Posts filed under ‘Regulatory’
The Wall Street Journal reports this morning that community banks are slowly fading away. In an excellent analysis of the trend, the paper reports that the number of banking institutions in the U.S. has dwindled to its lowest level since at least the Great Depression. The number of banks has now shrunk to 6,891 and with the exception of one brave — or some may argue, delusioned — group of investors, no one is applying to form new community banks these days.
I’m not highlighting these statistics to disparage community banks. Rather, I’m posting them because the trend highlighted by the article is so similar to that taking place in the credit union industry. For instance, the decline in bank numbers from their peak of 18,000 “has come almost entirely in the form of exits by banks with less than $100 million in assets. . . with the bulk occurring as a result of mergers, consolidations or failures.”
The credit union industry has long recognized that the small institution is fading away. The trend is impossible to miss. But it is one thing to spot a trend, it’s quite another to come to a consensus about what, if anything, to do about it.
Simply put, how much should the industry really care that small credit unions are fading away? I argued in a recent blog for CU Insight (shameless plug) that the decreasing number of credit unions is, in part, a reflection of regulatory overkill. But, the regulatory burden is growing and likely to continue to do so. Only large and growing credit unions are going to have the economy of scale necessary to absorb these costs.
The Wall Street Journal also notes that small banks are the most sensitive to interest rate squeezes. Again, I certainly sympathize with smaller institutions, but unless the economy makes a miraculous recovery, banking margins are going to be squeezed well into the future.
This raises one more question. Is there something that small institutions provide that larger institutions, be they credit unions or banks, simply won’t? Increasingly, I believe the answer is yes, but consumers are unwilling to pay for the better service or home-town feel that can only come from smaller institutions. To me, if I have to choose between a teller’s friendly smile and a convenient online bill payment, I’ll take convenience, especially if I haven’t had my second cup of coffee.
One more thought, with all the hurdles facing both community banks and credit unions, why in God’s name do banks waste so much of their lobbying time trying to destroy credit unions? Looking at these numbers, any community banker who believes that the key to the survival of this industry lies in altering the tax status of credit unions is about as misguided as White House officials extolling the virtues of their improved health care website. There’s so much more that needs to be done. . .
. . .Yesterday evening, the Moreland Commission begun by Governor Cuomo in July to investigate political corruption in the Empire State released a preliminary report. The executive summary recommends various campaign finance reforms, but also takes pains to stress that investigations of political corruption including possible allegations of criminal wrongdoing are ongoing.
Like a kid who slides a bad test score in front of her father on a busy Monday morning hoping he won’t notice the mark, the Obama Administration announced more bad news on the rollout of Obamacare the day before Thanksgiving. No one releases good news the day before Thanksgiving. By the time America’s tryptophan induced slumber has worn off, we are off to battle the Black Friday crowds at the mall.
So, it’s worth reminding you on Monday morning that the government announced that it would be delaying for a year the inauguration of its website for the Small Business Health Options Program, which in the words of the Department of Health and Human Services “will help curb premium growth and spur competition based on price and quality” for small businesses.
What has always intrigued me most about the impact that Obamacare could have on credit unions is how much it would entice credit unions to nudge employees into government based exchanges. Credit unions are a unique industry in that the vast majority of employers are small businesses that offer health care to their employees. This also means that they are acutely aware of how expensive health care has become.
Small employers — defined as employers with either 50 or 100 or fewer employees depending on the state in which you live — who offer qualified health plans will be eligible for various tax credits to help cover the cost of health insurance premiums. Although these tax credits are still taking effect, an Internet-based SHOP exchange was supposed to allow individual businesses to shop and compare health care plans the same way as individuals are supposed to be able to.
On Wednesday, the Administration, which of course is still struggling to get its health care site for individuals up and running, announced that it was delaying its small business website for a year. If you want, you can still shop for small business health plans and take advantage of tax credits with a broker, for instance, but really it’s the Internet that is needed to create a true marketplace where small businesses have leverage.
I have never seen any administration at any level of government self-inflict so much political damage on itself as the Obama Administration has with its health care legislation. Let’s not forget that beyond the political incompetence, there are real practical consequences for a health care system that cannot be sustained in the long run. . .
A few quick notes: The initial take on Black Friday is that consumer spending was a bit more sluggish than retailers had hoped. This is, of course, yet another piece of evidence that for the consumer, the economy remains stuck in neutral. . .
Finally, although this has absolutely nothing to do with credit unions, Amazon.com is planning to use unmanned drones to drop packages at your doorstep within a few years. Can you imagine being the first person in your neighborhood to get that delivery?
You can tell we’re on the brink of the holiday season. Our regulators and policy makers are rushing to get stuff out the door before things slow to a snail’s pace. Here are the major things in descending order of importance that you should take a look at when you get a chance.
1. NCUA announced that, barring unforeseen developments, there shall be no corporate stabilization fund assessments in 2014. The announcement follows the Justice Department’s record settlement with J.P. Morgan over allegations of mortgage fraud which included $1.4 billion for NCUA. Let’s give credit where it’s due, the NCUA deserves a lot of credit for leading the charge on this one.
2. As you probably already know, on Wednesday afternoon the CFPB released its final regulations (http://www.consumerfinance.gov/blog/a-final-rule-that-makes-mortgage-disclosure-better-for-consumers/) replacing the Good Faith Estimate the “early TILA” and the HUD-1 with two new disclosures; one to be given at the beginning of the mortgage selection process, the other to be given three days before closing. First, the good news. The CFPB backed away from its initial proposal to increase the number of fees that would have to be included in calculating the APR on mortgage documents. This means that we don’t have to worry about learning new calculations or explaining to prospective home buyers that their mortgages aren’t any more expensive than they used to be, they just look that way. In addition, the CFPB has given us until August 2015 to fully implement these new disclosures.
The only really bad news I can find so far is that the CFPB didn’t back away from its requirement that closing notices be provided three business days before the closing, but even this has a silver lining. The CFPB gave homebuyers much greater flexibility to waive the three-day requirement.
3. Yesterday, the NCUA finalized its most controversial proposal in recent years. (http://www.ncua.gov/about/Documents/Agenda%20Items/AG20131121Item3b.pdf) CUSOs will now be mandated to file financial reports directly with the NCUA. CUSOs that engage in activities that could systemically impact the industry such as those providing information technology support and mortgage servicing will be required to provide detailed financial reports to the agency. In contrast, CUSOs that provide services such as marketing will only be required to provide basic pedigree information such as the name of the company and its tax identification number.
NCUA has no authority to directly regulate CUSOs so this new oversight power will be exercised by mandating that credit unions only contract with CUSOs that are willing to abide by these requirements. In my ever so humble opinion, this is an extremely aggressive interpretation of its regulatory powers. There is nothing that NCUA is going to accomplish through this regulation that could not have been accomplished by more aggressively holding individual credit unions responsible for lax due diligence.
4. Nuclear fall out. Yesterday’s news was dominated by the decision of Senate Democrats to exercise the so-called nuclear option (http://www.politico.com/story/2013/11/harry-reid-nuclear-option-100199.html). Before the rules change, a minority party could require that three-fifths of the Senate (60 votes) be required to affirmatively vote in favor of Presidential appointments. Reacting to Senate Republican attempts to categorically refuse to fill vacancies to the federal D.C. Circuit. the Senate majority rammed through a rules change yesterday under which presidential appointments to both the Judiciary and Executive Branch Offices can be approved by a simple majority. As it stands right now, the rule change wouldn’t apply to Supreme Court nominations or legislation. But now that the Rubicon has been crossed, it’s hard to believe you won’t see the 60 vote threshold eliminated for everything.
Several of the appointments have important consequences. For instance, Congressman Mel Watt was nominated to be the head of the Federal Housing Finance Administration, which is a hugely important position as it oversees both Freddie Mac and Fannie Mae. When Watt was nominated by the administration I blogged that it was a blatantly political choice as the Congressman had no chance of being approved by the Senate. Now, he will most likely take the helm of this important post,
In addition, although no one really thought that Janet Yellen’s nomination to be the next Chair of the Federal Reserve was in danger, the Senate’s move eliminates any possibility of last-minute glitches for Yellen to become the Fed’s first female Chairman.
And remember, all this started because of Republican intransigence over nominations to the D.C. Circuit. Don’t underestimate just how important this Circuit is. It has aggressively moved to curtail the power of agencies to promulgate regulations that go beyond the plain reading of the statute. The best example of this is, of course, the recent ruling on the Durbin Amendment. The Court is also where future challenges to CFPB rulemaking will play out.
5. Although it doesn’t directly impact credit unions, you should take a look at a guidance issued yesterday by the OCC and the FDIC (http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-182.html) cautioning banks against the use of so-called “deposit advanced products” without having proper underwriting procedures in place. Critics of these types of loans argue that they share many of the same characteristics as pay-day loans.
Much of what the CFPB has done so far is mandated by Congress. We will start to see just how far reaching its powers are when it comes to promulgating changes to regulations that aren’t mandated by Congress but harm the Bureau’s sensibilities. I’m concerned that the Bureau is asking itself how a statute would have been implemented had it only been around.
Which brings us to the CFPB’s request for information about debt collection practices under the Fair Debt Collection Practices Act (FDCPA) in a wide-ranging ANPR published in the Federal Register on November 12 (https://www.federalregister.gov/articles/2013/11/12/2013-26875/debt-collection-regulation-f). Judging by its questions and the tone of the ANPR, there is a very real risk that a new regulatory regime on debt collection practices will impose mandates similar to those already burdening mortgage servicers and originators.
Most troubling to me is how the Bureau feels that regulations have to be promulgated to curb the alleged excesses of creditors — meaning your employees who have the audacity to call up members behind on their car payments and mortgage loans. As explained by the Bureau:
Congress excluded such creditors in 1977 because it concluded that the risk of reputational harm would be sufficient to deter creditors from engaging in harmful debt collection practices.[FN51] However, experience since passage of the FDCPA suggests that first-party collections are in fact a significant concern in their own right. For instance, the FTC receives tens of thousands of debt collection complaints each year concerning creditors.[FN52] The Bureau likewise has brought a debt collection enforcement action against a creditor,[FN53] and it recently issued a supervisory bulletin emphasizing that collectors, including creditors, need to ensure that they are not engaging in unfair, deceptive, or abusive, acts and practices. . .
What kind of regulations would creditors face? Judging by the questions posed in the ANPR, virtually everything is on the table ranging from the federal registering of debt collectors to enhanced notice requirements for the debtors.
All this has been proposed in the name of protecting people who have steadfastly refused to repay their debts. Furthermore, with or without regulations, pop FDCPA into any legal database and you quickly find out that there is no shortage of lawyers willing to extend protections to debtors who are wronged by an overly aggressive debt collector.
We are just in the preliminary stages of the regulatory process and I know you have a million other thing to do. But, please do yourself a favor and weigh in on the ANPR both to educate the CFPB about how credit union creditors don’t need more regulations and how this is no time to be imposing a whole new regulatory regime on financial institutions.
People are justifiably outraged by the incompetence with which the Government has rolled out the Affordable Care Act. From cancellation notices to botched websites, the Government has played right into the hands of those who argue that it isn’t competent enough to get too involved in people’s lives.
But what I am more than a little bemused by is why the American public hasn’t saved at least a little of its outrage against the elected officials and regulators who have done next to nothing to address the core issues that led to the financial crisis. Millions of people were thrown out of work as a direct result of activities carried out by some of our largest banks and more than five years after the meltdown began, the Government has still not done enough to implement even the relatively modest reforms Congress was able to agree to.
This is not blogger hyperbole. The GAO concludes in the first of two reports it will be releasing analyzing Government support for the largest bank holding companies, that while agencies have made progress, key regulations intended to limit the “too big to fail” safety net for our largest banks have yet to be fully implemented (http://www.gao.gov/products/GAO-14-18). In addition, it is yet to be determined how effective these regulations will ultimately be even if they are implemented.
Isn’t it great that there’s more of a political consensus, at least within the Republican Party, for cutting food stamps and unemployment benefits than there is to making fundamental changes to the way our largest banks are regulated? If you really believe in the free market, then the only way to truly regulate these behemoths is to put their share holders and executives on notice that they are not too big to fail. According to the GAO, the largest four U.S. holding companies each had at least 2,000 separate legal entities as of June 30, 2013. Does anyone really think an entity that big can be effectively managed, let alone regulated? Does anyone really think that if these banks are allowed to stay this large that they will be allowed to fail if and when they mess up again?
Meanwhile, credit unions, and to be fair, many small banks, are bombarded with a never-ending supply of CFPB initiatives. Something’s not right here. I’ve said this before, and I’ll say it again. No credit union or bank should be subject to any new regulations issued by the CFPB until all the Dodd-Frank provisions and regulations intended to be imposed on the nation’s largest financial institutions are actually implemented and operational. I know this could never happen, but even getting a proposal like this introduced would show just how much the country has missed he mark with it comes to cleaning up the financial industry.
Several trends are converging to make auto lending in general, and indirect auto lending in particular, the next battlefield for a regulatory skirmish between the CFPB, lenders and, to a lesser extent, Congress. First, the CFPB is criticizing indirect lending practices. Second, Bloomberg is reporting this morning that car underwriting standards are being lowered as lenders look for higher yields (http://www.autonews.com/article/20131113/FINANCE_AND_INSURANCE/311139989/frothy-subprime-borrowing-drives-u-s-sales-raises-alarms); and, last but not least, credit unions are more dependent than ever on auto loans (http://www.cutimes.com/2013/11/12/auto-loans-set-to-end-year-on-high-note?ref=hp).
Most importantly, the CFPB will be holding a forum tomorrow morning on indirect lending practices. I know most of you who read this blog know what that is, but this deals specifically with the situation where credit unions and banks act as third-party lenders to auto dealers who are authorized to provide loans to consumers that meet baseline criteria.
In a March guidance on the issue (CFPB Bulletin 2013-02), the CFPB was critical of policies that allow auto dealers to mark up lender-established rates. The CFPB is concerned that this discretion may have a discriminatory impact and thus run afoul of the Equal Credit Opportunity Act. This concern pre-dates the CFPB. There have been several lawsuits contending that minorities disproportionately end up with more expensive car loans when sales people are given discretion in negotiating lending terms.
In late October, a bi-partisan group of Senators wrote a letter to the CFPB (http://www.cfpbmonitor.com/files/2013/10/Auto-Finance-Letter-.pdf) asking it to explain what evidence it has that lender incentives in indirect lending have a disparate impact. As can be seen from this recent CFPB blog (http://www.consumerfinance.gov/blog/category/auto-loans/), the Bureau is not shying away from its criticism of these indirect lending programs. It is strongly encouraging lenders that enter into third-party relationships to insist that the dealerships only provide flat rate compensation to their indirect lending sales force.
This conflict has particularly important implications for credit unions. Indirect lending is tricky enough, but when credit unions engage in it, they have the added concern of making sure that the person taking the loan is eligible for and becomes a member of the credit union. In addition, whether you agree or disagree with the stance taken by the CFPB, it is correct to point out that lenders have a responsibility to clearly delineate the contractual obligations of the dealerships with whom they are entering into a third-party indirect lending relationship and to monitor these relationships on an ongoing basis.
Conversely, the lenders and dealerships have legitimate gripes as well. No one should tolerate lending discrimination, but these allegations should not be lightly tossed around. Implicitly suggesting that someone is discriminating against another person is an awfully big deal and regulators, and lawyers for that matter, should be held to a high standard when making these claims.
One of the little chestnuts tucked away in the Congressional wish list that is Dodd-Frank is a requirement that financial institutions promulgate guidelines for assessing how good a job financial institutions do at fostering diversity in their workplace. Specifically, section 342 requires each financial agency’s Office of Minority and Women Inclusion to develop standards for “assessing the diversity policies and practices of entities regulated by the agency.” Crucially, the statute stipulates that these assessments should not be construed to mandate any requirement regarding an institution’s lending policies.
While I am tempted to point out that financial institutions are already among the most highly regulated businesses in the country when it comes to issues involving Race and minority advancement, the law is the law, so the question is how can this regulation be shaped in a way that does not needlessly burden credit unions while providing a benefit.
These seem to be the questions still vexing regulators, including the NCUA. Recently the major bank regulators came out with proposed guidance to implement Dodd-Frank’s mandate and they seem more than willing to consider unique approaches to assessing how lending institutions of all shapes and sizes are doing when it comes to hiring minorities. The regulation actually calls on financial institutions to make a “self-assessment” of a range of hiring and contracting practices. The preamble stresses that the “assessment envisioned by the agencies is not one of a traditional examination. . .Agencies will not use the examination or supervision process in connection with these proposed standards.” In addition, institutions would be encouraged but not required to make these assessments available to their regulators and the public through their websites.
Finally, the regulators repeatedly stress that they know many institutions already have to demonstrate how they are fostering diverse workplaces by, for example, requiring institutions with 100 or more employees or who are federal contractors with 50 or more employees, that meet certain conditions, to file reports with the Equal Employment Opportunity Commission.
Assessments could be designed in a way that reflect an individual entity’s “size and characteristics.” So, what exactly is required under this proposed self-assessment guidance? All institutions, regardless of their asset size or number of employees would be required to assess 1) the organizational commitment to diversity and inclusion considerations in employment, promotion and contracting; 2) how policies and procedures allow your institution to evaluate the effectiveness of their efforts at workplace diversity; 3) the extent to which they take a vendor’s record on diversity into account when making contracting decisions; and 4) the extent to which it publicizes its diversity efforts.
As it stands right now, these regulations are a lamb in sheep’s clothing since regulators could have used their Dodd-Frank mandate to impose much more onerous requirements than they are currently suggesting. Nevertheless, these self-assessments will impose new burdens, particularly on smaller credit unions that may not have formalized their minority hiring and promotion practices and policies. Furthermore, today’s self-assessment could be tomorrow’s public mandate. In the hands of the wrong regulators, section 342 has the potential to become an HR nightmare for credit unions.
A quick note: the links have not been working for the past couple of days so feel free to visit NCUA’s website to look at the proposed regulations. I’m going to God’s Country, aka Long Island, so I will be back on Tuesday.
When Congress passed the Telephone Consumer Protection Act (TCPA) in 1991, a smart phone was an oxymoron and automated recordings were as grating as fingernails running across a chalkboard. Fast forward to the Siri world of 2013. Even though it was intended to protect consumers from being inundated with automated solicitations, it is now emerging as the latest legal speedtrap used by plaintiff’s lawyers willing to nickel and dime businesses that have the audacity to try to collect on a debt owed them.
If you think this is an exaggeration you might be interested in knowing that Bank of America agreed to a $32 million settlement for alleged violations of the TCPA, and that a recent decision by the federal Court of Appeals for the Third Circuit, if followed by other courts, will make the TCPA into another one of those nettlesome consumer protection statutes that marginally benefit consumers and make compliance more expensive, but help plaintiff lawyers send their kids to college.
First, everything I’m talking about just applies to the use of automated phone calls. If you just reach out and touch your debtors the old fashioned way, the TCPA doesn’t apply to you. Plus, the prohibitions I’m talking about don’t apply to informational phone calls. So the recorded message I just listened to reminding me of an upcoming doctor’s appointment aren’t affected by the statute, nor would a phone call to a member informing them of a low account balance or suspicious credit card activity.
The TCPA makes it unlawful for any person to make any call using any automated telephone system or artificial or pre-recorded voice to any land line phone, cell phone or pager (remember when pagers were cutting edge technology?). The prohibition does not apply to consumers who have voluntarily consented to receive phone calls from businesses by, for example, giving a credit union their land line telephone number when they open an account. The FCC has interpreted the statute as putting the burden on the business making a phone call to prove that the consumer has consented to be called. Violators can be slapped with statutory damages equal to $500 for every single negligent violation of the statute or $1,500 for every willful violation of its provisions.
In mid October, regulations took effect which are important to your marketing department if you ever plan on sending out one of those obnoxious autodialer advertisements. Most importantly, members must now provide clear and conspicuous consent to receive autodialed marketing pitches. This means that simply getting a member to give you his or her telephone number as part of the account opening process is no longer adequate to demonstrate your compliance with the law. Instead, there has to be a written consent on the part of the member. If you get this consent either with an in-person signature or in conformity with the E-Sign Act, you can rest easy.
Everything I’ve said clearly applies to members who provide you with a traditional land line number. But what happens if the member gives you a cell phone number instead? Here’s where the courts are beginning to make things a little dicey. First, in that Bank of America settlement referred to above, the Bank decided to settle a class action in which the plaintiffs contended that the Bank or its agents “illegally contacted” debtors via their cell phone with a pre-recorded message. In other words, the fact that Bank of America was willing to settle is an indication that there are special risks when reaching out to someone’s cell phone and this is why you are beginning to see lawsuits in which alleged violations of the federal Fair Debt Collections Practices Act are coupled with allegations of TCPA violations.
Another troubling example of this trend is Gager v. Dell Financial Services, in which a delinquent debtor claimed that the company was violating the TCPA by continuing to send pre-recorded messages to her cell after she told the company she no longer wanted to be contacted. The company pointed out that she had previously consented to being called but the Court ruled that this consent could be withdrawn at anytime and that the exception for robo-dialing members with whom you have an established relationship only applied to land line phones.
If you are in Third Circuit’s jurisdiction your credit union has fewer collection options for the consumer who relies on her cell phone as compared to the consumer who continues to cling to the increasingly antiquated land-line phone. The good news is that this ruling is inconsistent with at least two New York federal court rulings, which have held that the TCPA doesn’t give consumers the right to revoke automated phone calls. Unfortunately, the FCC’s regulations didn’t address the issue of if and when a member can revoke prior consent. However, the preamble material clearly strengthens the argument that the existing business relationship exception does not apply to cell phone usage.
This is one of those arcane areas of law where mistakes are both easy to make and easy to avoid. If your credit union contracts with third party debt collectors, I would reach out to them and see what precautions if any they are taking to make sure they don’t get tripped up by the TCPA.