Three Things To Ponder As You Start Your CU Day

Here are some things to ponder as you help your kids slip back into reality.

The credit union industry had real, solid growth in the second quarter. I’ve tried to find a soft underbelly to the industry’s economic performance and I can’t find one. The loan to share ratio is up to 71.66 from 70.88 last year, led by rising demand for car loans. In addition, student lending and mortgage loans have also showed marked improvement. The overall trend shows the industry lending out more of its money. There is even a slight decrease in the amount of long term investments but, of course, NCUA says that the current net long term asset ratio of 35.4% remains a “serious threat.” Never mind that interest rates remain at historically low levels, that demand in American bonds will keep yields down for the foreseeable future as Europe continues to struggle, and that there is still plenty of room for growth in the US economy. NCUA is right — someday interest rates will rise and when they do NCUA will say I told you so.

How important is fee income to your credit union? There is an extremely interesting article in the WSJ on fee income. (The very fact that I consider fee income interesting is a sure sign that I should have taken more time off this Summer). The paper is reporting that “As a percentage of total noninterest income, deposit-account fees dropped to 14.1% in 2013, the lowest level since 1942, according to the FDIC data. From 2000 through 2009, those fees accounted for an average of 17% of such income.” 

Redlining in Buffalo? Yesterday, the Attorney General accused Evans Bank, a regional bank in Western New York, of intentionally discriminating against African-Americans in Buffalo. This is not a claim based on a disparate impact analysis but a no holds barred claim that the bank had a policy of intentionally denying loans to credit worthy individuals because of their race. “Evans has redlined the predominantly African-American neighborhoods, intentionally excluding these neighborhoods from its lending area; developing mortgage products that it made unavailable to these neighborhoods, notwithstanding the creditworthiness of the applicants; and refusing to solicit customers, market mortgages, or provide banking facilities in those predominantly African-American neighborhoods.” If these allegations are true, good luck to the AG’s office. This is America, not apartheid South Africa.

 

 

 

 

September 3, 2014 at 8:27 am Leave a comment

Some More Good News About Prize-Linked Savings Programs

As many of you already know, New York credit unions support legislation (A.9037a Robinson/S.6805b Lanza) that would authorize credit unions and banks — if and when they get regulatory approval — to offer prize-linked savings accounts. As I mentioned in a previous blog, prize-linked savings programs allow credit unions to run lotteries for members who agree to deposit money into a certificate of deposit.

As an extremely positive article in the New York Times reported over the weekend, credit unions are being authorized to offer these savings/lottery plans across the country. In addition, Congress is taking a look at removing federal regulations prohibiting banks from offering such programs. Why are they popular? They appeal to conservatives as a free market mechanism to encourage saving and they appeal to liberals who complain that state lotteries are, effectively, highly regressive taxes.

The country has a savings rate of slightly more than 5% of income, which is less than half what it was 40 years ago. These programs can play a small but important part in getting people to save money and to do so through a credit union.

When I first heard about these programs several years ago, I was skeptical that they could really make a difference. But, over the years, I have become a true believer. For example, the other day I took a taxi to work. The driver was telling me how he was down on his luck but how a local church had a program where they offered temporary free housing for individuals who had jobs but needed to save money while looking for permanent housing. He was putting aside money for the anticipated cost of one month’s rent but he was also “investing” in two lottery tickets every day for a month. He also keeps a pack of cigarettes in the coffee holder that he keeps for puffs in between passengers. Do the math: assuming that each ticket costs $1.00 he is spending a minimum of $14.00 a week gambling. With the state minimum wage at $8.00 an hour and employers actively discouraging employees from working overtime, the lottery takes about 4% of his $320 salary before taxes; add on a state cigarette tax of $4.35 per pack (not including the additional tax that some localities impose) and you see just how regressive a tax system can be and how difficult it can be to save.

Contrast that with this vignette about the experience of North Carolina credit unions: “Seven credit unions in North Carolina joined the program last year after the State Legislature cleared the legal obstacles. Altogether, they counted 1,908 participants, who saved an average of $1,246 each, for a total of $2.38 million. The lure was 26 monthly prizes ranging from $25 to $100, a few quarterly prizes of $500 to $1,500 and one $30,000 jackpot. “

If the Governor signs the bill later this year, it will be up to credit unions to put in the time and effort necessary to make prize-linked savings programs a reality. Given the benefit to our members and the great example they provide of credit unions helping people get ahead, you should all take the time to seriously consider offering the program at your credit union.  I usually don’t use the blog to promote Association activities, but at next week’s Legal and Compliance Conference, we will be dedicating a session to explaining to credit unions how they can start these programs. 

  

September 2, 2014 at 9:16 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

Why We All Need To Know More About Mortgages

The SEC was literally asleep at the switch during the early days of the mortgage meltdown. Although it has made some marked improvements in its oversight of the financial industry, its glacial movement in implementing Dodd-Frank mandated reforms makes it quite clear that it is as reluctant to impose requirements on its regulated entities as the CFPB is zealous in dreaming up new and creative ways to protect the American consumer from himself.

So it’s big news whenever the SEC finally gets around to implementing Dodd-Frank requirements and even bigger news when, on balance, the proposal is one that makes a lot of sense. In fact, at the risk of insulting the CFPB, the proposal the SEC is reportedly finalizing today should nudge the CFPB to take a second look at its proposed revisions to HMDA regulations. Humor me a little bit and you will see where I am going on this one.

Asset-backed securities are a broad categorization of bonds comprised of pools of assets ranging from student loans to car loans to everyone’s personal favorite in the industry — mortgage backed securities. Purchases of these bonds are repaid with the revenue from consumer loan payments. These bonds are typically broken into tranches with more conservative investors getting less of a return but being first in line to get paid in the event that the loans start going delinquent.

As credit unions are painfully aware, in the pre-financial crisis days regulations permitted institutions like the corporate credit unions to rely on ratings agencies when deciding whether or not it was safe to buy an asset backed security like one comprised of mortgage loans. With 20-20 hindsight, we all know that this assumption was dangerously naïve. For the last several years, the question has been with what should the old system be replaced? New regulations require that institutions, including credit unions, no longer rely exclusively on rating agency determinations when buying securities, but as I have complained in previous blogs, it is unrealistic to think that most institutions have the expertise or access to information necessary to make the type of decisions for which they relied on the rating agencies. In addition, remember that all this is taking place against the backdrop of litigation in which credit unions have billions of dollars at stake in which the primary issue is the extent to which the bundlers and underwriters of mortgage-backed securities knowingly provided inaccurate information when selling securities that faded quicker than the Yankee’s playoff hopes. (Hey, at least we have the Jets and Giants to look forward to…Right?).

According to several news reports, the SEC will be finalizing regulations mandated by Dodd-Frank that require the issuers of asset-backed securities to provide more loan-level data about the assets that are being bundled and sold into securities. As a result, before an institution purchases a mortgage-backed security, for example, it will be able to examine the individual mortgage loans comprising the security.

Similar proposals have been floating around since 2010. So why the holdup? According to press reports, privacy groups have been concerned about how regulators planned on protecting such a huge treasure trove of personal financial data and a way that protects the individual homeowner. These are, of course, legitimate concerns, particularly since hackers have demonstrated on an almost daily basis that it is about as easy to steal computer-protected data as it is to find a first-term Senator who thinks he should be President. As legitimate as this concern is, the benefits of the proposal far outweigh its harms. By putting buyers on notice that the information is available to assess a loan’s quality, we’re creating a mechanism to improve credit quality before bonds go bad as opposed to trying to deter recklessness almost exclusively with after-the-fact law suits.

So where does HMDA and the CFPB come in? Currently, the agency that never sleeps called a Bureau has out for public comment proposed revisions to Regulation C, which implements HMDA. These mandate that you log information about mortgage loans you provide. Dodd-Frank gives the Bureau the authority to mandate the creation of a truly universal loan identifier. In an ideal world, regulators and lenders could track every loan from its creation to its payoff.  This would benefit housing advocates who believe that, with just a little more information, they can prove that lenders are somehow to blame for every mortgage not given to anyone who wants one and every foreclosure that takes place. It would also benefit lenders, many of whom already have to comply with unique loan identifier requirements if they participate in the MERS system. But the Bureau notes in the preamble that it isn’t planning a formal universal identifier proposal at this time. It should reconsider.

Given the nationalization of mortgage finance and the benefit to the financial system of insuring that all parties to complicated financial transactions have as much information to perform adequate due diligence as possible, the CFPB should consider speeding up its timeline for implementation of a universal loan identifier system. I understand that this process won’t be quick but the sooner a mortgage tracking system is implemented the sooner consumers and lenders can benefit from a more transparent lending system and resulting efficiencies.

On that note enjoy your day and, if you are in the Albany area, I’m giving you permission to leave early and take advantage of this beautiful weather while it is still around.

 

 

 

 

 

 

August 27, 2014 at 9:31 am Leave a comment

Is What’s Good For GM Good For Your Members?

 

Janet Yellen gets it even if the markets don’t.  How much richer do you feel today with the news that the SAP 500 Index reached record highs yesterday? The ostensible reason for the burst in enthusiasm is that with the Fed Chairman, at best, luke warm to the idea of raising rates anytime soon, the stimulus provided by these artificially low rates will keep the economy growing or so the theory goes.

But I would suggest a more cynical reason for the latest burst of enthusiasm: low interest rates delay the moment when the latest stock market rally comes to an end as people find safer places to put their money that provides them yield. 

Which brings me to the point of today’s blog.  Increasingly, there is a disconnect between Wall Street and Main Street which is distorting economic incentives and creating a system of haves and have nots where fewer and fewer of your members join in the nation’s economic growth.  Chairman Yellen hints at this when she repeatedly points out that the economy, while improving, isn’t nearly as strong as the traditional indicators say it is.

The simple truth is that corporations aren’t investing the way they should at this point of an economic rebound. Talk to your tellers: are members happier or still fretting about economizing? Look at your mortgages: Are members rushing out to get their piece of the American dream? Not even close.  Why then is there such a disconnect between the stock market and reality? 

One of the research papers sited by Chairman Yellen in her speech on Friday points out that labor’s share of national income has declined dramatically over the last 25 years.  Between the end of WWII and the mid-80s, the employees’ share of national income was 64%. Today that share has dipped as low as 58%.  The trend was interrupted in the mid 90’s but since then has picked up with a vengeance.

What’s going on? When capitalism is at its best, increased production raises demand to increase wages. The company wins and so does its employees. But today, companies are sitting on record amount of cash and stock buybacks are at an all-time high. In other words, it’s cheaper to invest in markets than it is to invest in employees.  

Don’t take my word for it. As the OECD concluded in a research paper last year: 

Right now the incentive structure implied by very low interest rates, which may be sustained for a long time, together with tax incentives, works directly against long-term investment. Debt finance is cheap, while the cost of equity capital needed for risky long-term investment is still high (unaffected by low rates). This combination provides a direct incentive for borrowing to carry out buybacks.

Of course, more is going on here than cheap money.  The causes of these trends are complex and varied, ranging from a global marketplace to tax policy to an uneven education system, but let’s not ignore the reality that something is going on that will likely impact the prosperity of your members and the growth of your credit union for the foreseeable future.

In the meantime when the stock market goes down, and I mean really down, for a week or two it will actually show the economy is getting better. Companies will have to start investing in real growth again and your average worker will benefit.

August 26, 2014 at 9:29 am Leave a 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

Where is the Line Compliance Officers Must Not Cross?

Monday, New York State’s Department of Financial Services (DFS) announced that it was banning Price-Waterhouse-Cooper from providing financial consulting services to financial institutions for two years and imposing a $25 million fine.  The settlement resulted from charges that PWC helped a Japanese bank evade BSA and OFAC requirements to facilitate wire transfers through American branches to sanctioned countries.

In zeroing in not only on illegal bank activity but the consultants who provide them legal advice, DFS’s actions may amount to a watershed moment in bank regulation that impacts compliance officers not only at the biggest banks but the smallest credit unions.  If you think I’m exaggerating, you’re wrong.  Here’s why.

The documents released by the DFS on Monday included an amendment made to a report tracking the bank’s wire transfer activities.  The PWC consultant correctly highlighted the transaction in a report to the bank.  But the bank successfully pressured PWC to remove the offending finding since it directly contradicted what the bank was telling the DFS.  Now, don’t get me wrong.  This is a particularly egregious example and the DFS was right to take the action it did, but the kind of pressures placed on the consultant are the type that are placed on lawyers and compliance officers every day.  We live in a world of regulations and every time a regulation in interpreted in a given way, it could restrict the actions a credit union can take.  Not every one of these decisions should be fodder for increased regulatory scrutiny.

At its core, the responsibility of the person who handles compliance at your credit union is to lay out a plan for translating regulations and laws into an operational framework.  By definition, this means that banks and credit unions are confronted with legal barriers between what they want to do and what the law says they should do.

I think it is perfectly legitimate for boards and CEOs to weigh legal and compliance advice and decide that the cost of compliance outweighs its benefits.  What isn’t legitimate is for any organization to create an environment where people are rewarded not for providing the best legal advice they can, but for providing the legal advice that the boss most wants to hear.  Ultimately, the line that shouldn’t be crossed is almost never going to be as clear as the case highlighted by DFS this week. 

What we need is a robust discussion about creating a codified set of ethical rules that apply to compliance officers,  What we also need is to clarify the distinction between the responsibilities of compliance officers and attorneys.  Regulators like to think that regulations are so clear cut that any institution that doesn’t interpret them the way regulators intended is clearly violating the law.  But I would hate to see regulators scrutinize legal memoranda in which retained and in-house counsels creatively analyze defensible interpretations of regulations for evidence that institutions chose not to adhere to the “correct” answer. 

 

 

August 20, 2014 at 8:32 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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