Posts filed under ‘Regulatory’
The CFPB proposed a regulation yesterday to extend for five years, until July 2020, a rule permitting depository institutions, including credit unions, to estimate certain fees and taxes when making disclosures to members making international wire remittances.
Under the Dodd-Frank Act, the CFPB was required to promulgate regulations mandating that consumers be given detailed information about the cost of an international remittance. In implementing the rule, the CFPB exempted institutions that make 100 or fewer international remittances a year. Nevertheless, the regulation has been among the most closely watched by the credit union industry. Under the proposal, providers of remittances must, among other things, include prepayment disclosures that inform the sender of the transfer amount in the sender’s currency, transfer fees, the total amount of the transaction in the sender’s currency, and an estimate of the exchange rate.
They also must include other fees imposed by entities other than the remittance transfer provider that will be deducted from the amount transferred by the consumer. These fees are almost impossible for depository institutions to ascertain since many of them do not have pre-existing relationships with the institutions that will be receiving the remittances. As a result, depository institutions and credit unions were given the authority to estimate these fees (fees and exchange rates) until January 21, 2015. The most important part of yesterday’s proposed regulation is that it extends this exception for another five years until 2020.
Once again, remember that this rule only applies to institutions that make more than 100 international remittance transfers a year. Those of you who are impacted should take a look at the actual proposal since the exceptions granted by the CFPB while important are limited. One final note, for many credit unions the CFPB has become the institution they love to hate. But, yesterday’s change reflects the Bureau at its best, it considers arguments on their merits and does a better job of explaining its proposed regulations than any agency out there.
Is NCUA and, by extension, the credit union industry important enough to have a seat at the table when it comes to deciding issues that impact the financial structure of the Country? Now, even if I didn’t get paid by the industry, I would still say the answer is yes. Credit unions represent more than 90 million account holders and influence the banking industry as a whole by providing needed competition to the for-profit banking model.
Nevertheless, yesterday, the Washington-based Bipartisan Policy Center released a report detailing recommended changes to the financial industry. The report, the outgrowth of a Task Force co-chaired by former New York State Banking Superintendent Richard Neiman, contains some ideas that should be seriously considered. It argues correctly that Dodd-Frank represents a missed opportunity for needed financial reform in this Country. It also argues that the Country should consolidate financial regulations and examiner training. The really good news is that this Task Force, unlike so many others, recognizes that credit unions are unique financial institutions and that NCUA should continue to exist to oversee their regulation.
Now for the part of the report that irks me. In lieu of calling for the creation of a single regulator, Dodd-Frank created a Financial Stability Oversight Council (FSOC). The purpose of the council is to create a framework for financial regulators to identify risk posed not only by large banks but by non-banks as well (think AIG before the meltdown). NCUA was given a seat on the council as a voting member. The Task Force recommends that this power be taken away from NCUA. It explains that “credit unions are an important part of the U.S. financial system, but they generally are small and do not figure into macro-prudential discussions. To the extent they do a credit union voice will still be represented on the FSOC, though without a vote.” This is bureaucratese for patting credit unions on the head and sending them to the corner with crayons while the adults do all the important work.
Since the Bipartisan Policy Center is dedicated to getting knowledgeable people together to come up with serious recommendations about serious problems facing the nation, its ideas have absolutely no chance of getting anywhere in today’s Washington. Nevertheless, this recommendation is irksome for several reasons. First, credit unions may not be as big as the behemoth banks that have the ability to bring the Country to its knees, but they certainly are impacted by the conduct of these institutions. Making credit unions comply with almost all of the Dodd-Frank inspired regulations but not giving them any ability to influence the conduct of the institutions responsible for Dodd-Frank in the first place is a lot like telling a teenager to get a driver’s license but then not letting him drive. More importantly, the proposal reflects the continued arrogance of the banking elite. Even after the masters of the universe engaged in policies and practices that have caused millions of people to lose their jobs and homes, we are still told that only a relative handful of self-proclaimed geniuses truly have the skills and knowledge necessary to oversee the Country’s financial system. What hubris.
Have a good weekend, I will be off Monday enjoying what I hope will be spectacular weather, but back Tuesday.
Good things come to those who wait. . .and wait. . .and wait. Nearly four years after deciding not to appeal federal court rulings holding that the IRS wrongly tried to tax certain state chartered credit union activities, the IRS has finally gotten around to issuing a memorandum to its examiners confirming that state chartered credit unions are exempt from most UBIT taxes.
It’s been a while since UBIT was a big issue, so here’s a quick refresher. The Unrelated Business Income Tax (UBIT) taxes the activities of not-for-profit tax-exempt organizations which are not substantially related to the activities for which an organzation was given tax exempt status. Federal credit unions are explicitly exempt from this tax. In two cases brought in federal district court and decided in 2009 and 2010, credit unions successfully argued that contrary to the IRS’s opinion, most of the products and services commonly offered by state chartered credit unions are exempt from the UBIT tax.including the sale of credit life and credit disability insurance, GAP auto insurance, ATM “per-transaction fees FROM MEMBERS,” interest on loans and the sale of checks from a check printing company to members.
The decisions and the recently released memorandum are not a complete victory for state-chartered credit unions. For instance, the sale of automobile warranties, accidental death and dismemberment insurance, life insurance and ATM “per-transaction fees FROM NON MEMBERS” are subject to UBIT. I’ve included a link to the IRS memorandum so you can take a look at the entire list. All in all, though, this is the biggest victory for credit unions in the last decade.
Credit unions are mainly concerned with the enormous power the CFPB has to promulgate consumer regulations. But to really get a feel for just how powerful the Bureau is, you should keep in mind that it also has the authority to take legal action against financial institutions engaging in deceptive financial practices. The latest institution to run afoul of the CFPB is Bank of America, which has agreed to pay approximately $727 million in refunds and $20 million in fines in relation to allegations that it engaged in deceptive practices when selling 1.4 customers credit cards and so-called “add-on services.” A separate agreement was reached with the OCC.
Among the sins highlighted by the Bureau were the fact that some consumers were led to wrongly believe that the first 30 days of coverage for certain add-on credit card services were free and aggressive enrollment practices which led consumers to believe that they were simply obtaining additional information about a product when in fact they were agreeing to buy it. These enforcement actions provide a pretty good signal of where the CFPB thinks additional regulation is necessary, so even though Bank of America’s misdeeds may not affect you today, they may impact the work load of your compliance officer tomorrow.
Just how bad is it for mortgage lenders out there? According to the Wall Street Journal, mortgage originations in February “fell to their lowest level in 14 years due to the months long plunge in refinancing activity and weak demand for loans to purchase new homes.” The Journal also reports that the share of mortgage applications for refinances hit their lowest level since 2009. Remember, this is all taking place as the FED is winding down its bond buying program and tougher lending regulations are taking effect. Unless we see a huge surge of consumer confidence and economic growth in the near future, this is shaping up as one heck of a depressing year for the mortgage market.
On that happy note, have a nice day!
I’m exaggerating only slightly this morning. In written testimony before the House Financial Services Committee yesterday NCUA General Counsel Michael McKenna stated that 70% of NCUA’s final rules over the last two years have provided regulatory relief or greater clarity without imposing new compliance costs. That’s a relief, here I thought credit unions were being overburdened by excessive regulation. I guess all those credit unions that have hired additional compliance staff over the last few years can rest easy.
As both NAFCU and CUNA were quick to point out, when it comes to assessing the impact of regulations, it’s not so much the quantity but the quality of the regulations that has to be assessed. In truth, the whole premise of yesterday’s hearing was a little silly. Regulators are responsible for regulating and they wouldn’t be doing their job if the industries they oversee reported to Congress that they loved the job they are doing. Instead of holding hearings, Congress should remind itself that regulations are, by definition, the outgrowth of laws it passes. Since that is unlikely to happen, however, NCUA can’t simply point to statistics to get around the fact that credit unions face burdens today that they didn’t have to deal with five years ago. For example, in recent years, NCUA has:
- blurred the distinction between federal and state oversight of credit unions by passing regulations giving it more direct control over state chartered credit unions;
- clamped down on CUSOs by making them report more information directly to the NCUA;
- and, of course, joined other regulators in imposing numerous regulatory requirements, euphemistically referred to as guidance, on credit unions. For example, just last week NCUA joined other regulators in emphasizing the need for small and mid-sized credit unions to take steps to guard against theft of debit card information.
(Incidentally, regulators try to have it both ways when it comes to issuing “Guidance”. On the one hand, they’re never referred to as regulations, but on the other examiners consider them just as binding on an institution as a promulgated rule).
Now, to be fair to NCUA, the agency has taken steps to minimize the regulatory burden by, for example, raising to $50 million the threshold for what is considered a complex credit union. In addition, NCUA’s regulatory streamlining of the Low Income Credit Union designation process was a master stroke in using regulatory powers to benefit the industry. Think about it. Without getting a bill passed, NCUA gave thousands of credit unions the opportunity to seek out secondary capital and take in member business loans without having to be concerned about a cap.
In the end, what is really going on here can’t be quantified. On the one hand, at its best NCUA has demonstrated a recognition that, given the huge divergence in the size and sophistication of credit unions, regulators should strive to avoid one-size fits all requirements. On the other hand, at its worst, NCUA myopically views almost everything through the lens of the Share Insurance Fund with the result that it demonstrates a cavalier disregard of the right of state chartered credit unions to be regulated primarily by state regulators and often seeks to impose safety and soundness requirements that impinge on the right of credit unions to run their credit unions in the way that best benefits their members.
As faithful readers of this blog will know, I occasionally feel the need to remind people that the opinions expressed are mine, and mine alone, although you, of course, are welcome to agree with me.
Both NCUA and credit unions are making serious mistakes in the march toward a more sophisticated risk-based capital scheme for credit unions with at least $50 million in assets. Another time I will talk about NCUA’s mistakes, but today I think it is time to take the industry to task. Most importantly, the industry can’t have it both ways when it comes to risk-based capital. For at least a decade, it has been pushing NCUA to adopt a risk-based capital formula arguing that a capital framework more in line with that of banks will free up capital at well run credit unions and ultimately help more members. This sounds great, but it is flawed for two reasons.
First, NCUA has always said that with any risk-based capital proposal there are not only going to be winners, but losers. If the industry wants capital reform but continues to insist that NCUA’s proposal is fatally flawed, then it has an obligation to come up with a workable alternative. However, my guess is that anything resembling industry consensus on what an alternative proposal would look like is impossible to obtain. For instance, if you think the proposal places too much emphasis on concentration risk, does that mean you’re in favor of increasing risk ratings across the board? And if you don’t think concentration risk should be dealt with by imposing higher risk ratings on mortgages and MBLs, then how else should NCUA account for concerns that too much concentration of any given asset poses a greater systemic risk to the industry? There is no win-win here; there are winners and there are losers.
Which leads us to the second, more fundamental problem with the industry’s position on risk-based capital. The simple truth is that despite the glorification of the BASEL framework, there is absolutely no indication that risk-based capital regimes actually work. remember that some of the largest banks that failed over the past five years were subject to BASEL requirements. In fact, as summarized in a recently released analysis from George Mason University “since 1991 the Federal Reserve has employed a risk-based measure of bank capital as its primary tool for regulating risk. However, RBC regulations are easily exploited and susceptible to regulatory arbitrage. Evidence indicates that such regulations have increased individual bank risk as well as systemic risk in the banking system.” Also, read the excellent quotes in the CU Times provided by Chip Filson, who is doing a great job leading the charge against a risk-based capital regime.
The myth of risk-based capital is underscored by NCUA’s proposal. Risk rating is complicated but at its core it is nothing more than a policy judgement on the part of regulators about which assets pose the greatest relative risk to safety and soundness. The problem is that such policy judgements are inevitably based on preventing the last financial crisis from occurring again. In reality, whether the next financial crisis occurs in five or fifty years, no one knows which assets truly pose the greatest risk to the safety and soundness of this industry.
Against this backdrop of uncertainty, it makes more sense to maintain general capital requirements than it does to provide regulators, financial institutions and the general public with false assurances that institutions are well capitalized. In short, if it was up to me, we would scrap NCUA’s proposal all together not because the proposal is so flawed, but because risk-based capital doesn’t work as advertised.
Yesterday the FFIEC, the regulatory body comprised of all the major federal financial regulators including the NCUA, issued two guidances related to the expected risk-mitigation efforts to be taken by financial institutions regarding automated teller machine (ATM) card authorization schemes and distributed denial of service attacks (DDoS). Don’t toss these statements into the bin on the corner of the desk. Efforts taken by financial institutions to mitigate cyber attacks are a point of emphasis for all examiners, including the NCUA.
The Joint Statement on cyber attacks on ATM card authorization systems is particularly noteworthy. Under an increasingly popular form of cyber theft called “unlimited operations,” crooks use basic phishing techniques to gain access to employee passwords. Over time, hackers are able to infiltrate a financial institution’s debit card authorization system. With this knowledge, they eliminate limits placed on the amount of money that can be taken from debit and pre-paid debit cards. In one scam highlighted by federal prosecutors in New York, cyber criminals distributed debit card information to co-conspirators in several countries who pulled more than $40 million from customer accounts.
Denial of service attacks have gotten a lot of attention lately because of the increasing evidence that they are being used by countries and cyber terrorists to disrupt the online services of major financial institutions. But these attacks designed to disrupt services are also commonly used to mask good, old-fashioned cyber crime. As explained by security analyst Avivah Litan:
“Once the DDoS is underway, this attack involves takeover of the payment switch (e.g. wire application) itself via a privileged user account that has access to it. Now, instead of having to get into one customer account at a time, the criminals can simply control the master payment switch and move as much money from as many accounts as they can get away with until their actions are noticed.”
Yesterday’s statements also underscore the need for all institutions, irrespective of asset size, to take steps to guard against cyber assault. In fact, the guidance on ATM takeovers notes that unlimited operations specifically target web-based controls used by small and medium sized financial institutions.
Also, keep in mind that while these statements are new, the need for credit unions to take appropriate steps consistent with their size and sophistication to guard against cyber crime is not new. You should periodically be taking a look, at 12 CFR 748 to make sure that your credit union is implementing an appropriate program of loss mitigation.
While all institutions should be required to make reasonable, good faith efforts regarding cyber crime, let’s face it, this is a high-tech game of Whack-A-Mole. Any successful efforts to mitigate a certain type of security breach will quickly be circumvented by hackers with the brains and the financial motivation to take other people’s money.
The federal government has to take the lead in developing an appropriate cyber defense scheme in this country. But with Congress unable or unwilling to impose basic security measures on merchants, this is about as likely to happen as the Yankees winning the World Series this year . . .that’s right after just two games I am willing to say that’s an awfully expensive mediocre team. On that note, enjoy your day.
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.
One charge that makes the Lords of Finance angrier than Chris Brown in an anger management class is the suggestion that Too-Big-to-Fail (TBTF) banks enjoy an unfair advantage over their smaller financial counterparts because they can make more aggressive loans and investments secure in the knowledge that in a worse case scenario, they will be bailed out by the American taxpayer.
The latest evidence for this hypothesis was released recently by that bastion of left-wing extremism – the Federal Reserve Bank of New York. Specifically, a paper by two of its researchers concludes that “Too-Big-to-Fail banks engage in riskier activities by taking advantage of the likelihood that they’ll receive government aid.”
In previous work, the same researchers demonstrated that T-B-T-F Banks have lower borrowing costs because people know that, the protestations of the political class notwithstanding, if these mega-behemoths can’t pay their bills the federal government will.
It’s one thing to have advantages because of your economy of scale – Capitalism is supposed to work that way – it’s quite another to be so big that the free market can’t discipline a bank’s conduct and the political class is too dependent on campaign contributions and too nervous about tanking the economy to step into the breach by building real firewalls.
Credit unions should be calling for the breakup of the banks too, not because there is any chance of this happening anytime soon, but because it underscores how hypocritical it is for the banking industry to call for the end of the credit union tax exemption while getting as much if not more government protection as any industry in America.
A less dramatic but also informative piece of research comes from the CFPB, which released a report on Wednesday analyzing a year’s worth of data on payday loans. The findings are hardly surprising but they provide a good indication of where the Bureau is headed as it gets ready to propose national payday lending regulations.
Most importantly, the Bureau confirmed that payday loans are typically not used as an isolated financial tool to help consumers through unexpected rough spots, but rather can best be seen as high-priced, medium-term loans that are great at getting people further in debt. According to the Bureau’s research, 82% of all payday loans are renewed within 14 days.
As Director Richard Cordray concluded in a speech accompanying the report’s release:
“Our research confirms that too many borrowers get caught up in the debt traps these products can become. The stress of having to re-borrow the same dollars after already paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”
The question is what can be done about it? Even if the Bureau has the authority to establish national payday lending standards that apply not only to states but to Indian reservations, the reality is that loan sharking is the world’s second oldest profession. If payday loans are made too restrictive they simply won’t be cost-effective enough for many credit unions or other lending institutions to offer; if the restrictions are too lenient then we could end up with a classic race to the bottom with institutions having to choose between foregoing needed revenue and taking a stand against loans that are in no consumer’s long-term interest.
Let’s continue to outlaw these predatory loans but recognize that for better or worse people need short-term loan options. A good place to start would be with NCUA’s own “short-term, small-amount lending program.” I would love to see the program fine-tuned to attract more credit unions.
One of the most amazing things about watching the legislative process in New York State is that, as a friend of mine once explained, key staff people in the Capitol tend to draw their powers from the night. As a result, almost all the important legislation passed in New York State is negotiated in the wee small hours of the morning when any normal group of people would be in bed. Therefore, it is amazing to me that there arent’ as many drafting mistakes as you would expect given New York’s proclivity for late night hijinks.
This came to my mind yesterday as I read a recently finalized regulation from the State’s Department of Financial Services, which provides guidance for the interpretation of Section 6-m of the Banking Law — New York’s subprime loan law. As anyone who has tried to comply with the myriad of disclosures tied to mortgage loans these day knows, timing is everything. For instance, in New York State, a subprime loan is a first lien mortgage, the rate for which exceeds the weekly primary market survey for comparable mortgages by one and three quarters percentage points.
According to the statute, you would review the survey posted in the week prior to which the lender provided the good faith estimate. The new regulation provides useful guidance as to how this should be interpreted on an operational level. For example, let’s say a member comes in on a Friday afternoon. Do you base your subprime loan determination on the survey posted a day ago or a week ago? Since the primary mortgage market survey is posted on Thursdays, the relevant survey to be used for purpose of determining whether or not a loan is sub-prime “is the one published on the Thursday prior to receiving the Good Faith Estimate.” This means that, for the example above, you would look at the survey published the day prior.
What happens if a new GFE is provided to the member? That triggers a new look back period to determine whether or not we have a subprime loan on our hands.
I apologize for giving you this information before you have had your second cup of coffee, but there is no area of lending where attention to detail matters as much as in mortgage lending..