Are These The Biggest Threats Facing Your Credit Union?

June 26, 2014 at 9:09 am 1 comment

The OCC released its semiannual review of the risks facing the banking industry and even though it doesn’t apply to credit unions it provides an excellent synopsis of the trends within the financial industry and the perceived threats highlighted by examiners. This is by no means a definitive list; I’m simply highlighting a few of the issues that might be most relevant to your credit union.

  • Cyber security continues to be on everyone’s mind. The reality is that everyone knows what hackers can do and we are waiting to see just how much more destructive and creative they can get at stealing people’s money. This is no longer just a problem for the largest big name financial institutions. As the OCC explains: “Business lines and functional areas within banks must perform thorough risk and control self-assessments, analyze operational events, and identify, assess, monitor, and mitigate emerging risks. Risk management is balancing resource constraints, retention of key talent, and overall capability to monitor the breadth of change.” Translating:  ongoing implementation of your BSA risk assessments is more important today than ever before. In addition, if your vendor contracts don’t appropriately apportion responsibility for monitoring risk, they need to be amended.

 

  • Banks are already feeling the pressure to reduce underwriting standards not only for their mortgage loans but for car loans as well. Why is this so intriguing to me? Because, contrary to popular belief, nothing in Dodd-Frank or the CFPB’s regulations prevents financial institutions from making exactly the type of mortgage loans that got us into this mess in the first place. Instead, the regulations are designed to incentivize better underwriting standards both by increasing penalties such as foreclosure defenses and monetary damages and providing incentives such as “safe harbors.” Credit unions can benefit from banker uncertainty if they are willing to make the same loans that they have in the past, particularly if they had the ability to hold on to more of their mortgages. It also means that credit unions, like banks, have to have clearly delineated underwriting standards, as well as an understanding of when it is appropriate to make exceptions to the standards. As for car loans, could financial institutions be pushing out loan terms so far that we could experience a car loan bubble?
  • Not surprisingly interest-rate risk remains a primary concern of the OCC, as it is with the NCUA. Yes, someday the sky will fall. As a result, the OCC is concerned by “increased exposure to interest rate risk (IRR) at some banks related to concentrations of agency-issued mortgage-backed securities (MBS) and unsupported non-maturity deposit assumptions.”  It’s the last part of that statement that intrigues me the most. Let’s face it, credit unions aren’t seeing record membership growth just because people are annoyed with banks or because credit unions provide great service.  There aren’t many places to safely put your money these days and get a decent return. Like corporations, consumers are hoarding their cash. While we can all disagree about how far and how quickly interest rates will rise, two questions your credit union should be asking are: how much and how quickly could your credit union stand to lose its core deposits? And, what steps is your credit union taking to convert short-term depositors into longer-term contributors to the credit union?

 

Of course, the issue of core deposits would not be quite so important to credit unions if they could all have access to secondary capital. But that’s a blog for another day.

Incidentally, everyone should be allowed to take an early lunch today and root for a tie against Germany. A tie gets the United States into the single elimination knockout round. Why am I rooting for a tie? Because I’m a realist. All Germany has to do is tie to guarantee a spot in the next round. Sure, a win would be nice but the U.S. beating the Germans in soccer is about as likely as Munich cancelling Oktoberfest.

Entry filed under: Compliance, General, Mortgage Lending. Tags: , , , .

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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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