Posts filed under ‘Advocacy’
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.
One of the first arguments the banks regurgitate in opposition to municipal deposit legislation is that tax dollars shouldn’t go to institutions that don’t pay taxes. First, we all know that credit unions do pay taxes; but, more importantly for this post, banks have never quite explained why their for-profit tax status automatically makes them better protectors of the public Fisc than credit unions.
That question is worth asking the Legislature next year in light of the New York Bankers Association successful efforts to keep New York City from scrutinizing the community investment performance of banks holding the City’s deposits. On Monday, a federal court ruled that a NYC ordinance mandating that banks holding or wishing to hold municipal deposits be subject to a local review of their investment activities was preempted by federal law and could not be enforced. (The New York Bankers Association, Inc., v. The City of New York, 15 Civ. 4001).
The Responsible Banking Act had its roots in the worst days of the Great Recession. NYC council members grew frustrated by the juxtaposition of mounting foreclosures and shoddy banking practices even as billions of dollars of public money was being deposited into banks for safe keeping. The bill established an advisory board that would report on how well banks were doing meeting financial benchmarks. The report would be used in evaluating institutions wishing to hold municipal deposits from the City.
To be fair, the information the advisory board was seeking was much more extensive than what needed to be supplied under the Community Reinvestment Act. For example, the banks were to be evaluated on how they addressed serious material and health and safety deficiencies in the maintenance and condition of their foreclosed property; developed and offered financial services needed by low and moderate income individuals throughout the city, and how much funding they provided for affordable housing.
Mayor Bloomberg hated the bill so much that he vetoed it and refused to appoint members to the advisory board after his veto was overridden. When Mayor DeBlasio was elected, he embraced the idea and the advisory board came to life. It was time to call in the lawyers.
In arguing against the legislation, the Bankers Association argued that both Federal and State law preempted the ordinance. They pointed out that the Community Reinvestment Act was intended to establish the framework for nationally chartered banks to be assessed for their community works. On the state level the Banking Law gave the Department of Financial Services broad powers of regulation to control and police the banking institutions under their supervision.
In response, the City argued that it was not regulating bank activity; but simply carrying out a proprietary function. It should be able to establish its own standards for deciding who gets the city’s money the same way it gets to decide what companies are awarded city contracts. It also argued that the activities undertaken by the Advisory Board were “purely informational.” Its findings were not binding on anybody deciding where the money should be placed.
Southern District Judge Katherine Polk Failla ruled in favor of every major issue raised in opposition to the bill concluding that “the RBA’s very structure secures compliance through public shaming of banks and/or threatening to withdraw deposits from banks that do not provide information to the CIAB. The Court sees no reason why regulation through coercive power, rather than by explicit demand or stricture, should be immune from preemption scrutiny.”
While the lawsuit may have solved the immediate legal problem facing banks it doesn’t change the fact that banks didn’t do enough in return for their public bailout. Nor does it change the fact that there are local leaders who feel that banks still don’t do enough for the communities in which they operate. Giving localities the ability to work with credit unions. which by their very structure invest in the communities in which they operate, would be a perfectly legal way of ending the banker monopoly and perhaps make these banks more responsive to local concerns.
Epilogue A Failure To communicate?
NCUA officials have fallen into the habit lately of making bold statements one day that have to be clarified the next. First, we had Chairman Matz’s clarification of her Congressional testimony that credit union CEOs aren’t representing their members when they advocate for budget hearings. Yesterday NCUA felt the need to clarify to the CU Times its position on how much information the public is entitled to about the Overhead Transfer Rate methodology following the release of a letter from its General Counsel to NASCUS on that very subject(See yesterday’s blog). I think it’s fair to say that NCUA is suffering from some communication problems.
The article quotes Board renegade Mark McWatters, who is emerging as a much needed voice of reason, as saying that “The agency will make the final determination as to the calculation of the OTR and I see no harm in subjecting the agency’s OTR methodology to public comment as a proposed rule under the APA,” Here is a link
NCUA’s obstinate and myopic refusal to submit its budget to a formal and open public process took another bizarre turn yesterday. To put it nicely, the agency is demonstrating everything that can go wrong when an independent agency has too little oversight.
The ostensible issue is about the Overhead Transfer Rate. The real issue is fast becoming how much power an independent agency has to spend other people’s money without oversight.
The OTR represents money that the NCUA takes from the NCUA Share Insurance Fund to cover “Insurance Related Expenses.” According to the National Association of State Credit Union Supervisors the OTR increased 40.1% from $67.0 million in 2013 to $93.9 million for 2015. NASCUS argues that “By shifting a portion of FCUs’ share of NCUA expenses to the NCUSIF, the OTR reduces out-of-pocket expenses incurred by FCUs. The resulting reduction in FCU Operating Fees provides a singular advantage to FCUs and adversely affects the competitive position of FISCUs relative to FCUs.”
A similar debate happens in New York State every year with industry stakeholders grousing that fees ostensibly paid to fund oversight of specific industries are swept for unrelated purposes. In New York State – no paragon of transparency – you can look up the budget numbers and get a pretty good idea of how much is being swiped for other expenses. But NCUA is an independent agency with no formal budget process. What’s more, NCUA has guarded the precise methodology it uses to calculate the OTR with the gusto of a retired CIA director tasked with guarding Coke’s secret formula, or, for those of you who admit to watching Sponge Bob with your kids, the formula for making Krusty Krab burgers.
NASCUS grew so frustrated with NCUA’s obstinacy that it retained a Washington law firm to analyze the issue. The resulting opinion letter opined that the adoption of the OTR formula is a regulation that can only be promulgated by the NCUA following a Notice and Comment period.
NCUA’s General Counsel Michael McKenna responded in a July 30th letter by noting that NCUA already does put a lot of information about the OTR on its website and that NCUA’s lawyers believe that the OTR is not subject to notice and comment requirements. Fair enough: reasonable people can differ.
But the letter goes off the rails with gusto: he explains that “courts, not public forums are best suited to resolve such complex legal issues.” What? This is a lot like saying the law is too important to leave to juries. Is NCUA really saying that the OTR is too complicated for the public to understand?
He also explains that forcing NCUA to divulge its advice about the applicability of the APA to the OTR formula would require NCUA to divulge the work product of its attorneys and ultimately chill its ability to receive candid analysis. I’m not unsympathetic to this argument in theory but it rings hollow considering that the NCUA and other banking regulators refuse to extend attorney work product exemptions to the institutions they oversee. Wouldn’t credit unions benefit from unfettered legal advice to the same extent as NCUA? Furthermore, legal discussions surrounding the OTR may be privileged but the actual formula and the rational for how it is constructed and implemented certainly isn’t. Why else do regulations have preambles?
Bottom line: NCUA is doing a great job of making a mole hill into a mountain. In her testimony before Congress the Chairman was dismissive of Congressional calls for greater budget transparency and questioned the motives of anyone who would dare request greater openness. With this letter to an organization of fellow regulators NCUA is doubling down: arguing that federal law shields it from explaining to the public how it allocates the money it receives from credit unions and that technical issues are best not discussed publicly. If its interpretation of the law is correct then its time for the law to change.
The agency is coming across as politically tone-deaf and hopelessly arrogant.
Here are some links so you can decide for yourself if you think I am exaggerating or if NCUA has to calm down.
Legislation that would authorize up to $200 million in state funds to be deposited in credit unions (S.3616-Funke) took an important step down the legislative road yesterday when it was scheduled to be voted on at next Tuesday’s Finance Committee, If the committee votes in favor of the bill, it goes out to the Senate floor where it could be voted on by the full chamber, A companion piece of legislation-A 774 Rodriguez- is awaiting action in the Assembly Banks Committee. The bill would authorize the state Comptroller and the Commissioner of Taxation and Finance to deposit up to $200 million in state funds in credit unions. It is modeled after a similar program for community banks.
Lest we all get too excited and banking lobbyists go apoplectic on a beautiful Friday, the bill is not a municipal deposit bill. It does not authorize municipalities in New York State to accept municipal deposits and get the best rates available (God Forbid!). It also would not decrease the amount of state funds going to banks. It simply puts credit unions on an equal footing with their banking counterparts.
One more point. A faithful reader of this blog was chatting with me about this bill the other day and she correctly pointed out that, in urging legislators to act on this and similar legislation it’s always important to point out that federal law already permits credit unions to accept federal funds. New York has made a public policy decision to block its government and localities from accessing credit unions.
This isn’t all that fair to New York State’s citizens. The fact that the Senate is seriously considering S3616 is an incremental but important step in the right direction.
Senate moves to crackdown on subprime car lending
The Senate Banks committee will take up a series of bills next week designed to crackdown on subprime auto lending activities.
At a hearing earlier this year Ben Lawsky, the former Superintendent of the Department of Financial Services, suggested that his Department needed more authority to crack down on nonbank actors that offer car loans.
In a wonderfully concise piece of legislative drafting, S. 5489 sponsored by Senator Klein stipulates that “Every sale of a motor vehicle that involves financing, whether originated at a motor vehicle dealer or at a lending institution, shall be deemed to be a “financial product or service” within the jurisdiction of the department.”
A second, potentially more controversial bill (S.5490A Savino), imposes new restrictions on the ability of car dealers to repossess vehicles. It provides that when a dealer signs a retail installment contract with a car buyer and the buyer drives the car off the lot the buyer is the owner of the vehicle and has the right to keep the vehicle except for reasons of non-payment of the contract. As a result dealers could no longer give themselves the right to repossess a vehicle for which they are unable to secure financing through indirect lending networks.
When I tell people that a good chunk of my professional life is spent reading and responding to regulations, they smile and their eyes glazed over as they try to suppress a yawn. But, believe it or not, an infusion of new members on the NCUA Board means that regulators are really looking to make some meaningful changes. Here are my thoughts on yesterday’s board meeting. All of these regulations and proposals were influenced by industry comments.
Associational Common Bonds Rule
This was the most controversial rule of the day. Responding to concerns that some credit unions were creating sham associations simply for the purpose of increasing membership eligibility, NCUA finalized regulations strengthening its oversight of associational membership requirements. On the bright side, the proposal increases to 12 the types of associational groups that receive automatic pre-approval, including “organizations promoting social interaction or educational initiatives among persons sharing common occupational professions.”
If I wanted to be a glass half-full kind of guy I would say that the final regulation is much improved from the initial draft thanks to industry suggestions. If I wanted to be a glass half-empty kind of guy, I would continue to question why NCUA felt the need to go forward with this regulation in the first place. The only organization that really thought associational membership was being abused was the American Bankers Association.
When Congress expanded the ability of credit unions to offer Interest-On-Lawyer Trust Accounts (IOLTA) late last year, it also empowered them to offer “similar” escrow accounts. Yesterday, the NCUA proposed regulations defining those similar accounts. Under the proposed rule, they would include accounts for pre-paid funeral expenses, for example. At yesterday’s board meeting, NCUA officials stressed that they are more than willing to consider expanding the types of accounts eligible for insurance coverage under this law. This is one area where a well-written comment letter could clearly benefit the entire industry.
“Technical” Amendments for Corporate Rules
My old boss in the Legislature used to say that there is no such thing as a technical amendment, only amendments that no one understands. I was thinking of this quote yesterday as I heard the board discuss amendments to corporate borrowing authority. These amendments didn’t go as far as the corporates would have liked; however, the final rule improves on the initial proposal by extending to 180 days the maximum term of a corporate’s secured borrowing authority. In listening to the board discuss the proposal, I was struck by how concerned NCUA still is about allowing the corporates to rely too heavily on perpetual capital.
In addition to finalizing this technical amendment, the NCUA proposed an interesting change allowing the corporates to provide bridge loans to credit unions awaiting funding from the Central Liquidity Facility (CLF). When a credit union borrows funds from the facility it can take up to ten days to get the money. Considering that the purpose of the CLF is to provide emergency liquidity for credit unions, this strikes me as a huge defect in the system. NCUA is proposing to allow the corporates to provide members with bridge loans to cover the gap between the request and availability of funds.
I wish the industry would be more concerned with the issue of how best to revitalize the CLF fund. The corporates capitalized the fund with credit unions having access so long as they were a corporate member. When the corporates crashed, so too did their ability to fund the CLF and the industry has been remarkably short-sighted, in my ever-so-humble opinion, when it comes to devising an industry based source of emergency liquidity. At least this is a step in the right direction.
Appraisal Management Companies
NCUA signed off on joint regulations mandated by Dodd-Frank strengthening regulations related to Appraisal Management companies. This regulation is a bit strange, as no one at NCUA seems to know for sure if any credit unions invest in appraisal management CUSOs. This means that even though NCUA approved the rule, it may have absolutely no impact on credit union operations.
On that note, enjoy your weekend.
RESPA has always prohibited kickback schemes. Specifically, RESPA explains that ”No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C.A. § 2607 (West). But figuring out where the line is between legitimate salesmanship and illegal kickbacks has always been a gray area and RESPA enforcement has always been a tad lax.
Yesterday provided examples of how RESPA says what it means and means what it says. The Bureau That Never Sleeps and the Maryland AG sued originators over an alleged referral kickback scheme (http://www.consumerfinance.gov/newsroom/cfpb-and-state-of-maryland-take-action-against-pay-to-play-mortgage-kickback-scheme/). Closer to home, Governor Cuomo and New York’s Department of Financial Services proposed tough new regulations that would, among other things, prohibit title insurance companies from providing meals and entertainment expenses to loan originators (http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf).
First, let’s talk about the RESPA violation. The CFPB and the Maryland AG are suing Genuine Title, a now defunct Maryland company that offered closing services. It’s alleged that the company provided loan officers with marketing services “including purchasing, analyzing, and providing data on consumers, and creating letters with the loan officers’ contact information” and that in return, the loan officers would refer homebuyers to Genuine Title.
RESPA stands for the simple proposition that you can’t get something for nothing. If an originator is getting a fee for doing nothing more than referring business, then something is wrong.
As for New York State, it is moving to clamp down hard on title insurance practices that it believes drive up the cost of title insurance and limit consumer choice. The Governor doesn’t always get quoted in DFS press releases. Here is an indication of how strongly the administration feels about the amount of gift giving going on in the title insurance industry.
“New Yorkers should not have to foot the bill for outrageous or improper expenses made by title companies just to refinance or close on their home,” Governor Cuomo said. “Our administration will not stand for that kind of abuse in the title insurance industry, and these new regulations will help ensure that New Yorkers are protected from unfair charges and get the most bang for their buck.”
The proposed regulations would prohibit title insurers from offering inducements to get business including: meals and beverages; entertainment, including tickets to sporting events, concerts, shows, or artistic performances; gifts, including cash, gift cards, gift certificates, or other items with a specific monetary face value; travel and outings, including vacations, holidays, golf, ski, fishing, and other sport outings; gambling trips, shopping trips, or trips to recreational areas, including country clubs; parties, including cocktail parties and holiday parties and open houses. THIS IS NOT THE COMPLETE LIST
Suffice it to say it’s about to get a lot less fun dealing with title insurers in NYS.
Here is a link to the proposal: http://www.dfs.ny.gov/insurance/r_prop/rp208t.pdf
NCUA Board meeting today
Here is a quick reminder that the NCUA is having a board meeting today. Among the issues on the agenda are a vote on a final rule amending common bond requirements for associations and proposed regulations for IOLTA accounts. Remember that federal law now authorizes credit unions to open up Interest on Lawyer Trust Accounts. The regulation will presumably describe what accounts are similar enough to IOLTAs that they can also be offered by credit unions.
It was nice seeing so many of you at the State GAC over the last couple of days. Great job!
I’m feeling lucky today. On the same day that New York credit unions are going to the Legislature to advocate for stronger data protections, among other things, news reports explain why small credit unions and banks are objecting to a proposed settlement between MasterCard and Target in relation to Target’s data breach.
To his credit, the Attorney General has made data breach legislation one of his main priorities. Recently, the Legislature introduced bills at his request (A.6866/S.4887) that would require all businesses in New York State to adhere to certain basic industry standards. For example, businesses that comply with Gramm-Leach-Bliley privacy protections would be in compliance with the AG’s standards. Since banks and credit unions have had to meet basic privacy protections for years, the main effect of the AG’s proposal would be to apply these standards to merchants. This is, of course, a good thing. But what happens when the merchants don’t live up to their end of the bargain?
Which brings us to today’s news. As explained in this article in the Wall Street Journal, small banks and credit unions are objecting to the proposed MasterCard settlement negotiated with larger banks on the grounds that it doesn’t provide adequate redress to smaller institutions. You may be aware that credit unions have joined class action law suits seeking damages against Target and other retailers for costs related to the breach. One of the main reasons why the Target lawsuit has legs is because Target is headquartered in Minnesota. In addition to being the land of 1000 lakes, it is also one of the first states in the nation to have a statute enabling financial institutions to recover for the cost of data breaches caused by merchants. These costs include the expense of reissuing new debit and credit cards.
The AG’s bill includes no similar rights for New York banks and credit unions. If the legislation ultimately includes such a right, it would be a pretty fair deal for financial institutions and consumers. Data would be better protected and the fear of litigation would put some teeth behind this bill. In contrast, unless credit unions and banks get a statutory right to recover for the costs of breaches for which they are not responsible, costs of these data breaches will not be shouldered by the parties most responsible. This is particularly important for credit unions since, as the article points out, data breaches are more costly for smaller institutions.