Groundbreaking legislation. Political intrigue. Indecipherable regulations. If you get chills of excitement just thinking about these topics, this is the blog for you! Henry Meier is taking on the latest laws, regulations and political issues that impact New York credit unions, so read often and join the conversation!
Just as you should have a plan to rapidly recover your credit union operations in the event of a natural disaster, so too should you have a plan to rapidly get up and running in the event your credit union is victimized by a cyberattack. That’s my main take-away from a joint guidance issued yesterday by the FFEIC, a group of financial regulators that of course includes the NCUA.
In addition to underscoring the importance of cyberattack recovery, the regulators are using the guidance to emphasize the importance of ongoing assessments and monitoring of your existing computer systems. For example, you are expected to maintain an ongoing risk assessment system that considers new and evolving threats and conduct regular audits to review who has access to vital systems.
Now for some more general points, in light of the Supreme Court’s recent decision upholding the right of the Department of Labor to reinterpret existing law simply by issuing a new letter, guidances of all types, including those issued by the FFEIC, are as binding on your credit union as if a new regulation had just been promulgated. The FFEIC typically claims that it is doing nothing more than synthesizing existing requirements, but at the very least make reviewing this memo a compliance priority.
In addition, notice how the regulators are not going to let smaller institutions off the hook. Obviously, the steps a $20 million credit union takes to both guard against and recover from malware attacks are not going to be as extensive as the steps taken by a $1 billion institution, but steps need to be taken nonetheless. The regulators have a point since the bad guys have demonstrated an increasing I’m concerned that without a serious attempt on the part of the industry to pool resources, increasing computer costs in conjunction with existing compliance mandates will make it that much more difficult for any small credit unions, or true community banks for that matter, to survive.
If you are a board member helping select candidates to be your next CEO or you’re an Executive filling a slot on your management team, are you more likely to hire George Bailey or Mr. Potter? Be totally honest. George Bailey is a much nicer guy, but who’s more likely to be running a growing credit union ten years down the line? For that matter, should character even matter when making hiring decisions?
These questions came to mind recently after reading an intriguing bit of research in the most recent Harvard Business Review. According to at least one recent survey, the higher character ratings a CEO is given by his staff the better a company tends to perform.
According to the research, CEOs whose employees gave them high marks for character had an average return on assets of 9.35% over a two-year period. That’s was almost five times higher than the return generated by Executives given the lowest ratings. The cynics might be wrong after all.
The findings are based on research performed by a leadership consultancy. They identified what they considered to be the most universally identified moral principles – integrity, responsibility, forgiveness and compassion. They then sent anonymous surveys to employees at 84 companies and not-for-profits and followed up by interviewing many of the Executives. The highest performing Executives, both based on their character and financial performance, were given high ratings on all four principles. For example, they were described as standing up for what’s right, expressing concern for the common good, letting go of mistakes and showing empathy.
On the flip side, the ten worst performing management teams – euphemistically described as self-focused – were described as warping the truth for personal gain and caring mostly about themselves “no matter what the cost to others.”
Ultimately, it may be impossible to objectively quantify character. After all, we would all have a intriguing enough to ponder next time you start looking for a top executive.
NYS Budget Plan Set
Late last enough, the smoke rose from the State Capitol. It’s been reported that a budget plan has been agreed to for the 2015-2016 State Fiscal Year. It doesn’t look like this will have much of a direct impact on your credit union. More generally, budget negotiations in NYS begin and end with an annual struggle over state aid to education. The “framework agreement” reportedly includes a school aid increase of $1.6 billion and ethics reforms.
On that note, enjoy your Monday. They say Spring will arrive any day now. I am not holding my breath.
Today my blog is like a mall food court – there is a little something for everyone just so long as you aren’t expecting a great meal.
Senate Minority Leader Chuck?
This is huge news that might be even bigger for New York. It’s just been reported that current Senate Minority Leader Harry Reid, D-NV, will not seek reelection. Power abhors a vacuum and you can bet that Senators are already talking about who will replace Reid as the Chamber’s top Democrat. One of the most likely candidates is New York’s own Chuck Schumer. He has developed a reputation as one of the Senate’s top tacticians and his past chairmanship of the Democrat’s Senate Campaign Committee means that he has fostered the type of long term relationships that are awfully important in leadership fights.
Smartphones Are Smarter Than You Think
Just how important is the smartphone to your growth plans? Whether you want it to be or not, it is absolutely crucial because more and more of your members are using their smartphones to access services. Yesterday, the Fed released its fourth annual survey of mobile phone use. According to the Fed, as of December 2014, 39 percent of adults with mobile phones and bank accounts reported using mobile banking – an increase from 33 percent a year earlier. Furthermore, although people continue to use their phones for the more basic transactions – such as checking account balances – they are getting more adventurous. I was surprised that 51 percent of mobile banking users reported depositing a check using their mobile phones, up from 38 percent a year earlier.
Viewing the mobile phone as just another access device is tantamount to describing the Model T as just another vehicle. It magnifies the power of the web by cost effectively giving everyone the means to transact business with anyone else anywhere in the world at the touch of a button. For those of you who want to delve more deeply into the issue, here is a link to a great recent article in the Economist magazine. Here is my favorite quote:
“Smartphones are more than a convenient route online, rather as cars are more than engines on wheels and clocks are not merely a means to count the hours. Much as the car and the clock did in their time, so today the smartphone is poised to enrich lives, reshape entire industries and transform societies—and in ways that Snapchatting teenagers cannot begin to imagine.”
The Great Bank Robbery
I’ve always been ambivalent about the Tea Party movement. On the one hand, it started as a visceral reaction to the banking crisis. People saw the average middle class family losing their homes in the name of capitalism while the very institutions that tanked the economy got a taxpayer bailout. On the other hand, their misdirected rage has been harnessed by a clever group of anti-government extremists masquerading as Republicans, but that’s a blog for another day.
This morning’s WSJ has an extensive article about how “regional banks” are once again lending money to factories. What caught my eye and stirred my ire in the article were quotes from small business owners about how difficult it was to get the loans three or four years ago when they would have been most useful.
Let’s not let bygones be bygones. Every time a legislator questions why credit unions need authority to make member business loans or worries that the big bad credit union movement is somehow undermining community banking, let’s remind them that the same institutions he or she wants to protect are those that took Government handouts and did nothing to help the American consumer in return. Sometimes the truth hurts.
About That Pregnant Employee. . .
Here’s one for your HR people. A couple of days ago the Supreme Court decided one of the most interesting HR cases of the year: Young v. United Parcel Service. I thought the case involved a fairly straightforward question – asking whether a pregnant part-time employee was discriminated against after the company refused her request that she not be required to lift heavy packages. Apparently, the issue is not as clear cut as I thought. The Court’s ruling seems to make dealing with the claims of pregnant employees more complicated than it was just a few days ago. As summarized by the SCOTUS blog, the ruling “sets up this scenario for a female worker claiming she was the victim of pregnancy bias: she must offer proof that she is in the protected group — that is, those who can become pregnant; that she asked to be accommodated in the workplace when she could not fulfill her normal job; that the employer refused to do so, and that the employer did actually provide an accommodation for others who are just as unable, or unable, to do their work temporarily.”
A man, even one who blogs, has to know his limitations. This is a case to ask your seasoned HR professional about.
Today, our friends at the Bureau That Never Sleeps (AKA the CFPB) take their first formal but cautious steps towards regulating not only payday loans, but what I am going to describe as medium- term loans. If you’re thinking that your credit union doesn’t do payday loans, you may be right. But everyone who makes loans has an interest in understanding the parameters that the Bureau ultimately puts around lending products.
The basic approach is to impose ability-to-repay requirements on lenders making loans of 45 days or less, as well as certain longer medium-term loans with an APR of 36% or greater. Lenders would have the option of establishing that borrowers have the “ability-to-repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing.” An alternative approach would relax the underwriting standards so long as a consumer’s income is verified and, among other things, the loan would not result in the consumer receiving more than three loans in a sequence and six covered short-term loans from all lenders in a rolling 12-month period. This approach also could not result in the consumer being in debt on covered short-term loans with all lenders for more than 90 days in the aggregate during a rolling 12-month period.
The Bureau is also considering imposing restrictions on lending and debt collection practices for what the Director describes as “high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent.” The good news is that credit unions making the short term loans authorized by NCUA regulations are already satisfying potential requirements. The CFPB wants to impose NCUA’s parameters on other lenders.
Why do I describe the CFPB’s approach as cautious? Because it didn’t announce proposed rules yesterday or technically even propose an Advanced Notice of Proposed Rulemaking. Instead it released a 30 page outline of what it is thinking about proposing and why. I’ve never seen anything quite like it and I love it. It enables stakeholders to quickly understand the general direction of where the Bureau is headed and comment on it without having to delve into hundreds of pages of mind numbing detail – that can come later. What we have now is a proposed proposal.
Incidentally, the CFPB stressed in the outline that it is not seeking to regulate overdrafts with this proposal.
Yesterday, the Supremes heard oral arguments in a key bankruptcy case it will decide this term. As I discussed in a previous post, in Bank of America, NA v. Toledo-Cardona the Court must decide whether a second mortgage lien can be voided in a Chapter 7 bankruptcy proceeding where the debt owed on the first mortgage exceeds the value of the property.
For example, in one of the cases under review by the Court, a homeowner declared Chapter 7 bankruptcy. He held two mortgages. Bank of America held the second mortgage which had a value of $100,000. The bankrupt homeowner successfully argued to the lower court that the second mortgage should be treated as an unsecured debt since the value of the property had tumbled far below his outstanding first lien. Bank of America appealed to the Supreme Court arguing that banks rely on a decades-old interpretation of bankruptcy law under which second mortgages survive Chapter 7 bankruptcies.
To consumer advocates, lenders holding wholly underwater junior liens should be out of luck. They argued in a brief before the Court that junior lien holders “hold up” efficient resolution of housing problems by blocking short sales and loan modifications. Conversely, lenders argued, with the support of the United States, that voiding junior lien is too draconian a result. For example, housing values in many areas are beginning to rise again. But under the approach being advocated by the homeowners in this case, lenders would have no means of capturing the value of these increases.
A decision in this case will come before the Court’s session ends in June.
That seems to be the attitude of many millennials based on the number of surveys that consistently report that those born between 1982 to 2000 are at best indifferent and at worst skeptical when it comes to financial institutions.
For example, according to recent research conducted by Goldman-Sachs, 33% of millennials don’t think they will need a bank in the near future. In addition, 50% of the surveyed millennials are counting on tech startups to overhaul banks. Interestingly, this group is not only skeptical of banking, but profoundly impacted by the Great Recession. According to this survey, less than half of them have a credit card.
This is consistent with what I’ve described in previous blogs: a generation that will make its banking relationship decisions in a vastly different way than any previous generation. In addition, this is a generation that is more than willing to scrap traditional banking models. After all, Facebook announced recently that it is debuting an App to allow its users to make account to account transfers. Can you imagine the previous generation so willing to transfer cash without breaking out the checkbook or walking down to the bank.
I came across this survey as I was taking one more look at a proposal by the CFPB to make reloadable general purpose prepaid cards subject to Regulation E. I just can’t make up my mind when it comes to the proper role of regulation and the prepaid card. On the one hand, as an advocate for credit unions, it makes sense that as prepaid cards provide consumers with almost all the same benefits they get from a traditional banking accounts and debit cards that these accounts be subject to the same regulatory requirements such as disclosures and overdraft protections. On the other hand, the growth in prepaid cards reflects, in part, a generational shift away from traditional banking. Like them or not, the availability of these cards in stores such as Walmart have provided access to financial products for a group of people who may have otherwise chosen to forego or at least delay entering traditional banking relationships.
My concern is that by making prepaid cards more like traditional accounts from a regulatory perspective, we run the risk of squelching innovation. Rather than imposing traditional account regulations on prepaid cards, let’s assume that in the aggregate your average consumer opting for the prepaid card knows what he or she is doing, and is willing to take the risk in return for a different kind of consumer product. After all, from a generational standpoint, millennials have seen what traditional banking can do to their parents. Who can blame them if they are not all that impressed.
NCUA Sues HSBC
HSBC became the latest investment bank to be sued by NCUA over its alleged failure to properly scrutinize mortgage-backed securities purchased by bankrupt corporates. This time, NCUA is headed to Manhattan Federal Court.
HSBC was a trustee for 37 trusts that issued residential mortgage-backed securities. As with almost all its other cases, NCUA is arguing that HSBC breached its fiduciary obligation to properly assess the quality of the mortgages it used to create these securities. As alleged in the complaint, “an overwhelming number of events alerted defendants to the fact that the trusts suffered from enormous problems, yet it did nothing.” Money recovered in these and other lawsuits after legal payouts will be used to reduce credit union costs related to losses to the Share Insurance Fund.