Uber Claims Another CU

LOMTO Federal Credit Union based in NYC was placed into conservatorship by NCUA yesterday for what the NCUA described as  “unsafe and unsound practices at the credit union”  the $236 million asset credit union  becomes the third NYC based CU specializing in taxi medallion loans to be conserved following Melrose and Montauk, which was merged into Bethpage FCU.

The credit union is the latest example of how the rise of Transportation Network Companies has transformed the NYC taxi industry,  turning taxi medallions from arguably the  safest and best performing loans into  toxic liabilities in the blink of an eye. When Uber started offering rides in NYC in 2011 the credit union had a ratio of delinquent loans to total assets of 0.00.  In March,   that ratio had risen to 20.55 and  its net worth  to total ratio has tumbled from over 15% to  5.96%.

Before you pass too much judgement on credit unions in trouble because of these loans remember that taxi credit unions prospered for decades.  LOMTO was chartered in 1936 . This is not just  a banking parable; it is an example of how rapidly technology is being harnessed to upend erstwhile  business models.

June 27, 2017 at 9:02 am 3 comments

Are Changes to the OTR Worth It?

The Overhead Transfer Rate is the formula NCUA uses to determine how much money it spends in  its role as protector of the Share Insurance Fund. A couple years ago I got into a rather spirited discussion over the OTR with a credit union veteran whose opinion I respect a great deal. (I really do need to find  more hobbies and learn to drink less coffee).  I argued  that the NCUA was making a mountain out of a molehill by being  so reluctant to explain the OTR. The person to whom I was speaking argued that the OTR was a discussion that credit unions really didn’t want to get into; it would expose  faultlines between state and federal credit unions since there is no perfect way to divvy up the funds.

We are about to see which one of us was right.

At its board meeting last Thursday the NCUA proposed important changes that will simplify the OTR and make it more transparent. It will also impact your credit union’s bottom-line For example, according to the NCUA  in 2017, under the current methodology 67.7% of NCUA’s operating budget is comprised of transfers from the Share Insurance Fund.  In contrast, if the methodology being proposed by the NCUA was used that number would drop to 60%, resulting in operating fees paid by federal credit unions increasing by approximately 24% or $23 million. It will be seeking public comment.

Why is NCUA making this proposal? Let’s take a trip down memory lane.  NCUA is unique among financial regulators in that it is charged with overseeing both the Share Insurance Fund and the general regulation of credit unions.  There is no FDIC for our industry. The OTR is the formula NCUA uses to allocate insurance related expenses to the Share Insurance Fund.  This puts it in a tricky spot.  The more money it takes from the Share Insurance Fund to cover insurance related costs for its  operations, the less money it has to charge federal credit unions for costs related to their oversight and the more money state charters have to pay for federally related expenses.  Industry groups led by NASCUS has been critical of NCUA’s allocation practices and the secrecy with which it has shrouded the process.

NCUA’s proposal, which is not a formal rule and can be implemented unilaterally by the agency, would greatly simplify things in a way that’s going to result in clear winners and losers. For example, currently, NCUA uses an examination time survey in which a sample of examiners are tasked with estimating the amount of time they spent on Share Insurance related activities.  If NCUA goes forward with this plan, the examination time survey will be eliminated and instead there will be a categorical assumption that NCUA employees spend 50% of their time on insurance related activities.  In this proposal, NCUA also states that “it’s only role with respect to federally insured state chartered credit unions” is as an insurer.  This might be a good thing for state credit unions to remind federal examiners of next time they take too aggressive a view of their oversight powers.

The result of all this would be a greatly simplified OTR mechanism which you could understand in less than the 2 ½ hours it has taken me  to watch the first six innings of  the  Yankee game.  This is a good thing.  I’ll leave it up to the numbers folks to decide whether or not the NCUA’s proposed revisions are a step in the right direction or a classic example of opening a can of worms that could divide the interests of state and federal credit unions.

 

June 26, 2017 at 8:43 am Leave a comment

Close But No Cigar on BDD’s

As succinctly summarized in this morning’s Albany Times Union, the 2017 Legislative session fizzled out late Wednesday night with no grand finale. Unfortunately our Banking Development District Legislation bill was also victimized by this inaction.

Although the Assembly passed a bill that authorized credit union to assist underbanked communities, in the end the Senate Rule Committee didn’t pull the trigger, failing to put the bill on the floor for a vote of the full chamber. The result is disappointing, but remember the legislative process is a marathon not a sprint. The fact that one house has passed the legislation and the senate has now seriously considered it is progress we can build on for next year.

It appears that many of the highest profile bills dealing with employment also withered on the vine. For example, legislation passed by the assembly which would have prohibited the use of consumer credit history in hiring employment and licensing determinations as well as legislation prohibiting inquiries about an applicant’s salary history, didn’t make it through the gauntlet .

On that note yours truly is taking tomorrow off and selling lemonade at my daughters lemonade stand- I have to pay for college somehow. I will be back on Monday.

June 22, 2017 at 9:01 am Leave a comment

And down the stretch they come…

With the legislative session scheduled to end sometime tomorrow, this is the time when most of the really important stuff is voted on, amended, or left to wither on the vine until next January.

While there are a bunch of bills that I will be talking about in the coming weeks there is of course one that continues to grab the attention of all faithful bloggers; I am talking about the Banking Development District bill which continues to advance. Yesterday it passed the Assembly without being laid aside for debate. The final tally was 83 to 9.

Remember now is the time to be contacting all those Senators and debunk all the nonsense the banks have been telling them. For one thing, credit unions do pay taxes, lots of them. You may also want to point out that this bill does nothing more than allow credit unions to participate in a program that would assist areas with a dearth of banking services.

A second issue that came up yesterday doesn’t deal with legislation, but it is a pressing concern not only in NY, but to anyone who offers mortgage loans across the country. State Comptroller, Thomas DiNapoli, issued a report calling for enhanced state/federal coordination of water quality standards. This gives me the opportunity to sound off on one of my personal pet peeves.

No one is ever going to accuse me of being a tree-hugger, but my research of issues surrounding the water contamination in Hoosick Falls and the potential ramifications of hydro-fracking has demonstrated to me that lenders must get clearer guidance from the federal government and the GSE’s in particular about baseline environmental standards including water quality.

As it stands right now any time a mortgage is sold to the secondary market the seller is making strict liability guarantees regarding the environmental safety of the area in which the property is located. If these warranties are breached the lender can be made to repurchase the mortgage. Obviously, this makes sense if someone is selling land in love canal, but most environmental issues are not as clear cut as the extreme cases that get national attention. The result is that lenders who work with the GSE’s are forced to make tough decisions about the long term environmental impacts dealing with issues such as water quality and mediation, often with little guidance from the Federal Government.

Furthermore, many of the areas in need of environmental remediation are already suffering from economic decline. The hesitancy of lenders to lend in these areas (even for a short time) makes these declines even more dramatic.

I applaud Comptroller DiNapoli for highlighting the importance of this issue, but I would suggest that any comprehensive analysis is incomplete unless it also highlights the need for the GSE’s to work more closely with lenders, lending in areas where the water quality is in need of mediation. One of the most basic things they can do is limit the scope and or length of warranties.

 

June 20, 2017 at 9:44 am Leave a comment

Banking Development District Bill Gains Traction

Legislation that would allow credit unions to participate in Banking Development Districts (BDD) (S.6700 -Hamilton)/A.6494B -Zebrowski) for the first time in two decades is gaining traction in both houses of the Legislature as we enter the final week of session. This is good news for anyone in need of greater access to financial services. The bill has advanced to the Assembly floor and has been introduced by the Senate Rules Committee, which means it can be voted on at any time by the full legislature.

The BDD program has been in existence since 1997 with the first district authorized in 1999. The basic idea of the program is that localities and financial institutions jointly apply to the DFS for designation as a BDD. In return for opening up a branch in an area underserved by banking institutions, banks and other depository institutions are eligible for low interest deposits.

The program is a great idea since it makes it more cost effective for financial institutions to provide banking services in areas which are currently lacking access to depository institutions. Unfortunately, as the DFS noted earlier this year, banks and other financial institutions “have submitted a modest number of applications over the last twenty years.” In addition, a 10 year review of the program by the Banking Department concluded that it could be “dramatically improved.” Allowing credit unions to participate in the program could provide the jolt it needs to be truly effective.

Shock of shocks, the usual suspects are trying to kill the bill. The kneejerk opposition of the banking industry, while utterly predictable, is even more cynical than usual. Despite the fact that the industry has demonstrated a lack of interest in participating in the program for almost 20 years, it is fighting to keep credit unions from enhancing the program.

This is the latest example of banks being so opposed to credit union that they are putting their own perceived interests above consumers. Despite the fact that we live in one of the wealthiest states in the nation, there are millions of New Yorker’s who have no choice but to turn to check cashers and payday lenders. Anything the Legislature can do to encourage and help persons of modest means get their monies deposited in to a financial institution is in everyone’s best interest.

 

June 16, 2017 at 9:23 am Leave a comment

In Defense of Debt Collectors

My gripe with consumer advocates is that they posit a kumbaya world in which there are no tradeoffs between consumer protections and access to credit. The CFPB scrutinizes debt collection practices and payday lending, and Congress mandates that lenders offer “Qualified Mortgages” without any acknowledgement of the fact that these restrictions will result in fewer people owning houses, fewer people in desperate need of short-term financing getting a loan and an increase in the number people who could but simply don’t want to repay a debt getting more legal protections.

It’s not that the evidence isn’t out there, it’s that they choose to ignore it. Recently the New York Fed published a paper which analyzed the impact on state laws regulating third-party debt collectors and the availability of credit. According to the researchers, there is “consistent evidence that restricting collection activities leads to a decrease in access to credit and a deterioration in indicators of financial health.” Moreover this impact is concentrated primarily among borrowers with the lowest credit scores.

By the way, their finding are not some research anomaly but are broadly consistent with other research findings. This will come as no surprise to those of us in the credit union industry. The more members consistently and promptly pay back their loans, the easier it is to keep the branch lights on and the more money there is to provide reasonably priced loans to other members.

This is common sense, but all too often it’s a point that legislators and regulators just don’t get or choose to ignore. New York and other so-called progressive states reacted to the mortgage crisis by providing delinquent homeowners with a panoply of additional protections ranging from 90 day pre-foreclosure notices and stringent lender affidavit requirements, to making larger lenders responsible for maintaining abandoned property on which they haven’t foreclosed. In isolation, all of these are defensible and well-intentioned, but in the aggregate they make home-buying a more expansive proposition for those on the lower end of the economic ladder.

 

Fed raises rates

As expected, the Fed raised the Federal Funds Rate again yesterday. I wanted to pass along this article from the Economist arguing against the Fed’s latest move.

June 15, 2017 at 9:22 am Leave a comment

News Flash: Treasury Report is Worth Reading

No administration is truly complete without at least one Treasury Department Report calling for radical reforms to the banking system. They are like a Sean Spicer press conference: they generate lots of headlines and are sometimes entertaining, but they are almost always meaningless exercises.

The report released by the Trump Administration on Monday however proposes a series of changes for credit unions that are worth paying attention to. First, many of the proposals can be implemented without legislative action; Secondly, with the Trump administration being able to pick a new director of the CFPB next July, these proposed changes could be viewed as a blueprint for the type of reforms we could see under a Trump chosen director. Here is a best- of- list in which I am highlighting the reforms that would both impact credit unions positively and are actually achievable.

  • The report calls on NCUA to apply its risk based capital requirements only to credit unions with $10 billion or more in assets. Instead credit unions of all sizes should have a single leverage test.
  • Currently RBC requirements are scheduled to be imposed on credit unions with $100 million more in assets, starting in 2019.
  • The proposal calls for the CFPB to raise the threshold for compliance with Dodd-Frank’s ability to repay/qualified mortgage requirements from institutions with $2 billion in assets to those with assets somewhere between $5 and $10 billion. This is an example of the type of change we could see with a new director.
  • Treasury calls for the coordination of cybersecurity requirements.
  • Amen to that. Do we really want 50 different state and competing federal cybersecurity requirements?
  • The report endorses the expanded use of supplemental capital by credit unions. This clearly will provide further support to NCUA as it considers what authority it can give credit unions to use supplemental and secondary capital.
  • If I had to list one warning sign in the report, it is Treasury’s call to consider streamlining and coordinating regulatory activities. While this sounds harmless in theory, in practice it could open the door to elimination of the NCUA.
  • The report recommends raising the threshold for mandated credit union stress testing from institutions with $10 billion to $50 billion in assets.

On that note enjoy your day!

 

June 14, 2017 at 9:11 am Leave a comment

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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