President Bush Tried To Make the World a Better Place: Does Your Credit Union?

Image result for president bushAs I was listening to the eulogies for President Bush last night, I couldn’t help but notice how often I heard words like loyalty, decency, public service, leadership, competitiveness humor and compassion. It struck me that this language has become antiquated and naïve sounding less than 30 years after a man who dedicated his life to these principles assumed the Presidency.

It got me thinking that something has fundamentally changed in how we view each other, our government, and the obligations we owe one another and not for the better.  What is the credit union tie-in you wonder? Everyone reading this blog is making a living off an industry dedicated not only to helping people grow their wealth but also lending a helping hand to people of modest means. To me, at its core, this means a movement dedicated to ensuring that people, irrespective of their social station, are treated with the respect and entrusted with the responsibility that comes when helping your neighbors by pooling your resources together. Let’s continue to grow as an industry but let’s never lose sight of the fact that we have an obligation beyond growing in net worth. Here is a portion of the President’s inaugural address from 1989 which his son referenced in his eulogy.

My friends, we are not the sum of our possessions. They are not the measure of our lives. In our hearts we know what matters. We cannot hope only to leave our children a bigger car, a bigger bank account. We must hope to give them a sense of what it means to be a loyal friend; a loving parent; a citizen who leaves his home, his neighborhood, and town better than he found it. And what do we want the men and women who work with us to say when we’re no longer there? That we were more driven to succeed than anyone around us? Or that we stopped to ask if a sick child had gotten better and stayed a moment there to trade a word of friendship?

No President, no government can teach us to remember what is best in what we are. But if the man you have chosen to lead this government can help make a difference; if he can celebrate the quieter, deeper successes that are made not of gold and silk but of better hearts and finer souls; if he can do these things, then he must.

December 6, 2018 at 8:37 am Leave a comment

It’s Back: Beware of the Inverted Yield Curve

One of the many things that spooked Wall Street yesterday was the return of the dreaded inverted yield curve. Specifically, on Monday, Bloomberg reported “the spread between 3- and 5-year yields fell to negative 1.4 basis points , dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed.” Why does this matter?

Well, you folks know a lot better than I do that from a banking perspective as the yield for shorter term bonds rises faster than the yield on longer term bonds, you end up in a classic squeeze of your operating margins making it more difficult to generate money off member funds. In addition,  the yield curve has an uncanny knack foredicting a coming recession, which makes sense because the higher yield being demanded for shorter term investments means that investors would rather put their money where they can lock in returns for the next few years.

Remember there is also a huge safety and soundness/interest rate risk component to all this. I would expect your examiners to be scrutinizing your knowledge of your interest rate risk exposure in the next round of examinations even more so than usual.

By the way, the inverted yield curve is coming at a time when things on the international stage may once again have a potential impact on the American economy. Just as the Greek debt crisis in the fear of that country opting out of the Euro produced economic reverberations throughout the international economy, we will have to wait and see just how big of an impact England’s inability to decide on divorce terms with the European Union will have on world economic growth.

By the way, British Prime Minister Theresa May, may go down as one of the worst politicians ever. A vote on the plan she negotiated with Europe establishing the terms of England’s post-Brexit relationship with Europe is expected next week and has so far been about as well received as year old candy on Halloween. It’s so bad that the one thing opponents and proponents of Brexit agree on is that Britain would be better off with no Brexit deal than the one being offered by May. That’s quite the trick.

New York’s Economy Continues to Grow But Gaps Remain

Closer to home, the New York Federal Reserve Bank released its latest analysis of the New York economy and if you’re a downstate credit union finding it hard to fill positions you’re not alone. According to the bank, “Employment in New York City is up about 25 percent from its trough following the Great Recession, which is considerably more than the nationwide increase. Meanwhile, upstate New York has not fared as well. Albany had seen solid job growth through much of the expansion, but growth has slowed over the past year. In Western New York, after years of modest employment gains, Buffalo and Rochester have seen job growth slow considerably since 2016.” One can only wonder just how much more the Upstate and Downstate economies will diverge once Amazon moves into town.

OCC: New York DFS Jumped The Gun On FinTech Litigation Again, New York Responds “Not So Fast”

In this letter to the court, the OCC explained that DFS’s lawsuit must be dismissed because no harm has been suffered by anyone since no FinTech Charter has been issued. Meanwhile, the CU Times reported that DFS has responded to this allegation by asking the court to block the OCC from approving any FinTech Charters before the litigation is resolved. Stay tuned, at some point we will actually have extremely important litigation defining the parameters of the OCC’s chartering powers and helping to frame an important public policy debate about how best to regulate hybrids of banks and technology companies.

December 5, 2018 at 9:07 am Leave a comment

Regulators: Don’t Be Afraid To Innovate When It Comes To BSA Compliance

Federal financial regulators, including the NCUA, recently issued a joint statement encouraging banks and credit unions to “consider, evaluate and where appropriate responsibly implement innovative approaches” to meet their BSA compliance obligations.

Here are my takeaways, but please read the memo and decide for yourself how best to integrate this joint statement into your compliance framework if you think it’s appropriate.

  • Developing technology, such as artificial intelligence, is well-suited for helping credit unions enhance their BSA programs.
  • Far from discouraging innovative approaches, regulators are encouraging pilot programs to test and validate the effectiveness of these new approaches.
  • In fact, pilot programs “in and of themselves” should not subject banks or credit unions to examiner discipline even if they prove to be unsuccessful.
  • Here’s where things get a little tricky: At the same time, banks and credit unions have a continuing obligation to comply with BSA, so they should only implement innovative approaches following adequate due diligence.
  • The agencies want to act as catalysts for change and are each working to “establish products or offices that will work to support the implementation of responsible innovation.”
  • No credit union should feel pressured to adopt new technology. It can continue to take whatever approach to BSA compliance that is best for the credit union based on its size and sophistication.

Frankly, I’m not sure quite what to make of this. I have always felt that the existing regulatory mandate for financial institutions to have effective BSA compliance programs commensurate with their size and sophistication is the perfect encapsulation of everyone’s responsibilities. To me, it goes without saying that, as technology evolves, so too would a bank’s or credit union’s approach to BSA compliance. It also goes without saying that more can be expected of a $25 billion institution than a $25 million credit union when it comes to the scope and speed of technological innovation.

Conversely, if there are institutions that are gun-shy about trying innovative approaches to BSA compliance to the extent that this statement provides them assurances that they will not be penalized for using new techniques, than this is a good thing. Similarly, to the extent that regulators are willing to actively participate in the development stage, this will lessen the risk that institutions will be fearful of investing in new technology that their regulators will ultimately deem insufficient.

New York CU Attorney Subject to Prohibition Order

NCUA last week issued a prohibition order against Mitch Reiver, who was Melrose CU’s General Counsel.

December 4, 2018 at 8:54 am Leave a comment

Global Warming, Mortgage Insurance and Bad Christmas Music

(Updated 2:50) Greetings, people. If all goes according to plan this is the weekend that the Meier family will be cutting down, yes cutting down, the family Christmas tree. That being said, there’s a lot I have to get off my chest before I focus in on my Christmas joy. So here it goes.

It appears that we are once again seeing a last second reprieve of the NFIP take shape.  Late last night the Senate and house did agree on a seven day extender of the program which now does not expire until December 7.  Sorry I missed that this morning.

Here’s an analysis from the Mortgage Bankers Association of what the consequences of the lapse may be. One thing I would add however is that unless you are portfolio-ing your loan, in other words you do not want the option of selling them to secondary market participants, I would continue to insist on flood insurance for mortgages in flood zones.

No matter what variation of kick-the can Congress ultimately decides to play  it seems to me that the increasingly contentious debates about how to fund and make more effective our flood insurance program exposes gross hypocrisy on both sides of the global warming debate.

For the record, I am not one of those conservatives who feel that a good republican buries his head in the sand with the flood waters rise around it. That being said, it does seem odd to me that democrats such as New Jersey Senator Robert Menendez are scrambling to prop up a program which provides incentives for people to buy housing in areas that are simply going to become more expensive to maintain in the coming years. For instance, the Union of Concerned Scientists (Does that mean there’s a union of unconcerned scientists?) issued a report in September calculating “that by 2045—near the end of the lifetime of a 30-year home mortgage issued today—sea levels are projected to have risen such that nearly 311,000 of today’s residential properties, currently home to more than half a million people, would be at risk of flooding chronically, representing a doubling of at-risk homes in the 15 years between 2030 and 2045. Not only are the mortgage loans on these homes at growing risk of default if the value of the properties drops, but each successful sale of one of these homes represents the potential transfer of a major latent financial liability. Eventually, the final unlucky homeowners will hold deeds to significantly devalued properties.”

By the way, even if you are a climate change skeptic, insurance companies are going to use statistics like these in assessing the risk to property. Against this backdrop, one must wonder if a system predicated on subsidizing insurance costs with the American public ultimately on the hook, is a sustainable policy.

Nominee to Head CFPB Clears Important Hurdle

Kathy Kraninger, President Trump’s pick to be the anti-Cordray CFPB Director, cleared a procedural vote by a 50-49 vote yesterday indicating that she will shortly win approval to take the reins of the controversial but still hugely powerful independent agency. As I like to remind credit unions, Presidents and Directors will come and go but the CFPB will always be here, like it or not.

Worst Christmas Song Ever

It’s not even December, but this year’s winner of the blog’s occasional award bestowed on the most annoying Christmas song in the Universe is “Last Christmas” by Wham!, which has spawned several equally  obnoxious covers. Yoko Ono has previously won this prestigious prize.

Nothing says Happy Holidays like this beautiful lament from a spurned lover who is determined not to be jolted again even as he is apparently still obsessed with talking to the jolter. “Last Christmas, I gave you my heart, But the very next day you gave it away, This year, to save me from tears I’ll give it to someone special.” I’ll be sure to play that song as we set out to cut the tree and decorate the house for the Holidays. See you Monday.

November 30, 2018 at 9:30 am 2 comments

5 Things To Know To Start Your Credit Union Day

Regulators Provide Update On Examination Process Review

This sounds like the same old song just a different tune. Yesterday the FFIEC, the group representing federal and state bank regulators including the NCUA provided an update on its  “Examination Modernization Project.” In yesterday’s update,  it emphasized the need to tailor examinations plans and procedure based on risk. Most importantly the examiners committed to issuing guidance clarifying the following principles:

  • Consider the unique risk profile, complexity, and business model of the institution when developing an examination plan.
  • Analyze existing information such as Call Report data, publicly available information, and confidential supervisory information to help identify areas of higher and lower risk when planning examinations.
  • Monitor financial institutions between examinations.
  • Tailor the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review.
  • Apply examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
  • Discuss financial conditions, risk profiles, new or expanded business lines, and pertinent new supervisory or regulatory information with institution management prior to finalizing the scope of review.

Now we will have to see if this commitment results in tangible benefits to credit unions or just is more regulatory and bureaucratic gobbledygook. I’m not holding my breath.

Fed Signals More Rate Uncertainty Ahead

Several important speeches are being made by fed officials this week and next and it seems as if the one theme in the presentation so far is that expect less certainty about the Federal Reserve’s actions on interest rates next year. This may not seem like a big deal but remember we went through the better part of a decade without any interest rate hikes followed by three well publicized rate hikes, with another one coming in December. But now we are entering an extremely tricky period where it’s not clear if the economy is too strong, on the verge of a slow-down, or somewhere in between. As a result, don’t expect the Fed to signal its intentions as clearly as it has done in the last few years.

In his speech yesterday, the Fed Vice Chairman, Richard H. Clarida  explained that with the increasing number of uncertainties the Fed will become more dependent on the latest data, “I believe we should continue to update our estimates of them as new data arrive.”

NCUA Update Arrives

Every time I mention news like this I think of Steve Martin running down the street in excitement after finding out his name is in the phone book. It may not be the most exciting thing in the world but I wanted to give you a head’s up that the latest issue of NCUA’s Online Newsletter is now available. I personally will be taking a look at its explanation of the use of narratives for credit unions applying for community charter expansions.

Congratulations Stewart-Cousins

Andrea Stewart-Cousins is on the verge of completing a political assent that started with a hard-fought victory over a prominent republican Senator, Nick Spano, in 2006 and will end with her becoming the first female Senate Majority Leader in the New York State’s Senate history. On Monday, her conference voted to designate her as the Majority Leader when democrats return to claim leadership of the Senate. Stewart’s election is also historic for another reason. Except for brief, unstable stents, the republicans have dominated the Senate since World War II. Now with only 23 republicans left standing after the election night massacre and redistricting right around the corner, I would bet you that she is the first in a very long line of Democrat Majority Leaders.

Speaking of Senate Elections

Meanwhile, despite some bumpy moments, Mississippi Senator, Cindy Hyde-Smith held back a spirited challenge from former Congressman and former Agriculture Secretary Mike Espy to win her reelection bid. We now know that republicans will have 53 seats in the new Senate, a net increase of 2 heading into what will be one of the most contentious two years in the Senate’s history.

November 28, 2018 at 9:17 am Leave a comment

Would More Information Sharing Prevent Elder Abuse?

Image result for elderly person bankingMaybe it’s because I hit one of those depressing milestones the other day when the young lady whom I was buying tickets from at the Museum of Natural History coyly asked if there was anyone I was buying tickets for who was 60 or older? Considering that my twin brother wasn’t on line and my daughters were the only ones with me, I can only assume she was talking about me even though I don’t look a day over 49 ½.

But as this article underscores,  issues surrounding the elderly and financial mismanagement are  getting more and more attention. A suggestion by a researcher at the Federal Reserve Bank in Philadelphia is to authorize and encourage the sharing of information among financial institutions about potential financial exploitation in much the same way they have been encouraged to share information about potential money laundering and terrorist activity since passage of the Patriot Act in 2001. I want to be absolutely clear here. Currently sharing such information among financial institutions is illegal. This is a suggested policy which would require amendments to federal law in order to take effect. Would this be worth the risks?

The first question we have to answer is what exactly we are seeking to prevent? If our goal is to prevent  criminal financial exploitation then the existing framework may well be good enough.  State laws either mandate reporting by  or protect financial institutions that  choose to report suspected abuse.  And federal law keeps getting more and more robust more and more robust. Financial institutions can   file Suspicious Activity Reports specifically dealing with elder financial exploitation and  S.2155 included provisions that will soon   start shielding institutions from lawsuits  when they report suspected exploitation  provided  they comply  certain training requirements.   

In contrast, if our goal is to spot early signs of dementia or general cognitive decline so we can put the member and their loved ones on notice  than expanded information sharing makes sense. For example, chances are that the elderly person you are dealing with has money not only at your credit union but with a brokerage firm as well. In addition, one of the more disturbing trends we are seeing is an  increase in borrowing among older individuals. If we really want to stop the effects that cognitive decline can have on a person’s ability to manage their resources as well as spot financial exploitation then shouldn’t we give institutions the ability to holistically examine how their members are handling their finances? Furthermore, data analytics seems ideally suited to spotting signs of financial mismanagement.

The simple truth is, if we want to really protect the elderly from financial abuse and mismanagement  then we have to have an honest discussion about how to balance the rights of individuals to financial privacy against the increased risks of mental deterioration and exploitation that come with age. I for one will never be comfortable about any group of institutions, no matter how well intentioned, being able to make judgments about what I can and can’t do based on my age. Besides, I am so grossly disorganized that no lesser expert than my wife has commented that it will take her years to realize I have gone senile.



November 27, 2018 at 9:24 am Leave a comment

Should These Loans Be Legal?

On the day before Thanksgiving, one of my readers forwarded  this article to me  from Bloomberg Business Week that immediately got my attention. It reported that New York law has become the epicenter for merchant advance loans, loans which quickly provide often huge amounts of cash to small mom and pop businesses in return for confessions of judgment which enable lenders to quickly seize almost all of the businesses’ assets the second the loan goes delinquent or a payment term is unmet. The catch is that these lenders have figured out a way around New York’s usury laws and have utilized New York to circumvent laws in other states that forbid precisely these types of loans.

While the article over-simplifies the lending process, its conclusions as to how this loan works operationally are spot-on. My first question after reading the article was how do these lenders get around New York’s usury laws which cap loans at no greater than 25%?

Because technically these aren’t loans. A loan is an unequivocal commitment to pay back a specific sum. In contrast, the lender making  merchant advances typically receives a percentage of the borrowing business’ accounts receivable in return for making the loan Since repayment of the loan is contingent on there being enough money generated to repay the advance, there is theoretically no guarantee that the money will be repaid. Colonial Funding Network, Inc. for TVT Capital, LLC v. Epazz, Inc., 252 F. Supp. 3d 274, 278–79 (S.D.N.Y. 2017) compare Merch. Funding Servs., LLC v. Volunteer Pharmacy Inc., 55 Misc. 3d 316, 320, 44 N.Y.S.3d 876, 879 (N.Y. Sup. Ct. 2016). Legally this sounds good but in reality the loans must be repaid  very quickly  and with the use of confessions of judgment, lenders can quickly drain bank accounts and seize enough assets to make huge returns on even delinquent loans.

How can New York have jurisdiction over so many loans throughout the country? That’s easy enough. In addition to agreeing to a confession of judgment, the borrowers also agree that New York will have jurisdiction over the judgment. That’s how easy it is so long as it is properly disclosed to our borrowers. This is particularly important since according to the article many states outlaw merchant advances.

Now if I was one of the eight NY Democrat Senators taking office for the first time next year, this is the type of issue that I would be interested in pursuing as I look around for stuff to do. After all, Federal law already prohibits these types of advances for consumers and it really isn’t New York’s way to be the place where you go to take advantage of desperate small business owners.

That being said, let’s not throw out the baby with the bath water. Confessions of judgment have been around since the middle-ages, not because they are anti-consumer but because there are circumstances where it makes sense to have parties agree to forego litigation when there is truly no defense. In addition, while I find it disgusting that some people choose to make a living by being a glorified loan shark, let’s not overlook the fact that behind most of these loans was a very foolish decision. Ultimately a fool and his money are easily separated and no law or regulation is going to change this reality.

November 26, 2018 at 9:26 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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