring out which CFPB regulations are valid.
Still, the decision does mean that scores of decisions issued by the NLRB over the last two years are void and that’s still a pretty big deal when you consider how aggressively the Board has pushed to impose workplace conditions on private sector employers. If you think I’m exaggerating, go to the NLRB’s website where an entire webpage is dedicated to explaining to private sector employees what ”concerted activity” is and how their actions may be protected under federal law.
Even though all of the current board members have been confirmed by the Senate, The National Law Journal is reporting this morning that “By one estimate, more than 800 board decisions are viewed as ‘tainted’ by the participation of recess appointees, and more than 100 decisions have been invalidated by appeals courts because of the appointment problem. Hundreds more actions by regional directors appointed by the board may also be challenged.“
While many of my personal favorites are NLRB rulings that predate the recess appointments, anything that mucks up the Board’s machinery is OK in my book. Among the actions that still make me scratch my head are a Board ruling that a car dealership’s courtesy policy was too broad because it might be interpreted by employees as discouraging their use of concerted activity to address work place conditions and a recent decision to join in a lawsuit claiming that policies prohibiting the use of company smart phones and computers for non-business activities is outdated. Never mind that the Board was asking the court to reverse its own ruling.
Legislative Game Changer?
I would be remiss if I didn’t tell you a little about the decision of State Senator Jeff Klein and the other members of the State Senate’s Independent Democratic Caucus to end their coalition with Senate Republicans. This means that, barring Republican gains in November, the five Democratic Senators that comprise the caucus can sideline Senate Republicans from power and hand the reigns back to Senate Dems. Considering that Republicans have controlled the Senate for most of the last 50 years, this is another big deal.
It means that Senate Democrats will get a second chance at exercising real power in Albany after an abysmal performance the first time around, but this time with a stable majority. Depending on the outcome of the Senate elections, Democrats are positioned for one party rule in Albany since the Governor has a commanding lead in the polls, and the Assembly Democrats control almost two- thirds of that chamber’s seats. Add into the mix that NYC has the most unabashedly liberal politician in America in Mayor Bill De Blasio and next year’s legislative session could be the most interesting in years. Here is an interview in which the Senator explains why he decided to jettison the Republicans.
Matz Signals Big Changes to RBC Proposal
The Credit Union Times is reporting today that Chairman Matz used an appearance before credit union officials in Los Angeles yesterday to signal that you can expect big changes in the Risk-Based Capital Reform proposal before it is finalized. Specifically, she singled out reduced ratings for CUSOs, member business loans, mortgages and corporate capital as likely. She also said she is open to considering raising the $50 million threshold at which credit unions would be subject to a RBC framework. She’s still holding firm on the need for an RBC framework to emphasize concentration and interest-rate risk. Stay tuned.
Late Monday, Legislators and sleep-deprived staffers put the finishing touches on the 2014-2015 New York State Budget. For credit unions, the two most important take aways I have deal with title insurance and state tax policy.
As for title insurance, the Legislature agreed to the Governor’s proposal, which I talked about in a previous blog, to establish licensing requirements for title insurers. For those of you who want to take a closer look, you can find the relevant language in Part V in S.6537-D. In addition to establishing title insurer licensing requirements, the legislation imposes new disclosure requirements whenever lenders suggests using a title insurer with whom they are affiliated.
As a result, this bill will have its largest impact on the relative handful of credit unions that have mortgage lending CUSOs that provide title insurance services. The legislation is also significant because it gives the Department of Financial Services the authority it was seeking to more directly regulate title insurers by, for example, establishing minimum standards for the profession.
A second part of the budget that doesn’t directly impact credit unions but could be helpful in seeking needed reforms has to do with corporate tax reform. Specifically, the Legislature agreed to the Governor’s proposal to scrap Article 32 of the Tax Law, which imposed a tax specifically on banks. As a result, banks will be subject to the same tax treatment as other corporations in New York State. The proposal was perhaps the most controversial of the Governor’s Tax Package since some groups argued that it was essentially a tax cut for banks when New York is still suffering the effects of the Great Recession. However, this argument overlooks the fact that New York may be the capital of the banking industry, but is not guaranteed to remain so. The bank tax is a vestige of the time when banks simply didn’t have the ability to shift from state to state the way they do today.
Besides, the tax indirectly benefits credit unions. How’s that, you say? Because credit unions are also seeking authority to help New York’s economy grow by allowing municipalities to invest their funds in credit unions. Frankly, the argument that credit unions are somehow less deserving of these funds because they don’t pay corporate taxes rings all the more hollow now that the banks have successfully argued for their own tax breaks.
One generic point, Governor Cuomo and the Legislature deserve a tremendous amount of credit for four on-time budgets. But the Governor and all future Governors should give a big thank you to former Governor Pataki. It was his administration that laid the groundwork for these on-time budgets by successfully arguing that the Legislature could not amend the Executive’s Budget proposal without the Governor’s consent. On a practical level this means that the Governor has a tremendous amount of leverage since the legislature must ultimately choose between accepting the Governor’s recommendations or shutting down the Goverrnment. Simply put, the legislature doesn’t have as much leverage as they used to have in budget negotiations.
As readers of this blog will know, there are days when the amount of news is so great that I do away with my normal commentary to highlight the latest developments. This is one of those days.
Most importantly, NCUA announced late last evening that it would modify its Risk Based Capital proposal to both accommodate credit union concerns for greater flexibility and NCUA concerns about protecting the all important Share Insurance Fund. NCUA has decided to scrap its proposed placement of credit union assets into ten risk-rated categories. Instead, all assets held by credit unions will be given asset ratings of 1250%. This means that all credit unions will have to back up all their loans with 100% collateral.
For example, if you want to make a $100,000 member business loan, the member will have to provide you with collateral equal to 100% of the loan. Chairman Matz pointed out that the new system will make the SIF the safest of all bank insurance systems in the world. In addition, whereas the initial proposal effectively penalized credit unions for holding concentrations of residential mortgages and investing in CUSOs, the new system doesn’t discriminate against any type of lending activity. When asked how credit unions could survive under this new regime, Matz responded that “the key is going to be volume, lots and lots of volume.”
“Besides,” she explained, “NCUA’s ultimate responsibility is to protect the Share Insurance Fund, not credit unions.”
Following up on a ground-breaking speech yesterday in which she tried to convince people that the Federal Reserve Board really does care about Joe Six Pack when it artificially depresses interest rates that could otherwise be used to help fund retirements and help credit unions and community banks make more mortgages, Chairman Yellen announced that she would be converting the Federal Reserve Banks to credit unions. She explained that credit unions really do care about their local communities and if they modeled the Fed after the credit union corporate system, what could possbily go wrong? If the conversion goes through, it will reflect a trend where banks are converting to credit unions by the thousands to take advantage of the credit unions’ tax exempt status. Once the conversion is finalized, Yellen will be stepping down and her job will be taken over by credit union expert Keith Leggett. I have a soft-spot for Keith since he’s one of the few people I am certain consistently read this blog. His new job as head of the credit unions will enable him to take advantage of the low rates and great service offered by credit unions without being fired by the Bankers’ Association.
Speaking of new jobs, CUNA has responded to the clear, decisive guidance of credit unions by publicly announcing the criteria it will be using to recruit a new CEO. Specifically, CUNA has been tasked with finding someone who’s a cross between Mother Teresa and Karl Rove. Rumor has it that CUNA already reached out to Pope Francis about taking the job, but he declined explaining that Popes cannot resign. Another early candidate was Oprah Winfrey but she declined as one of the few candidates for whom the CUNA job would represent a pay cut.
Yesterday was the drop dead deadline for the American public to sign up for health insurance or be required to pay a fine — I mean tax, sorry Judge Roberts — for refusing to purchase health insurance. But if you haven’t signed up yet, don’t worry. The Department of Health and Human Services is expected to announce later today new regulations under which only the politically popular parts of Obamacare will take effect and the public can ignore those aspects it doesn’t like. The HHS explained that while the regulation may seem broad, it is perfectly consistent with the President’s power to do whatever he wants to do when Congress refuses to go along with his proposals.
Speaking of Congress, House Republicans reacted with anger to Chairman Yellen’s speech yesterday. They announced their own policies to increase employment highlighted by a bill to do away with all unemployment benefits. They explained that by completely eliminating government handouts people will have to go out and finally get a job.
Finally, New York State passed an on time budget for the fourth year in a row late last night. This is no joke, although if I said this just a few years ago, it would have been. The truth is your erstwhile blogger can remember sitting around the Capitol on Easter Sundays watching the Ten Commandments while Legislative leaders tried to hammer out a budget.
On that note, enjoy your April Fools Day.
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.
Well, it’s all but official that no major tax reform, let alone tax reform putting the credit union tax exemption at risk, will take place this year. Not only is the credit union tax exemption not to be included in draft legislation but no lesser an authority than Senate Minority Leader Mitch McConnell took tax reform off the table for this year. While this is, of course, good news, given the amount of time and energy that the industry has devoted to the issue over the last several months, the bankers have still scored a partial victory. We’re in a mid-term election year and we have yet to get serious traction on what I consider the single most important issue facing the industry: the need for secondary capital.
Why is secondary capital so important? Let me count the ways. First, it simply makes no sense for credit unions to be penalized while growing in popularity. This is precisely what happens every time a member opens an account in this low interest, moderate growth economy where it is extremely difficult to make money off other people’s money. If credit unions are going to grow then they need the ability every other financial institution has to seek out investors.
Second, any doubt as to the crucial need for secondary capital has been dispelled by the NCUA’s Risk Based Net Worth regulatory reform proposal. In its simplest form, there are two ways a credit union can improve its risk weighting. It can either reduce its assets or increase its capital. But unlike the nation’s largest banks, our largest credit unions don’t have the opportunity to seek out additional capital. In short, if NCUA’s proposal goes forward it will put the brakes on the growth of credit unions whose only sin is to be large.
I understand how divisive the secondary capital debate is within the industry. Credit unions are, at their core, mutual institutions. They have to remain that way if they are going to continue providing members a unique financial experience. But secondary capital reform can be introduced in ways that maintain the essence of the credit union movement, which is one person one vote. If an institution is willing to invest in a credit union it would only do so against the backdrop of restrictions that give it no more or less influence than any other member of a given credit union.
Let’s keep in mind that low income credit unions can already take secondary capital and no one can seriously suggest that these institutions, in the aggregate, do not advance the core missions of the credit union movement.
Tax reform is like one of those Friday the 13th movies. The villain never really dies. The industry must, of course, remain vigilant. But, we don’t want to win the battle and lose the war by letting concerns over the credit union tax exemption crowd out other important pieces of the credit union agenda.
We’ve come a long way and not for the better since Barak Obama electrified the nation with his speech before the Democratic National Convention proclaiming the need for politicians to unify the nation. Last night, now President Barak Obama, who taught constitutional law at the University of Chicago, put forward a mix of proposals emphasizing his ability to act unilaterally in furtherance of his goals with or without the help of Congress.
However, even though the President can make headlines by relying on initiatives to better coordinate activities with state government and can push the envelope of regulatory rulemaking authority, in the end there is very little he can do to fundamentally change the nation’s public policy without Congress. The result is that we can expect another year that will once again feature gridlock and limited opportunities for credit unions to advance their objectives. But this isn’t all bad. Here’s what we can take away from last night’s State of the Union Address.1) There is no chance of the type of grand bargain tax and budget reform that would endanger the credit unions’ tax-exempt status. The only mention of tax reform made by the President was of changing the tax code to make it more attractive for companies to bring foreign investments back home to U.S. Government coffers. Don’t get me wrong, of course credit unions have to be on the lookout for efforts to eliminate our tax exemption. But there is nothing about the current political dynamics in Washington indicating that this concern should crowd out other legislative priorities.
2) Patent reform might be the area where credit unions have the best chance of getting movement on an important legislative priority. The President mentioned patent reform relatively early in his address and the polite applause it receives indicates that there may be bi-partisan support for legislation in this area.
3) Are we going to see reform of Fannie and Freddie this year? Who knows? In his speech, the President said that “since the most important investment many families make is their home,” Congress should send him “legislation that protects tax payers from footing a bill for a housing crisis ever again and keeps the dream of home ownership alive for future generations.” This incredibly vague passage is the only reference to the banking crisis and continuing need for financial reform. The passage is noteworthy because the President seems to be acknowledging that not enough had been done to keep Americans from having to bail out banks in the future. For many of us, this is fairly obvious, but for years both the President and Congress have argued that Dodd-Frank put an end to too big to fail banks.
4) In the coming days you will be hearing about a new pension program called the MYRA Guarantee Program. According to the President it will be a new kind of saving bond that will encourage Americans to build a nest egg.
5) State of the Union Addresses are legislative wish lists wrapped loosely around a theme. This year’s theme is the need to attack what the President and many others in the Democratic Party believe is deepening economic inequality. The President aruged that “upward mobility has stalled. . .The cold, hard fact is that even in the midst of the recovery, too many Americans are working more than ever just to get by, let alone get ahead, and too many still aren’t working at all.”
For those of you visiting Washington in the next few months, the increasing focus on economic inequality gives credit unions a great opportunity to highlight the central role they play in mitigating inequality. More affordable mortgages and reasonably priced financial products mean more money in the pockets of Americans.
If Governor Cuomo has his way, New York State will soon be requiring title insurers to be licensed for the first time. The proposal, which was included in the Governor’s budget package released yesterday, could impact your credit union if, for example, you have an ongoing relationship with a title insurance company. It includes a new, more detailed disclosure that would have to be provided to your members. You can find the language related to this proposal in Part V of the Article VII language bill for the Transportation, Economic Development and Environmental Conservation budget (TED).
The proposal got a surprising amount of attention yesterday. It was highlighted in yesterday’s New York Post and by New York State’s Budget Director Bob Megna. The administration is highlighting the proposal as a way of clamping down on New York’s closing costs, which are among the most expensive in the nation. I’m not quite sure if the proposal will have the dramatic impact on closing expenses that the Governor is suggesting. However, it makes little sense on a policy level not to license title insurers.
Now, for a little inside baseball. Because the proposal was included as part of the Governor’s spending plan, the Legislature won’t get an opportunity to take an up or down vote on it. Instead, it will be amended, if at all, in the context of budget negotiations. A series of court cases dating back to the Pataki Administration have given the Executive Branch enormous power to force the legislature to adopt programmatic bills, which previously had been considered outside the budget process. The Governor noted yesterday that this year’s budget negotiations may be a bit more contentious than his previous submissions because of the number of legislative proposals integrated into the spending plan. Still, we are in an election year and I would strongly suspect that we see another budget pass by the April 1, 2014 deadline.
By the way, it’s cold out there. Stay warm.
Good morning my credit union brethren. Here are some news items to ponder as you start your day.
The Wall Street Journal is reporting that consumer spending made solid gains in December fueling hopes that consumers will help strengthen the economy this year. According to the Journal, retail sales gained 0.2% in December and jumped 0.7% when auto sales are excluded. Considering that retail spending drives a little less than 70% of the nation’s economic output, this is, of course, good news.
I’m curious how many of you are seeing evidence of this spurt in consumer confidence in the activities of your credit union members, particularly given the persistence of high unemployment, but this skeptical view of the nation’s economic malaise may just reflect the fact that I haven’t had my second cup of coffee yet.
Another day, another Empire State office holder calls it quits
Almost all of you will be meeting with newly elected officials in the year ahead. Plattsburgh Democrat Bill Owens announced that he will not be seeking re-election to the Congressional seat that he has held since 2009. Owens will go down as one of the luckiest or craftiest politicians in the history of New York State. In 2009, he made national news when a divide within the Republican party helped him become the first Democrat to hold the seat since the Civil War. His Departure gives the Republicans a prime opportunity to pick up an open seat and you don’t have to be Charlie Cook to expect an awful lot of national money being poured into the race.
Owens joins Long Island Congresswoman Carolyn McCarthy (Democrat), who recently called it quits. It will be interesting to see if McCarthy’s departure triggers a new round of political musical chairs. Republican Lee Zeldin from Long Island has already indicated that he is foregoing another term in the State Senate to run against Congressman Tim Bishop. Zeldin’s departure coupled with the recent retirement of Senator Charles Fuscillo means that the battle for control for the State Senate where Republicans combined with an independent caucus of four Democrats to control the chamber promises to be the biggest political fight of this election cycle.
Incidentally, not all the departures have been completely voluntary. Earlier this week, Bronx Assemblyman Eric Stevenson lost his seat after he was convicted of taking $22,000 in bribes. This followed on the heels of Assemblyman Dennis Gabryszak resigning under pressure following accusations of sexual harassment. There are now eleven open legislative seats.
Tales of QM Mortgage Woes
Yesterday, the concerns of credit unions and community banks regarding the qualified mortgage regs were highlighted at a hearing of the House Financial Services SubCommittee on Financial Institutions and Consumer Credit. Speaking on behalf of NAFCU, Orion FCU CEO Daniel Weickenand, explained in his testimony that “when you take into account the additional legal liability associated with non-QM loans, this margin will be even narrower. While some institutions may start charging a premium on their loans to account for the additional risk associated with non-QM’s, we do not feel that this is in the best interest of our credit union, our members, or our community. Consequently, we have decided to cease to offer non-QM loans at this time.”
Reasonable minds can, of course, differ and I wholeheartedly agree that Congress should consider extending greater QM relief for credit unions and smaller lending institutions. In addition, each credit union has to make its own decision based on its own unique circumstances. However, I’ve said it before and I’ll say it again: before your credit union starts exclusively offering QM mortgages, do an analysis as to whether or not the cost associated with the perceived risk of potential legal liability are outweighed by the loss of credit union revenue from refusing to do perfectly legal non-QM mortgages.