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!
The blog is going on its summer hiatus. I could say that I am using the upcoming week to help get the kids ready for school, but the truth is that with two fantasy football drafts to prepare for I need to take a break from analyzing credit union news and regulations to ponder really important questions like: Who will Green Bay’s primary receiver be this year? Are there any running backs worth drafting in the first round? And just how many weeks will Tom Brady miss?
But before I get started I wanted to remind you of NCUA’s proposed MBL amendments and why they are even more important than they appear to be.
In case you missed it, NCUA is proposing to give credit unions greater flexibility in making MBL loans. It is moving to what it describes as a principles-based approach under which the existing detailed mandates will be replaced with a requirement that credit unions actively engaged in making MBL loans, or that are over $200 million in assets, design and implement a broad range of policies and procedures addressing MBL lending. For example, the existing requirement that a credit union have at least one person with two years of experience underwriting its MBL loans would be replaced with a requirement that staff have experience directly related to the specific types of commercial lending in which the credit union is engaged. This is including, but not limited to, demonstrated experience in conducting commercial credit analysis and evaluating the risk of a borrowing relationship using a credit risk rating system.
Credit unions will be evaluated on the basis of “supervisory guidance to examiners, which would be shared with credit unions, to provide more extensive discussion of expectations in relation to the revised rule.” Which brings me to why this proposal is even more important than meets the eye: it will give both credit unions and the NCUA the opportunity to hash out once and for all the difference between supervisory guidance and regulations. Based on my reading of the case law-and keeping in mind this is my opinion- from a compliance standpoint there is no practical distinction between an agency’s interpretation of its regulation and a regulation itself.
For example, earlier this year the Supreme Court upheld the right of the DOL to issue an interpretation making mortgage originators nonexempt employees eligible for overtime. (Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1212, 191 L. Ed. 2d 186 (2015). The mortgage bankers argued that this “interpretation” was an amendment to a rule which could only be changed after notice and comment. The Supreme Court said that a regulation is only amended when language is changed. As Justice Scalia commented in a concurring opinion “[a]gencies may now use these rules not just to advise the public, but also to bind them. After all, if an interpretive rule gets deference, the people are bound to obey it on pain of sanction, no less surely than they are bound to obey substantive rules, which are accorded similar deference. Interpretive rules that command deference do have the force of law.”
Also remember that even when an agency interpretation is intended to give a credit union greater flexibility that same guidance gives examiners greater flexibility to determine if a credit union is acting properly.
Now don’t get me wrong. I’m not saying that NCUA isn’t genuinely interested in giving CUs greater flexibility. It is, and it deserves a tremendous pat on the back for its willingness to do so. But because the new MBL framework will only be as useful as NCUA’s guidance and examiner oversight, an ongoing dialogue with the agency is crucial. Everyone needs to be on the same page.
That’s why industry stakeholders, including the New York Credit Union Association, are urging NCUA to submit its MBL guidance to a formal notice and comment period. Doing so will help everyone understand just how much additional flexibility they have to make MBL loans. In addition, everyone has to understand that there will be bumps along the road. Adults have to be willing to sit around a table and talk out their differences.
On that note – see you next Tuesday as the blog marks its fourth anniversary.
The late Met announcer Ralph Kiner used to say that a team is never as good as it looks when it’s winning and is never as bad as it looks when it’s losing. The same could be said of a stock market.
With apologies for those of you recalibrating your retirement plans with every 100 point drop in the market, this rout is not as bad as it looks.
What does the investing class know today that it didn’t know yesterday morning? We already knew that the economies of developing countries were weakening. Brazil is in the midst of a major government corruption scandal, Russia is busy trying to restart the Cold War, India needs to further decentralize its economy and the Chinese economic engine had to slow down at some point. All of this has been going on for months. Since March 2014 an estimated $1 trillion has been pulled out of emerging markets by investors. (http://money.cnn.com/2015/08/24/investing/emerging-markets-capital-outflows/index.html)
Was there surprising news about the state of the Western economies? No. In July, the Word Bank downgraded its economic growth forecast in response to an “unexpected output contraction in the United States, with attendant spillovers to Canada and Mexico.” As for Europe, growth in the EU declined from 0.4 to 0.3% in the second quarter.
What we also knew yesterday morning was that the world economy could only take off if the American consumer started spending again. As explained in that same IMF forecast, ”[t]he underlying drivers for acceleration in consumption and investment in the United States—wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market—remain intact.” http://www.imf.org/external/pubs/ft/weo/2015/update/02/. I could take issue with each one of these conclusions, but I’ll just point out that anyone who thinks the American consumer is feeling flush with higher wages is wrong. Wages are barely budging and took a beating over the last five years,
So what really happened yesterday? Nothing more or less than an overdue correction to an overheated market. The best piece of analysis I have read comes from Mohamed El-Erian, the chief economic adviser at Allianz SE and a columnist for Bloomberg News who writes: “Some commentators have rushed to describe the recent global stock market turmoil as “historic” and “unprecedented,” yet its evolution has been quite traditional so far.” The markets are adjusting to the reality that central banks can’t quickly stabilize asset prices. Quantitative easing is over.
What all this means is that markets are trending towards reality, which is exactly what markets should do. Expect bond yields to remain low and the Fed to put off raising short-term rates especially now that China has moved to cut its own rates. The economy has never been as strong as some people thought it was. Wall Street is just waking up to this reality.
I am a firm believer in not making the same mistake twice; I prefer to make new ones instead. In that vein, please do me a favor and double-check the way your credit union handles delinquent credit card accounts.
Late last week, a federal district court in Massachusetts ruled that American Airlines Federal Credit Union violated both the Truth in Lending Act and a similarly worded Massachusetts state law by seizing funds in the member’s account after she became delinquent on credit card payments due to the credit union. A recurring question that the Association’s Compliance Department fields is just what steps credit unions can take to “offset” member funds when they fall behind on credit card payments. The case provides a great opportunity for everyone to remember the basic rules and double-check their procedures. (See Martino v. Am. Airlines Fed. Credit Union, No. 14-10310-DPW, 2015 WL 4920015, at *4 (D. Mass. Aug. 18, 2015)).
The most important thing to keep in mind is that the Truth in Lending Act extends added protections to credit card holders. Consequently, if you want the option of claiming funds to recover delinquent credit card payments, there are several steps you must take ahead of time. Fortunately, this is one area where the regulations are self-explanatory.
The best place to go is 12 CFR 1026.12(d)(2) and its official staff interpretation conveniently provided for us on the CFPB’s excellent website. Most importantly, a credit card holder must affirmatively agree to a card issuer having a security interest to pay off delinquent credit card debts. A technical but critical distinction is that the agreement must create a security interest, which defines with specificity the funds that can be accessed to pay off delinquencies. For this security interest to be valid, the consumer must be aware that he is granting it.
There are three basic indicia to be reviewed in determining whether a consumer has been given adequate notice:
- Separate signature or initials on the agreement indicating that a security interest is being given.
- Placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions.
- Reference to a specific amount of deposited funds or to a specific deposit account number.
Of these three indicia, perhaps the most challenging to implement involves referencing a specific amount of deposited funds. In the American Airlines case, the court noted that courts are split as to how specific the reference language must be. In this case, the court held that reference to accessing “all” accounts is insufficient. Instead, the credit union should have referred to a specific account number, or highlighted the full amount that could be taken in the event the security interest was executed.
So ends your compliance lesson for the day. I hope you enjoyed your weekend.
If you are one of those hopeless idealists who actually think that facts, as opposed to the exercise of pure political power, make a difference in credit union efforts to raise the cap on Member Business Loans, then a recent report issued by Filene is a must read. Its most important finding is that “increasing the percentage of total assets that credit unions may lend to businesses should be beneficial to local communities,” particularly where there are already larger bank and savings institutions.
David A. Walker is a long-serving business professor at Georgetown University, who previously served as the director of research for the Office of the Comptroller of the Currency as well as a senior financial economist for the FDIC. In order to gauge the impact that raising the MBL cap would have on business lending activities, he analyzed 120 federally insured credit unions nationwide that were up against the cap in 2012. Specifically, 84 had business loans between 9.5% and 12.25% of their assets; 15 had a percentage below 9.48 and 21 had a percentage above 12.25. The report has special resonance in New York since 12 of the credit unions are based in this state. If you have a Filene password you can access the full report at https://filene.org/research/report/room-to-grow-credit-union-business-lending
One of the big policy debates in recent years has been the extent to which a decline in bank lending to small businesses has been the inevitable result of a down turn in economic activity resulting in fewer businesses needing loans, as the banks argue; or the result of tougher bank lending standards. Based on Walker’s research, a strong argument can be made that small businesses have been squeezed by banks and would benefit from greater access to credit union loans. Most importantly, he points out that in the profiled credit unions, credit unions actually lend out a greater share of their assets in Member Business Loans in counties where banks and savings institutions are larger.
Banks love to argue that behemoth credit unions are gobbling up Member Business Lending at the expense of smaller community banks. Walker’s research strongly suggests that this is more fiction than fact. He notes that “it is not the largest credit unions that lend the largest percentage of their assets to businesses.” The 120 credit unions studied had a median asset size of $170.8 million. In contrast, the 10 largest credit unions had a median size of $8.8 billion in 2012.
This next part is my own extrapolation. The data also suggests that small business lending is particularly beneficial during an economic downturn. The profiled credit unions shifted a larger percentage of their loan volume from consumer to business loans. Between 2010 and 2012, their business lending portfolios increased faster than their credit card loans, real estate loans and auto loans. This is further proof for the proposition that since credit unions are generally much more dependent on local community lending than are regional and national banks, they are more willing to offer business loans during economic downturns than are their commercial banking counterparts.
So the next time you talk to your friendly neighborhood Congressman, you can point out that a vote for raising the MBL cap is a vote for helping small businesses grow, keeping the economy strong, and making sure that local money is spent locally. To me, raising the MBL cap is a no-brainer; but then again, I don’t have to worry about running for re-election.
FHFA Benchmarks Raised
As mandated by Congress, the Federal Housing Finance Administration (FHFA) has adopted affordable housing benchmarks for Fannie Mae and Freddie Mac for 2015 through 2017. Specifically, both GSEs are given the goal that 24% of their purchases be of low-income homes. A low-income home is one to borrowers whose income is no greater than 80% of the area’s median income. The benchmark increases the goal by 1% over the 2014-2015 period.
I’m taking tomorrow off, have a great weekend.
If at First You Don’t Succeed. . .
Visa and Target announced a settlement intended to compensate card issuers for the high profile data breach of the Minnesota retailer that compromised an estimated 40 million debit and credit cards. The price tag is reportedly $67 million. The agreement comes months after issuers, including credit unions, scuttled a proposed $19 million settlement with MasterCard. NAFCU’s Carrie Hunt is quoted in the WSJ: “This settlement is a step in the right direction, but it still may not make credit unions whole.”
Stay tuned. This will be an interesting issue to keep an eye on in the coming weeks as the specific terms are analyzed.
Foreclosures in New York: Alive and Well
NY’s foreclosure problems are far from resolved, especially in NYC’s suburban communities according to State Comptroller Thomas Dinapoli, who has the numbers to back it up. Between 2006 and 2009, the number of new foreclosure filings jumped 78%. They leveled off in 2011, hitting a low of 16,655, but shot up again. Filings climbed to 46,696 by 2013 before edging back to 43,868 in 2014, still well above pre-recession levels, according to the report.
By the end of 2015, there were over 91,000 pending foreclosures with Long Island and the Mid-Hudson accounting for a disproportionate share. The four counties with the highest foreclosure rates are all located downstate: Suffolk (2.82 percent, or one in every 35 housing units), Nassau (2.47 percent, or one in every 40 housing units), Rockland (2.26 percent, or one in every 44 housing units), and Putnam (2.10 percent, or one in every 48 housing units). Counties in Western New York and the Finger Lakes regions, in contrast, tended to have lower pending foreclosure rates and decreasing caseloads.
The good news is that these numbers most likely represent a backlog of delinquencies rather than a further deterioration of economic conditions. The Comptroller reports that there are fewer foreclosures at the beginning of the process while activity at the end of the process (notices of sale, notification that the property has been scheduled for public auction) is accelerating.
The backlog of foreclosures reflects not only the aftershocks of the Great Recession but also the inevitable result of a foreclosure process that is hopelessly byzantine and invites delay. Maybe there will be a grand bargain in which state policymakers take steps to expedite foreclosures in return for lenders having to comply with one of the nation’s most onerous and lengthy foreclosure processes. In the meantime, I’m curious if the trends persisting in New York began to spread nationally thanks to the adoption of New York style regulations on the national level. Here is a link to the report.
Time Extended for Two-Cents on Online Lenders
You have more time to sound off about the extent to which online marketplace lenders should be regulated if you are so inclined. The Treasury has extended until September 30th the deadline for responding to its Request for Information on the proper regulation of online lenders. The RFI asks a series of questions related to companies operating in three general categories of online lending: (1) balance sheet lenders that retain credit risk in their own portfolios and are typically funded by venture capital, hedge fund, or family office investments; (2) online platforms (formerly known as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable third parties to fund borrowers; and (3) bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, originate loans and directly assume the credit risk.
Are these flash-in-the-pan industries that will fold with the next economic downturn or innovative disruptors of the banking model? If they are the later they may hit credit unions particularly hard. According to the Treasury, small businesses are already more likely than their larger peers to go online for their products and services. Online lending may provide them with a means to quickly access the cash that traditional lenders are reluctant to provide them during economic downturns.
There are an increasingly large number of examples of America changing from a “Can do” to a “Can’t do” or “Won’t do” nation.
The latest example is the news that “more than twice as many taxpayer accounts were hit by identity thieves than the agency first reported, with hackers gaining access to as many as 330,000 accounts and attempting to break into an additional 280,000.” (WSJ http://www.wsj.com/articles/irs-says-cyberattacks-more-extensive-than-previously-reported-1439834639). Many of you will undoubtedly deal with the consequences of these breaches first hand.
The IRS’s underbelly is its system for accessing consumer tax information online. We learned earlier this year that hackers had broken into the system and gained access to taxpayer info but what we learned yesterday was that the break in was much more extensive and far-reaching than the IRS first believed. The type of information the hackers gained access to is ideal for establishing a fake identity. It potentially includes line-by-line tax return information and income reported to the IRS.
(The IRS points out on its website that the break ins underscore the need for consumers to “think twice before posting publicly personal or financial information on social media or the Internet.” As someone who proudly doesn’t have a Facebook account this last bit of advice makes sense to me but I’ve given up thinking that people can be kept from informing hundreds of their closest friends about how they are getting through their day.)
It used to be that when America was confronted with great challenges it confronted them head on. I’m thinking of the Erie Canal, WW II and the Race to the Moon just to name a few. In contrast, where is the resolve to truly confront cybersecurity threats? According to Frank Abagnale Jr. of “Catch Me If You Can” fame, who spoke at the Association’s convention a few months ago, there are things that the government could do but isn’t doing to better protect the American public’s information.
And there is much more going on here than bureaucratic inertia. Congress still hasn’t passed meaningful cybersecurity legislation that breaks down barriers to information sharing and makes all industries, not just financial service providers, legally responsible for guarding against cyber theft.
Meanwhile the American public seems indifferent to the chronic invasion of its privacy by hackers. If terrorists compromised our computer networks as successfully as the Chinese have there would be calls for sanctions, Congressional hearings would be held and presidential candidates would be questioned about more important things than what they think of Donald Trump. Stories about cyber break-ins hardly get noticed for more than a day or two.
Cyber crime makes every business less efficient and more expensive to run. It makes every consumer vulnerable to theft and makes us all less safe. Can it be prevented? Not entirely but it certainly can be deterred.
In the meantime regulators continue to prod banks and credit unions to prioritize cybersecurity even though the best efforts of every financial institution won’t solve a thing in the absence of a comprehensive government led defense to protect our personal information.
So it goes.