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!
I would have to double check with the Compliance Department, but I’ll bet that at least twice a year a credit union tells us that an examiner is in their office and has told them that they must require their employees to take at least two consecutive weeks of vacation. Is the examiner right, they want to know.
My decisively equivocal answer to that question is, not exactly, but a from a safety and soundness standpoint, it makes a lot of sense. First, you won’t find a statute or regulation specifying the amount of vacation time your employees must take. The most authoritative documents I’ve seen on the subject are two legal opinion letters issued by New York’s Department of Financial Services. In 1995, the Department issued a general industry letter to financial institutions in which it opined that the State considered it “prudent business practice for every bank” and branch to have vacation policies that at a minimum mandate that “those officers and employees involved or engaged in transactional business or having the ability to change the official records of” an institution take at least two consecutive weeks of vacation each year. This letter would only be binding on state-chartered credit unions and even then, only strongly encourages credit unions and banks to have mandatory vacation policies.
As for NCUA, Section 4-6 of its examination manual, which assesses a credit union’s internal controls, tells examiners to find out whether or not officers and employees in “sensitive positions” take two consecutive weeks of vacation each year, “if practical.” The manual doesn’t define what practical is, but it clearly provides a bit of wiggle room for that smaller credit union to point out that it doesn’t have enough staff to mandate vacation time policies. Chapter 18 of the Guide lists an employees unwillingness to take vacation as a money laundering red flag.
The reason for these policies is obvious enough. Two weeks should give you more than enough time to figure out if an employee is engaging in illegal activity at the credit union. (And here you thought your employer just wanted you to be well rested). Still, it is clear that on both the state and federal level, credit unions that ignore the role that vacation policies play in protecting them from being used for illegal activity may raise legitimate safety and soundness concerns.
This idea seems simple enough, but this is another example of how your IT and compliance activities have to be coordinated. For example, in 2005, a Type-A bank employee asked the DFS if its vacation policy recommendation meant that she couldn’t access e-mail while on vacation. Let’s face it, some of us are more addicted to email than Donald Trump is to his own ego. The DFS explained that while employees can access email while on vacation, financial institutions should ensure that this discretion does not allow employees to blur the lines between routine email communications and communications effecting transactions.
The distinction the Department was trying to make is all the more difficult in 2015 when many employees are allowed to bring their own smartphones to work and passwords can access the most important of databases. So what conclusions should you draw from all this? First, although examiner concerns have traditionally been geared toward employees who can execute transactions, it seems to me that in this day and age, virtually all your employees have that power. As a result, while there is no statute or regulation mandating your employees take a significant, consecutive amount of time off each year, such a policy makes sense. Besides, it’s a good mechanism to ensure that your credit union isn’t dependent on one employee to perform a core function.
Second, for these vacation policies to be most effective from a safety and soundness standpoint, your IT Department should know who has access to what credit union resources at any given time. Even if you don’t rigorously enforce a vacation policy, one of the most basic steps you can take from a cybersecurity standpoint is to limit access to employees who actually need it.
Finally, don’t assume that your employees would never embezzle from your credit union. The sad reality is that good people do bad things all the time. Your typical embezzler is not a 26 year old kid whose been working at the credit union for a year; but is the trusted middle-aged executive with bills to pay.
Come to think of it, I better put in for vacation time between Christmas and New Years. See you on Monday and Happy Fourth of July!
You can never have too much information, especially if your job is to help keep your credit union on the straight and narrow. When I started on my compliance journey, one of the greatest resources that I used, and continue to use to this day, were examination manuals.
Recently, federal examiners released an updated lending examination manual and because it includes the pending integrated mortgage disclosure requirements, it is well worth your read. For example, Section V-1.9 contains a great chart to answer the age old question of what costs should be included in mortgage finance charges. What these manuals do is provide concise but informative summaries on the issues that your examiners will be reviewing when they come into your credit union. Unfortunately, New York State’s Department of Financial Services does not have its manual available on its website. Perhaps that is something that can be addressed in the future. Even if you don’t do compliance, but just need to get a quick overview of a trending compliance issue, these manuals are a great place to start.
Another OCC resource to check out is the OCC’s semi-annual report on banking trends. Although many of the risks it highlights are hardly surprising, it is still worth taking a look. Like the NCUA, the OCC continues to be concerned with the usual suspects of evolving cyber threats, the temptation to relax underwriting standards too much as competition for loans heats up, and of course, interest-rate risks. Like their credit union counter parts, the OCC is concerned that smaller institutions in particular – those with less than $1 billion in assets – are still stretching out their investments too long in the search for higher yield. One day the examiners will be justified in this concern, I’m just not sure in what future decade.
Incidentally, one interesting little factoid that I pulled from the report has to do with auto lending. According to the OCC, 60% of loans originated by banks in the fourth quarter of 2014 had a term of 72 months or longer. In addition, the OCC is becoming concerned with collateral advance rates. It reports that the average loan to value ratio for used auto loans was 137%. In addition, loan to value ratios for borrowers with credit scores lower than 620 averaged 150%. Statistics like these justify the increased scrutiny that auto lending is getting from New York State Legislators and regulators.
Epilogue: DOL Posts Overtime Proposal
As expected, the U.S. Department of Labor formally posted proposed regulations increasing the salary threshold for employees to be considered exempt to $50,400. When the proposal came out, the Association staff HR guru Chris Pajak and I looked at some industry-wide numbers and this proposal could have a huge impact on many credit unions. For instance, many of the CEOs of the smallest credit unions have salaries hovering right around $50,000. The same is true for many of the people you probably consider exempt employees, such as your teller supervisors and your compliance directors. Even if these employees don’t typically work overtime, the regulations mean that if you currently don’t track the hours these employees work, you’re going to have to start.
One aspect of the proposed regulations that I haven’t talked about includes an exception for “highly compensated employees (HTE).” As a very general rule, if an employee receives a base salary of at least $23,000 but receives compensation of at least $100,000 and performs at least one of the functions of an exempt employee, then that employee is exempt from overtime pay requirements. The DOL is proposing to increase the HTE threshold from $100,000 to $120,000.
Epilogue: My Big, Fat Greek Default
Despite a last second request for emergency credit, Greece officially defaulted on a debt payment due to its international creditors last night. The next big date to look for is July 6, when the Greeks hold a referendum on whether or not to accept the latest loan bailout requirements.
Greece’s troubles are already having an impact on our economy. The stock market has tumbled, bond prices are gyrating, and with corporate profits declining in the second quarter it appears that those who thought that the economy was gaining momentum were, once again, overly optimistic.
If not, then they can no longer be classified as exempt employees and must get overtime. According to this morning’s news reports, that’s the core part of proposed regulations updating the Fair Labor Standards Act to be released by the Obama Administration’s Department of Labor later this week.
Under existing regulations, one of the conditions for an employee to be classified as exempt is that he or she makes a little more than $23,000. Critics point out that this threshold requirement is so low that it has allowed employers to contravene the intent of federal law by classifying an employee as the supervisor and expecting them to work 50-60 hour weeks without overtime pay. They argue that a $50,000 threshold simply adjusts the Act to where it would be had it kept pace with inflation.
Opponents of this well-meaning but fatally misguided view correctly point out that a $50,000 threshold won’t increase the salary of many employees, but simply decrease the amount of hours existing employees work and, in a best case scenario, encourage the hiring of more lower-paid employees.
To put this in practical terms, review a list of your exempt employees making less than $50,000 and estimate how many hours they work over 40 each week. Then figure out how much it would cost you to pay each of these employees time and one-half for these hours. This is how much the federal government effectively wants to tax you. Occasionally, it makes me wonder if we live in a capitalist country.
Remember those Greek tragedies we all had to read in High School? The basic plot lines always had the protagonist with a fatal personality flaw, which he didn’t recognize until he met his end. Over the weekend we moved closer to a real-life Greek financial tragedy and this one may impact the United States economy.
About the only thing that the German and Greek economies have in common is that they share a common currency: the Euro. For the past five years, the Greek financial system has been kept alive by loans from a consortium of international creditors. These loans have come at a steep price. Led by Germany, creditors have demanded structural reforms in Greek government spending. Although these reforms were starting to demonstrate some benefits, with the Greek unemployment rate over 25%, late last year, Greeks voted to hand over power to a party opposed to further Greek concessions in return for financial aid.
On the one hand, the Greeks bet that the Germans would agree to modify the demanded reforms rather than let the Greeks default on the debt payment and walk away from the Euro. On the other hand, the Germans knew that the Greeks overwhelmingly support membership in the Euro Zone and assumed that the Greeks would ultimately agree to continue structural reforms to maintain their financial system. This game of international chicken took a dramatic turn for the worse over the weekend.
With Greek debt payments due tomorrow, European creditors rejected Greece’s latest offer to restructure its debt. To everyone’s surprise, Greece’s Prime Minister, Alexis Tsipras, called for a referendum to decide whether or not to agree to European demands. Considering that this referendum is scheduled for July 5, this move is strange enough. But what really has Europe digging in its heels this morning is the fact that Greece’s Prime Minister is actually urging its citizens to vote against European demands. He apparently believes that a public rejection by his countrymen will give Germany no choice but to agree to better terms.
Early signs are that this gambit is going to backfire. To prevent a further run on Greek banks, limits have been placed on the amount of money that can be withdrawn from bank accounts and according to press reports, now the European public and its politicians are unified in their opposition to Greek demands. If Greece votes no on the referendum, it will have no choice but to do away with the Euro and start printing its own currency once again.
All very interesting, Henry, but why should I care? Importantly, this will have an impact on the U.S,. Economy, the only question is how great the impact will be. Already this morning, the yield on 10-year U.S. Treasuries is down and the stock market appears poised for an early tumble. In a worse case scenario, Greece exists the Euro and the debt of other European countries such as Italy and Portugal skyrockets as investors question Europe’s commitment to supporting the Euro. This body blow to the European economy would weaken economic growth for the United States and for China as well. In a best case scenario, five years of this Greek tragedy has given private creditors more than enough time to unwind their exposure from a so-called Grexit. Europe suffers a temporary setback but is ultimately strengthened as Greece no longer hangs like an Anvil over Europe. Either way, it’s safe to say that the single most important economic event over the summer will not occur in the United States. Hopefully, calmer heads will prevail between now and tomorrow.
The big news this morning is that there really is no big news this morning.
Yesterday the Supreme Court upheld the use of “disparate impact analysis” in housing discrimination cases. So, lending criteria that has the effect of discriminating against minorities continues to be illegal regardless of your credit union’s intentions. The State legislature left town without addressing what to do about Uber and other transportation companies. And, of course, the Court upheld a key provision of Obamacare.
To understand why no news is big news today, let me describe what could have happened. Everyone agrees that the Fair Housing Act outlaws intentional discrimination on the basis of a protected characteristic. But does it outlaw practices that have a disparate impact on minorities even when such practices are not motivated by a discriminatory intent? You won’t find any disparate impact language in the Fair Housing Act statute. Nevertheless, nine federal circuit courts have interpreted the statute as authorizing disparate impact lawsuits. Yesterday, a 5-4 majority of the Supreme Court sided with those circuits and held that plaintiffs who can demonstrate a disparate impact can bring anti-discrimination lawsuits. In a decision written by Justice Kennedy, the Court concluded that the precedent established by lower courts, as well as the similarity between the FHA and other anti-discrimination statutes that outlaw disparate impact policies demonstrated that Congressional intent was to authorize these lawsuits. As many commentators have pointed out this morning, the ruling will embolden the CFPB and HUD to continue to bring enforcement actions.
As for the State Legislature, there are many issues left to be taken up another day. For example, the Legislature is sure to continue to consider insurance requirements that should be imposed on transportation network companies like Uber and Lyft seeking to operate statewide. In addition, although progress was made this year, we will continue to push for legislation permitting the Comptroller to deposit state funds in credit unions. Finally, Senator Savino did a great job this year in highlighting subprime auto lending practices at dealerships and I expect that this issue will continue to be scrutinized.
As for Obamacare, if you are a credit union planning to cover your employees through a state exchange, yesterday’s decision by the Court gives you the green light to go ahead and do so. A decision against Obamacare would have ended the provision of subsidies in states where health care exchanges were set up by the federal government. I’m with the President on this one, it’s time to move on.
On paper, the NCUA’s proposed shift away from a prescriptive MBL framework to a principles-based framework is everything credit unions could have hoped for and more. It does away with mandates like the two-year experience requirement and instead requires that credit unions that have $250 million or more in assets or that actively engage in MBL lending have detailed policies and procedures. But my guess is that while many credit unions will find the changes a welcome relief from certain aspects of compliance; others will soon be longing for the good old days of detailed MBL regulations. Here is why.
- Most importantly, with great power comes great responsibility. The changes give responsible credit unions greater flexibility on the assumption that credit union boards and senior management have the expertise to properly administer complex MBL programs. On a practical level, your credit union should maintain many of the constraints existing regulations already impose on them. All that NCUA is allowing you to do is responsibly modify those policies to reflect the unique attributes of your credit union.
- Credit unions really won’t know how much flexibility they have until they start seeing the guidance from NCUA that will be used as the basis for future examinations. Take a look at some previous guidance issued by the NCUA and you will soon realize that they can be just as prescriptive as regulations but without the benefit of having gone through a comment period as is required of proposed amendments.
- Examiners will also have more flexibility. One of the most common refrains of credit unions is that there is too much inconsistency among examiners. A principles-based system could produce even more confusion. If the system works properly, examiners will justifiably ask tough questions to assess a credit union’s due diligence. For example, it is appropriate for an examiner to ask what criteria they use in assuring that their MBL staff is qualified. It is not appropriate for an examiner to confuse his or her beliefs as to what constitutes the “best criteria” with the only safe and sound way of making MBL loans.
- Principles-based regulation is not without its risks. Whereas your erstwhile compliance officer can now go to her erstwhile CEO and say “You can’t make that loan because it violates an NCUA regulation,” under the principles-based approach she can only say “You shouldn’t make that loan because it violates our lending policies.” When times are good, bending of the rules won’t matter; but if we learned anything from 2007-08 it’s that we usually won’t know that the good times have ended until it’s too late.
- The proposal hastens the divide between big and small credit unions. Credit unions with $250 million or more in assets will have to implement detailed policies. Those with less than $250 million in assets that are not regularly originating MBL loans will not. On a policy level, this makes sense. But in the name of mandate relief, the industry is willingly going along with proposals that divide big and small credit unions more effectively than bankers ever could. Every time the industry agrees to further divisions along asset lines, it is making it that much easier for Congress to one day tax larger credit unions.
It’s never good when a blog post puts you to sleep and even worse when it’s one you have written, so as important as NCUA’s proposed MBL changes are, an article in today’s American Banker (subscription required) convinced me to return to that subject tomorrow. The article reports that some of the nation’s biggest regional banks (roughly defined as banks that have grown too large as to be described as “community banks” with a straight face) are moving to enhance their image by producing online video content. According to AB, “Regions Financial hired an Academy Award-winning filmmaker to direct a video series about financial planning, while U.S. Bancorp in Minneapolis is sponsoring a video about affordable housing that’s being produced by a prominent Los Angeles creative firm.”
Some in the credit union industry have also embraced this trend. Last year, Coop released a slick documentary style advertisement featuring the millennial singer/songwriter Daria Musk. We need to see more efforts like this. https://newyorksstateofmind.wordpress.com/2014/05/27/the-best-credit-union-ad-ever
Full disclosure: few things get me as fired up as what I consider the stale, unimaginative way in which the industry has branded itself. In the debate between those who think that credit unions emphasize their credit union roots too much and those who think they advertise them too little, I’m solidly in the too much camp. Your average consumer might be intrigued by the idea of a not-for-profit cooperative, but they are going to join only if it is in their financial interest to do so.
Let me put on my director of marketing wanna-be hat and explain why I think that digital production should be in the short term plans of larger CUs and the medium term ones of smaller CUs.
First, it takes advantage of the paradigm shift that has upended traditional media. Today the challenge is no longer finding a platform to get your message out, but getting people to view your message. Anyone can upload a video to YouTube. The trick is getting people to watch it. It’s not as expensive as you might think to pay for a quality video. As one contributor to the article pointed out, the idea is to spend money on production instead of advertising space.
Second, without the constraints of a thirty second or a minute spot you can really get creative in associating your brand not just with a product but with an ethos. For example, the Coop commercial uses aspiring star Musk to identify credit unions with an independent, determined and cooperative spirit. This is a heck of a lot more appealing than repeating over and over again that credit unions are comprised of “people helping people;” at least to anyone under the age of eighty.
Third, you have to move your advertising to where the consumers are and more and more people, particularly younger ones, are streaming their content on demand and watching on their tablets. Even cable companies like HBO and ESPN are cutting the cable cord. Traditional TV watching is so eighties. According to a survey released by Nielson this past December, about 2.6 million households are now “broadband only.” That only represents about 2.8% of total U.S. households, but it is more than double the 1.1% of households that were broadband only last year. Now, don’t get me wrong — Americans aren’t turning off the tube to read Moby Dick – in fact, they are watching more video than ever, but unless you can pony up the money to broadcast during a live sporting event, the days when they can be force fed traditional advertisements are fast coming to an end.
You know that famous phrase by Marshall McLuhan that “the media is the message?” Increasingly, businesses are being judged not just by what they say but where they say it. Time to start planning those online videos if you haven’t already.