5 Ways the International Economy Affects Your Credit Union

My good friend Otto von Bismarck once said that “the nations of the world are on a stream, which they can neither create nor direct, but upon which they can steer with more or less greater skill and success.”  This quote came to mind this morning, not just because this is International Credit Union Week, but because the economic environment in which your credit union operates is increasingly impacted not just by the U.S. economy but by international events as well.  If you want to know why the stock market is more inconsistent than the Giants, all you have to do is look at what’s going on in the world.

  • The slow-down in the German economy is directly impacting the rates you get for your mortgages.  The German economy has been the one bright spot of the Euro Zone for the last several years.  It has used the pulpit given to it as a result of its economic performance to demand that other Euro Zone countries, most notably Greece, put fiscal discipline ahead of short term economic growth.  It has also made German bonds an attractive option for investors looking for safe but solid returns.  But recently, Germany’s run of economic good fortune seems to be coming to an end.  Its exports, which have been the key to its economic growth over the last decade, are declining.  What does all this mean for your credit union?  Don’t expect longer term bonds to rise any time soon.  A weakening German economy makes U.S. Treasuries that much more attractive.  Yesterday the yield on the benchmark 10-year treasury note fell to 2.206, the lowest closing level since 2013 and the 30-year bond’s yield dropped to 2.957, which, according to Dow Jones Business News, is its lowest closing level in 17 months.
  • China is still experiencing a rate of economic growth that would be the envy of any politician seeking re-election here next month, but its decline in GDP growth is already impacting countries like Germany and if its slow-down continues, China’s economic woes will take momentum from our tepid economic recovery.
  • Another country to keep an eye on is Brazil.  Along with India, China and Russia, it comprises the so-called Bric nations that exemplify the growth of emerging markets.  However, Brazil’s economy is now in recession.  Considering that, according to the Federal Reserve, 47% of total U.S. exports go to emerging markets, the slow down in these countries will impact America’s economic growth, the only question is by how much.
  • Finally, the world is a lot more interconnected than it was in 1976 when a young Belgian researcher discovered of a new virus.  This morning the CDC confirmed that a second health care worker contracted the Ebola virus.  If the virus continues to spread, don’t underestimate the potential economic impact.  For example, it is estimated that the SAR virus cost the world economy $50 billion in 2003.

Of course, it isn’t just bloggers that are paying attention to these trends.  In a speech before the IMF last weekend, Stanely Fisher, the Vice Chairman of the Federal Reserve, remarked that “if foreign growth is weaker than anticipated, the consequences for the U.S. economy should lead the Fed to remove accommodation more slowly than anticipated.”  In other words, the international climate is already impacting just how low short term interest rates are going to remain and for how long.

October 15, 2014 at 8:50 am Leave a comment

Are credit cards your sweet spot?

 

For financial industry junkies today is like a total eclipse of the sun. Third quarter earnings reports kickoff for the major banks and J.P. Morgan, Wells Fargo and CitiGroup are all announcing their earnings on the same day. (Incidentally, because of a computer glitch J.P. Morgan’s results slipped out earlier than their 7:00 AM release time and it reported  positive results. What a coincidence.)

One thing for you to keep an eye on is the extent to which credit cards boost the bottom lines of these behemoths. If the conventional wisdom is correct credit cards present both a growth opportunity and a challenge for your credit union. As the WSJ explains in an article yesterday:

“The U.S. credit-card industry has found its sweet spot: a combination of moderate economic growth, low-interest rates and consumers who have struck a balance between spending more and paying their bills on time”

Even for those of us who look at the U.S. economy and see a glass half empty the facts tell you that people are once again taking out the plastic and that there may be some low hanging fruit for credit unions with the right cross-sales pitch.

The bank making the most aggressive push is Wells Fargo. As explained in this recent article in the San Francisco Business Journal , its CEO John Stumpf has groused that the bank has the largest network of branches in the country but ranks seventh among card issuers “ Of our 25 million customer households, how many do you think have a credit card?” They all do, but only 35 percent have their credit card with us.” He is out to change this.

Then there is the fact that, even though the CARD Act outlawed some of the most unseemly consumer credit practices, the low-interest rate environment more than makes up for the lost fee income. In addition, some executives sheepishly admitted to the WSJ that the legislation might actually end up being good for business since it makes it easier for people to manage their existing debt.

How does all this help credit unions? Even though the explosion of vehicle loans is getting the lion’s share of the attention credit unions have also seen solid growth in the credit card business. CUNA Mutual reported in its July Credit Union Trends Report that “ Credit union credit card loan balances are expected to grow 7% in 2014 even though some consumers are still leery of debt after the Great Recession and others are hesitant to take on higher-interest rate debt. Better pricing, easier access to credit and lower fees have boosted credit unions’ market share of the consumer installment credit market.”

Of course continued growth is predicated on the assumption that the American Consumer has climbed out of the bunker and now is confident that the worst is over. Consumer confidence is still shaky and no doubt even shakier after the market gyrations of the last few days. Still, given how low-interest rates are and the fact that the unemployment rate is falling how well you cross sell your members on credit cards will be one of the keys to your growth in the year ahead. After all if you don’t close the deal one of the behemoths probably will.

October 14, 2014 at 9:24 am Leave a comment

When It Comes To Merchant Liability, Sometimes the Truth Hurts

Kudos to the trades.  According to the Politico website, assertions made by NAFCU and CUNA have “hit a nerve with merchant associations.”  I’ve just been on the retail website and hitting a nerve is a bit of an understatement.  The hyperbole being used by the retailers is more analogous to a person getting root canal without anesthetic.

From a tactical standpoint, I respect what the merchants are doing.  After all, there a times when a good offense really is a good defense.  Consequently, no one should be surprised by suggestions that merchants would somehow all be using EMV technology today but for credit unions that have been reluctant to adopt the technology.  Nor should anyone be surprised by the suggestion that merchants already face more than enough liability.  No need to point fingers here, we’re victims, too, they argue.

Now for reality.  The HomeDepot data breach is the latest example of merchants investing less in consumer protection than they could have to prevent foreseeable harm.  According to press reports, employees within the company put their supervisors on notice that the company was vulnerable to cyber attacks, but precious little was done in response to these concerns.  The reality is that given the current state of the law, liability for card issuing credit unions and banks is clear cut.  Under Regulation E, credit unions have long been strictly liable for any unauthorized consumer debit transactions. In addition, financial institutions have long made consumers whole for unauthorized credit card transactions.  When it comes to the maintenance of business accounts, the UCC has been interpreted as imposing an obligation on the part of financial institutions to exercise reasonable care to protect against data breaches caused by electronic transfers.

in contrast, courts have been reluctant to impose liability on merchants for the negligent protection of consumer data.  Although there are some recent cases suggesting that this may be changing (See Lone Star Nat. Bank, N.A. v. Heartland Payment Sys., Inc., 729 F.3d 421 (5th Cir. 2013), the reality is that if I’m HomeDepot or a small merchant down the street, when I do the cost-benefit analysis of investing in greater technology to protect consumer privacy or putting that money toward the bottom-line, the arithmetic still says to put it toward the latter. 

To be clear, no merchant wants to see their consumer’s data stolen.  And it is impossible to say how many data breaches would be prevented if merchants faced greater liability for their lack of due diligence.  What is clear is that is that our legal system works best when it places the cost of accidents on the party best positioned to prevent losses from occurring.  Right now there is no balance between merchant and bank liability and this has to change.

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Does New York need a state level export/import bank?  Governor Cuomo thinks so.  In a speech yesterday, he proposed creating a state level bank modeled after its controversial federal counterpart.  It would provide credit and grants to foreign corporations that want to move to New York and New York companies looking for assistance to increase their exports to foreign markets.  Assuming the Governor is re-elected, this proposal will be featured prominently in next year’s Executive Budget proposal.

October 8, 2014 at 8:27 am Leave a comment

4 Cases This Term That Will Impact Your Credit Union Operations

Well, it’s opening day for legal junkies.  The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June.  With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.

Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).

This case is important to credit unions for two reasons.  First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act.  Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week.  However, there are several exceptions to this requirement.  In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement.  In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.

In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period.  As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.

For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.

EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).

Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business.  This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code.  However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation?  This is the question that the Court will grapple with in this case.  It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people.  What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons.  Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.

Jesinoski v. Countrywide Home Loans, 13-604.

We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions.  Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage.  This case deals with a narrow but important question:  does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction?  This may not seem like a big deal, but the Circuit courts have been all over the map on this one.

Young v. United Parcel Service, 12-1226.

Federal law prohibits discrimination against employees because they are pregnant.  But, are you discriminating against a pregnant employee by refusing to provide her an accommodation?  In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages.  This case isn’t as clear cut as it sounds.  Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.

I will, of course, be keeping an eye on this and other cases in the coming months.  In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.

October 6, 2014 at 8:49 am Leave a comment

Court Rules NY Can Regulate Internet Payday Lending

The Court of Appeals for the Second Circuit held yesterday that New York’s Department of Financial Services has the authority to regulate Internet payday lenders based on Indian Reservations.  The decision is a major victory for the Department and its logic paves the way for the further regulation of out-of-state payday lenders that use the Internet to facilitate their loans.

In 2013, DFS ordered payday lending operations, most of which were based on Indian Reservations, to stop making payday loans in New York State.  Since New York State caps interest rates at 16% for unlicensed lenders, it effectively bans payday loans.  In addition to ordering these businesses to stop making loans that exceeded New York’s usury cap, the State strongly urged lenders, including several credit unions, to stop facilitating ACH payments to the payday loan providers.

Faced with a dramatic decline in their business, two tribes sued New York State in federal court, seeking to prevent it from blocking their Internet payday lending activities,  They argued that under the federal Constitution’s Indian Commerce Clause, the State had no authority to regulate lending activity taking place on New York State Indian Reservations.  They argued that the loans in question were processed through websites owned and controlled by Indian tribes, that the loans were granted based on underwriting criteria developed by the tribes, and that the lending contracts specified that tribal law would control any disputes.  In addition, they complained that by sending letters to banks and credit unions urging them to stop working with Indian lenders, the State was singling out Indian tribes for retribution.

A district court rejected the argument of the tribes and refused to grant an injunction against the DFS.  Yesterday’s decision by the Court of Appeals for the Second Circuit upheld that decision.  Most importantly, the Court agreed that the tribes had not presented sufficient evidence that the loans in question were, in fact, loans made on the Reservations.  It concluded that even though the tribes argued that the loans were “processed through websites owned and controlled by the tribes” they “never identified the citizenship of the personnel who managed the websites, where they worked, or where the servers hosting the websites were located.  Loans were approved by a tribal loan underwriting system, a vague description that could refer to the efforts of Native American actuaries working on the Reservation but could also refer to a myriad of other systems” located anywhere in the world.

Jurisdiction over Internet-based lending has implications that go far beyond questions of tribal law.  For instance, the rationale articulated by the Court yesterday strengthens New York’s ability to block Internet loans offered by banks located in states that authorize payday lending.  However, the decision is by no means a total victory for the State and underscores just how unsettled this area of the law is.  For instance, the Court stressed that even though it would not impose an injunction against the DFS at this time, the tribes could ultimately win their lawsuit if they provide additional evidence demonstrating that most of the lending activity took place on tribal lands.  Such a claim could take years to prove, and in the meantime the tribal business model is frozen.

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JP Morgan had personal information of 76 million customers stolen off its website this summer.  The announcement is the latest example of hackers targeting bank websites and online services not simply to gain access to member funds but to gain access to information such as names, addresses and phone numbers that can be used to facilitate other data breaches in the future.

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I know you all are dying to get this information:  my bet the mortgage World Series Champion prediction is that the California Angels will defeat the St Louis Cardinals in six games.  Just how trustworthy are my predictions?  NCUA is considering making them acceptable investments when it comes out with its updated Risk-Based Capital proposal.

October 3, 2014 at 8:21 am Leave a comment

What Tom Brady, subprime loans and White House break-ins have in common

There are some things we just instinctively know don’t happen. Like we know that a lunatic can’t jump the white house fence with the ease of a drunk teenager diving into a neighbor’s pool and that the same lunatic couldn’t procede to run for more yards on White House than Tom Brady passes for in a Monday Night Football game. Similarly, we know instinctively that credit unions don’t make subprime loans. As a result I’ve seen otherwise studious compliance professionals daydream when the presenter starts talking about subprime lending disclosure requirements.

So you may have been a little surprised by yesterday’s CU Times article suggesting that Navy Federal Credit Union may be setting itself up for Fair Housing examination scrutiny by offering No- Money-Down mortgages with 5% interest rates . The article exemplifies a simmering problem in mortgage regulation: Everyone is against sub prime lending but there is no set definition of what makes a subprime loan a subprime loan. With interest rates continuing near record lows all credit unions and banks for that matter, should  double-check if they are making loans that regulators could single out for greater scrutiny.

So what exactly is a subprime loan? First let’s keep in mind that almost all statutes and regulations now tie subprime loans to the APOR. The APOR is generally an average index of comparable loans. As interest rates go down so do the subprime trip wires.

First grab some more coffee. Then here are some of the differing definitions of a subprime loan,

Regulation Z defines a higher-priced mortgage loan as follows:

Higher-priced covered transaction Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction

12 C.F.R. § 1026.43

High-Cost Mortgage which regulation Z defines as The annual percentage rate applicable to the transaction, will exceed the average prime offer rate, as defined in), for a comparable transaction by more than:

(A) 6.5 percentage points for a first-lien transaction,

(B) 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,00012 C.F.R. § 1026.32

But wait there’s More…The state of course has its own definitions for what constitutes a High Cost Loan in 6-L of the Banking Law and a Sub Prime loan in 6-M.

There are many more examples with which I could sedate you; Keep in mind that each one of these definitions comes with its own disclosure requirements and penalties for noncompliance, and it quickly becomes apparent that what started as a genuine attempt to rein in abusive lending practices has morphed into a regulatory minefield more analogous to a speed trap then a legitimate regulatory framework. While it is true that none of this would matter much but for the fact that interest rates are so low they are, and now a bank or credit union making a 5% mortgage can be scrutinized for making a subprime loan.

Clearly something should be done. Congress could come up with a definition that preempts competing state requirements. Conversely, states could streamline their own subprime definitions   so that they are defined in reference to federal law.

Of course, I’ve given up on commonsense changes at least on the federal level, so my suggestion to you is to take a quick look at your mortgage interest rates this morning. You may be making “subprime loans” without even knowing it…

Speaking of subprime loans the New York Times is continuing to sound the alarm against the tactics used by used car dealers to qualify individuals for auto loans, they can’t afford. This morning, it is reporting that: “some of the same dynamics-including the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers that helped precipitate the 2008 mortgage crisis are  now playing out, albeit on a smaller scale in the auto loan market”

The paper is reporting this morning that prosecutors in New York, Alabama and Texas are zeroing in on used car dealerships and have discovered hundreds of fraudulent loans given to people with inadequate credit. If you do indirect lending now would be a good time to double check the credit union’s underwriting policies and to make sure that you can document adequate oversight over the dealerships with which you have a relationship..

 

October 2, 2014 at 9:37 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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