Last Friday, the Supreme Court granted an appeal in the case of King v. Burwell. This move has gotten a lot of attention because if the Court rules against the Administration, Obamacare is gutted. Let’s face it, healthcare has joined politics and religion as a subject you don’t discuss at dinner parties – unless, of course, you’re really bored and want to liven things up a bit. So maybe it’s not surprising that lost in all the media coverage is the fact that whether you support or oppose Obamacare, the case is directly relevant to any institution subject to federal regulation.
The case will give the Court the opportunity to delineate precisely how much flexibility agencies have when making regulations intended to implement federal legislation. I know that doesn’t sound quite as interesting as saying the case could gut Obamacare, but it means that this case is much more likely to impact the regulatory environment in which credit unions operate than the first challenge to Obamacare upheld in 2012. The GAO estimates that the federal government promulgates between 2,500 and 4,500 regulations on an annual basis. Any time the Supreme Court weighs in on how much power agencies have to promulgate these rules, it’s worth paying attention to.
A core component of the Affordable Care Act (ACA) is the establishment of exchanges through which individuals can purchase health insurance. Section 1311 provides that “each state shall, not later than January 1, 2014, establish an American Health Benefit Exchange.” However, a subsequent section provides that if a state chooses not to establish an exchange, the Secretary of Health and Human Services is required to establish an exchange within that state. Only 16 states, including New York, and the District of Columbia established health care exchanges.
Crucially, tax credits are provided for millions of individuals to help offset the cost of health insurance purchased through the exchanges. Specifically, the Act provided that such subsidies are available to a tax payer enrolled in a health plan “through an exchange established by the State.” The IRS was given responsibility for implementing this provision. It decided that the statute was designed to make health care subsidies available to all eligible individuals who purchased health insurance through an exchange regardless of whether that exchange was run by the federal or state government. The issue in this case is how much flexibility the IRS had to interpret the pertinent language as applying to both federal and state exchanges.
This is the part of the debate relevant to credit unions. As we are all too aware, Congress routinely passes huge statutes with vague language. How much flexibility agencies have in interpreting these provisions is governed by a well-established judicial framework. Where a statute is clear, agencies are responsible for implementing its plain meaning. However, where a statute is susceptible to more than one interpretation, courts defer to the agency’s interpretation so long as it is reasonable. This is the reason, for example, why the Court of Appeals for the District of Columbia Circuit ruled that the Federal Reserve acted within its power when it determine the criteria to be used when establishing the debit interchange cap. Critics of so-called Chevron deference argue that this approach gives agencies too much flexibility. This case gives the Court’s conservative wing a high profile case in which to criticize or limit an agency’s discretion in writing statutes.
Why does all this matter? Because every day credit unions and their associations lobby Congress and make good faith efforts to comply with regulations spawned by Congressional enactments. The less flexibility regulators have, the more important the legislative process becomes. Conversely, the more flexibility agencies have then the more the legislation passed by Congress is simply the first stage of an increasingly convoluted law making process.
Speaking of court cases, the NCUA has filed another lawsuit seeking to recoup losses to the Share Insurance Fund stemming from the purchase of mortgage-backed securities. This lawsuit is against Deutsche Bank National Trust Company. It alleges that the company failed to properly exercise oversight over the purchase of mortgage-backed securities purchased by U.S Central, WesCorp, Members United, Southwest and Constitution between 2004 and 2007.
Any vendor that can make itself relevant to the financial services industry since 1859 is worth paying attention to because it clearly knows how to change with the times. That’s why this post from the Motley Fool about Diebold caught my attention. At a recent electronics conference in Sin City, Diebold unveiled its vision of the branch of the future.
Diebold envisions what it describes as a “responsive banking concept” in which tellers are eliminated and branches become smaller but much more high tech. You can go into the branch for simple ATM transactions, or if you want to make more sophisticated transactions using virtual tellers, you can do that, as well. Let’s say your member is interested getting a home or car loan. Another virtual touch board would allow the member to easily communicate with a live person via two-way video.
Similarly, IBM recently announced that it was partnering with the Bank of China to create a flagship technology branch. This branch will not be entirely virtual since members will have the ability to call over bank representatives when they need them, but the basic idea is the same: members will use cell phones or codes to execute transactions with minimal involvement from tellers.
What intrigues me so much about these prototype branches is what they portend about the future of banking. Even if you are an advocate of the brick-and-mortar branch, you have to recognize that the branch itself is going to become more virtual. Tomorrow’s member is going to expect a seamless transition between the banking she conducts on her cell phone and that she carries out in her branch.
In addition, the virtual branch will make Big Data analytics an essential tool for all financial institutions. For instance, the branch being constructed by IBM allows bank executives to get real time information about what consumers are interested in. Consumers can even be encouraged to go to less crowded branches that may be near by. In other words, going digital will provide your marketing department with more information about your members’ needs and desires than you could ever have anticipated. The institutions that are best equipped to analyze this information and translate it into financial products and services will be the ones most prepared to prosper going forward.
Comptroller Urges Retailers to Take Responsibility for Data Breaches
The need for retailers to take on more of the burden for preventing data breaches got a high level endorsement on Friday. Speaking before an audience of community bankers, Comptroller of the Currency Thomas J. Curry pointed out that data breaches impose a particularly heavy burden on smaller financial institutions, responsible for reissuing compromised debit and credit cards. Data breaches also “demonstrate why we need to level the playing field between financial institutions and merchants. The same expectations for security of customer information and customer notification when breaches occur should apply to all institutions. And when breaches occur in merchant systems, it seems only fair to me that they should be responsible for some of the expenses that result.”
Well said. On that note, have a great day.
A day after the CU Times reported that NACUSO issued a call-to-arms urging credit unions to help fund regulatory and potential legal actions designed to protect CUSOs against regulatory encroachments by the NCUA, it is being reported that Home Depot’s data theft was much more serious than initially reported. Not only were a mere 56 million credit card accounts compromised, but 53 million email addresses were also stolen. It now appears that access to the system came from a password stolen from one of the company’s vendors. Just how many issues does this raise? Let me count them.
- Look to you left, look to your right. Then look down the hallway. Think about the most technologically incompetent person you have working for your credit union. Realize that your data security is only as safe as that employee can make it. Data security starts with your employees. Only give access to databases to those who truly need it. The hackers are so sophisticated now that once they have access to a password, they can virtually sneak around your system and find more and more vulnerabilities.
- I’ve said it once and I’ll say it again, and I expect NCUA will be saying it to you shortly: your vendor contracts are absolutely crucial. Given the explosion of technology, it is only natural that credit unions are going to turn to vendors. If they don’t they won’t be able to provide the type of services that members expect. But turning to the vendor doesn’t absolve the credit union of ultimate responsibility for the services the vendor is providing or the continuing need to protect member information. Consequently, just like Warren Buffet never invests in a business he doesn’t understand, your credit union should never contract for technology it doesn’t comprehend. Your vendor relationships must include ongoing monitoring by knowledgeable employees on your staff. You should make sure that your vendors document on an ongoing basis that they are compliant with the latest data security standards.
- CUSOs provide a crucial mechanism for credit unions to pool resources. Given the importance of vendor management, is it really that unreasonable for NCUA to seek a more holistic view of the CUSO industry? Personally, I don’t think so. The problem is that NCUA has sought to exercise powers it doesn’t yet have. Mandating that credit unions force their CUSOs to agree to NCUA audits is a blatant attempt to boot strap its jurisdiction. But at the end of the day, it makes sense for NCUA to have a clear picture of what a CUSO is doing, Not only are these organizations providing services for credit unions, but their financial success or failure directly impacts credit unions’ bottom line. The middle ground is for everyone to be a lot less dogmatic and a lot more pragmatic. NCUA should seek specific legislative authority to regulate CUSOs. But it should only exercise enhanced oversight over those CUSOs that represent a truly systemic risk to the industry. This means that NCUA should base its enhanced auditing not on the type of services the CUSO provides, but on how many credit unions use its services. In addition, NCUA should reduce its proposed risk rating for CUSOs. Credit unions should be encouraged to use CUSOs as opposed to third-party vendors with no connection to the industry.
The biggest news from last night’s elections for New York credit unions isn’t the Republican takeover of the U.S. Senate. Rather, it is the fact that Senate Republicans appear to have gained a slim but decisive majority in the State Senate. If the preliminary results hold up, it appears that Senator Dean Skelos of Long Island won’t even need the five member Independent Democratic Caucus (IDC) to exercise control over New York’s Senate Chamber.
On a practical level, this means that the lines of power in Albany are clearer than they have been in years. For decades, Republicans ruled the State Senate and acted as a counterbalance to the overwhelmingly Democratic Assembly and the occasional Democratic Governor. In recent years, the model appeared to be changing. Republicans only kept control by entering into a coalition with the IDC. In addition, it appeared that Republican strong holds in Long Island and the mid-Hudson were fading away.
These long term trends may continue, but they’ve been arrested, at least for this election cycle. Republicans cruised to victory on Long Island, picked up an open seat in the Hudson Valley (Terrence Murphy), flipped a seat in Hudson Valley (Susan Serino beat Terry Gipson), won a hotly contested capital region race (George Amedore defeated Cecilia Tkacyzk) and flipped a seat in the Rochester area (Richard Funke beat Ted O’Brien). To me, the remarkable thing is not only that the Republicans reclaimed the Senate majority, but that it was so decisive. In recent years, no election cycle has been complete without a drawn out legal battle. But this year heading into a new legislative session, we have a re-elected Governor and, in all likelihood, a single majority leader. Here is a great site recapping election results.
As for the national election results, to me the real question isn’t so much who has the majority, but what they want to do with it. The American public has been playing ideological ping pong since the beginning of the 21st Century. The result has been an increasingly dysfunctional Congress more interested in ideological posturing than getting anything useful accomplished. I actually think that President Obama has more flexibility to strike deals with U.S. Senate Republicans than he would if the Democrats held on to a slim majority. Maybe, just maybe, it is in the interest of both Congress and the President to get something accomplished. Otherwise, we have another two years of political atrophy while the political class awaits the results of the next decisive election,. The problem is that there are no decisive elections in American politics.
The Federal Financial Institutions Examination Council (FFIEC), which reflects the combined wisdom of all the financial regulators including the NCUA, released a “statement” yesterday in which it strongly recommended that financial institutions participate in the Financial Services Information Sharing and Analysis Center (FS-ISAC) as part of their efforts to enhance the cyber security of their institutions. The call for greater information sharing is the biggest takeaway from a report and statement the FFEIC released yesterday based on an assessment of the steps that 500 financial institutions are taking to deal with cyber threats.
Although regulators stressed that the report’s observations were not to be treated as official Guidance, don’t believe them, they may not be binding on you, but they easily could be required of you in the near future. Plus, the report provides some great advice to help develop a more robust cyber security program. For example, the report is filled with questions that board members and executives should be asking about their cyber security preparedness and steps that institutions should consider taking to mitigate risk. Among the questions that boards should be asking are:
- What is the process for ensuring ongoing and routine discussions by the board and senior management about cyber threats and vulnerabilities to our financial institution?
- How is accountability determined for managing cyber risks across our financial
institution? Does this include management’s accountability for business decisions that may introduce new cyber risks?
- What is the process for ensuring ongoing employee awareness and effective response to cyber risks?
What I would suggest doing is actually asking yourself these and the other questions outlined in the report and see what vulnerabilities your credit union has and can realistically guard against given its size and sophistication. Furthermore, ask these questions at least once a year. Cyber security is a dynamic threat and has to be monitored constantly.
As for getting involved with FS-ISAC, this organization is designed to get information about cyber threats out to financial institutions as quickly as possible and act as a repository of emerging cyber threats. Here is a link to the site: https://www.fsisac.com/
One editorial comment: The way this information was released underscores a growing problem with the way credit unions and apparently other financial institutions are being regulated. By issuing “Guidance,” “Statements” and “Reports” without clearly delineating what obligations these documents are imposing on credit unions, regulators are adding a degree of confusion to compliance that doesn’t have to be there. Here is a simple solution: All documents directed at financial institutions should include a sentence explaining what statutory power an agency is exercising in publishing the material. Regulations always include a reference to the statute pursuant to which a regulation is being promulgated and the same procedure should have to be followed when it comes to issuing reports with recommendations that sound an awful lot like examiner commandments.
Here is a link to the material: http://www.ncua.gov/News/Pages/NW20141103FFIEC.aspx
According to this morning’s CU Times, NCUA officials have officially decided that interest rate risk would be removed as a focus of NCUA’s Risk Based capital proposal. Instead IRR would be dealt with in a separate proposal.
We have to see what NCUA is actually going to propose but in concept this is a very positive development. Many of the proposed risk weightings – most noticeably those dealing with mortgage concentrations – seemed to have been designed to make it structurally impossible for credit unions to take on too many long-term loans and investments even if this meant making it difficult for them to offer sound products that members wanted.
In addition, by the middle of next year, we should have a better idea of how risky the interest rate environment is. The Fed will either start raising short-term rates by the middle of next year or the economy will continue to be so sluggish that only the clinically paranoid will fear a sudden spike.
I know it’s a cliché, but people all over the world die for the right to vote. Don’t be lazy. Vote today.
My guess is that as soon as the elections are over and the Republicans take control of the Senate-Don’t delude yourselves Dems. this is going to happen – you will hear talk about tax reform again.
Now don’t get me wrong this is not one of those premature “Don’ Tax My Credit Union” call to Arms. The industry has more important things to do heading into a new year of legislating than man the barricades every time someone somewhere raises questions about the credit union tax exemption. But my guess is that there are enough legislators who secretly want to actually demonstrate to the American Public that they can legislate. I’m also guessing that tax reform will be a big issue over the next two years especially since the President has signaled a willingness to talk about the issue in the past and still has two years to accomplish something. So let’s have a thoughtful fact based discussion about the advantages and disadvantages of various tax policies.
A recently posted Liberty Street Blog by researchers at the New York Fed is a good place to start.
First I want to squelch at the earliest possible moment any talk of reforming the tax code so that fewer banks can effectively avoid paying corporate income taxes by becoming S- corporations As this recent post by the New York Federal Reserve Liberty Street Blog points out:
“S-Corporations currently account for 3.7 percent of total banking industry assets . Excluding the fifty largest banks, S-Corporations account for a more sizable 19.9 percent of aggregate commercial bank assets. As a rule, the higher the percentage of corporate income to be distributed, the more beneficial it is to elect S-status. So the S-Corporation best benefits an existing profit-making corporation that doesn’t reinvest earnings, or cannot do so because of an accumulated earnings problem, and expects to distribute substantially all of its income to shareholders. “
I know what you are thinking. Those banks are stealing money that could be used to reduce the deficit. Besides how many of these tax dodging banks have really done enough to deserve their tax status?
But I say calm down and think logically. These are smaller banks and it’s not as if they don’t pay a host of other taxes. I Say the value of helping institutions stay in local communities is much better than having them fade away.
Besides S-Corporations have been around since the late 50’s but commercial banks weren’t eligible for the treatment until 1997. S-Corporations can have up to 175 shareholders. They are allowed to pass through income and losses to the individual shareholders. Let’s say you’re an $800 million asset community bank with healthy profits, What the S-Corp allows you to do is avoid double taxation since the shareholders but not the bank corporation will be taxed on the profit. If this sounds a lot like the tax exempt status of credit unions it’s because it is: In fact according to the bloggers one of the arguments for expanding the S- corp. was that community banks needed a level playing field on which to compete with credit unions.
Has the S-Corp bank been worth it? I’d say so. For example according to the Blog’s authors, S-Corps are more likely to stay independent as opposed to merging with larger banks. My guess is that their favorable tax status combined with the fact that they have access to capital creates enough of an incentive for shareholders and board members to stay independent rather than give up the fight against their larger competitors.
This is worth pondering. It means that at a time when both the banking and credit union industries are struggling to keep smaller lending institutions with viable growth plans alive. the S- Corp provides a great example of how tax exemptions, narrowly employed and coupled with the right incentives can help local financial institutions grow and serve the needs of the communities in which they are located. Wouldn’t it be ridiculous to waste time arguing against smart tax policy? I certainly think so.
Here is the Post
That is my most important takeaway from the FDIC’s biannual survey of unbanked and under-banked households that was released yesterday. If you are interested in getting these potential members into your branches-as credit unions you have an ethical and legal obligation to try to do so-you better find a way of competing with the prepaid card.
“The survey results suggest that sizeable proportions of unbanked households and, to a lesser degree, under-banked households, relied on prepaid cards for many of the same purposes that households associate with checking accounts” Its authors conclude.
According to the report 7% of US households are unbanked but a staggering 20 percent of households are under-banked meaning they have an account but have obtained services from nonbank alternative financial service providers in the last 12 months. The unbanked rate is down from 8.2%.
The survey reveals that nearly 8% of all households use prepaid cards and 22.3% of unbanked households have used prepaid cards in the last year. Clearly this is a growing market and it’s going to get bigger but the report underscores just how difficult it is to break into this market. On the one hand almost half of unbanked prepaid card users plan to open up an account in the next year but here is the catch: Only 10% of all households obtained their prepaid cards from branches and among the unbanked, where distrust of banks is higher, only 4% do. It will be interesting to see how many of the unbanked really do open up accounts. I have my doubts because as prepaid cards offer more of the conveniences and consumer protections of traditional accounts many people won’t see the need to make that first visit to the bank or credit union.
I have always been squeamish about prepaid cards because people at the bottom rung of the financial climb need to open up accounts to climb to financial security. But prepaid cards are here to stay and if these survey results are accurate offering them may be a great way of exposing the unbanked to your credit union. Based on this survey if I was putting together a prepaid marketing plan here are the key points that I would want to get across to consumers looking for a Prepaid Card: Credit Unions are (1)Trusted partners that can (2) Offer you the convenience of prepaid cards and are (3) backed up with the safety and security that comes from belonging to a financial institution protected by your friends and neighbors.
The report is a great resource. Here is a link.
RIP Quantitative Easing
With the Fed’s announcement yesterday that it was no longer going to make additional purchases of long term treasury bonds and mortgage backed securities it means that the most aggressive long-term intervention by the Fed into the broader economy will be coming to an end almost. Remember that the Fed will still be rolling over its existing bond purchases so it will be continuing to exercise downward pressure on long-term interest rates. Yesterday’s FOMC statement also indicates that the fed is not concerned that the recent downturn in the global economy, which played such a big part in Wall Street’s recent gyrations, fundamentally alters the outlook for US economic growth. If the conventional wisdom is correct expect short-term rates to rise the middle of next year.
They Might Be Giants
With their third world series win in five years the Giants must now be considered the most dominant team in baseball. They can’t be considered one of baseball’s great flukes anymore. They win when it matters the most.
I like it when good teams consistently win championships because championships should be difficult to win. The Royals lost this year but their lose will make their eventual World Series victory that much sweeter. My only question is: Why is it that when the Yankees win four World Series in the 90’s with strong starters, dominant relievers and a solid lineup of great defensive players its considered bad for baseballs, but everyone celebrates the resurgence of the game when the Giants win with the same formula?