Return of the Walking Dead

New York Attorney General Eric T. Schneiderman used a recent appearance before the New York State Association of Towns to announce that he would soon be introducing new and improved legislation aimed at making lenders more responsible for abandoned property that has not been foreclosed upon. Under this version, fines levied against lenders for non-compliance with property maintenance requirements will be given to local governments “to hire additional code enforcement officers.” According to the press release, independent Democratic conference leader Jeffrey Klein and Assemblywoman Helene Weinstein will be sponsoring the legislation.

First, a caveat. The views I express on legislation in this blog are mine and mine alone and do not necessarily reflect the views of the Association as a whole. There’s a second caveat. I understand why AG Schneiderman and the town leaders are so concerned about vacant property. According to the AG, in some areas of the State up to 42% of the properties in foreclosures are abandoned before the process is complete. The result is that property lays vacant and deteriorates as homeowners walk away from their responsibility to care for their homes and lenders are less than enthusiastic about assuming the legal responsibility for a deteriorating piece of real estate.

Schneiderman’s bill seeks to address this problem by imposing requirements on mortgagees and servicers. Specifically, Section 1307 of NY’s Real Property Actions and Proceedings Law currently imposes maintenance obligations on a plaintiff in a foreclosure action who obtains a judgment of foreclosure. The most important thing this bill will do is impose maintenance obligations on lenders and servicers whenever property is vacant and abandoned or a foreclosure action has been commenced. Among other things, vacant and abandoned property can be any property that is at least three months delinquent and vacant or the mortgagor has informed the mortgagee in writing that they no longer intend to occupy the property. Assuming your typical delinquent homeowner won’t be quite so conscientious, property can also be classified as vacant where there is “a reasonable belief that the property is not occupied.”

What frustrates me about proposals like this is that they refuse to address the core reasons behind zombie property in the first place. New York has one of the most difficult and time consuming foreclosure processes in the nation. It’s not uncommon for lenders to take four years to complete a foreclosure. Rather than imposing obligations on lenders with regard to property they don’t own, why not simply expedite the foreclosure process?

For example, we should use this legislation’s definition of vacant and abandoned property as a basis for allowing foreclosures to go through without many of the procedural hurdles that are currently in place including the requirement under New York Law for pre-foreclosure settlement conferences. In addition, any party that fails to show up in a foreclosure proceeding should be understood as having waived any and all defenses to the foreclosure.

Ironically, many of the towns supportive of this legislation are well aware of what a disaster a foreclosure in New York can be. Under New York Law, municipalities have a first-lien right to foreclose on property on which delinquent taxes are owed. It seems to me somewhat disingenuous to complain about lenders not taking responsibility for real estate they don’t own when municipalities could, in many instances, take control of the same property but choose not to. I wonder why?

And one more thought. It’s one thing for a lender who has taken over foreclosed property to be responsible for proper maintenance. It is another thing to impose on that lender the obligation to refurbish property that may not have been up to code for years before the lender entered repossession. Under this bill, municipalities would have the right to intervene in foreclosure actions to mandate that property be maintained up to code. Let’s think about this for a second. The GSEs have already complained that New York mortgages are not as valuable as in other parts of the country because of foreclosure costs. Now we are going to make the system even more expensive by allowing municipalities to impose a back door maintenance tax on mortgagees.

Finally, I personally would love to know how much of the stock of zombie property not only in New York but nationwide is owned by Fannie and Freddie. My guess is that we might find that these government sponsored entities are not particularly conscientious absentee landlords.

Preparing for the Worst, Hoping for the Best

Maybe it’s because the desolate Albany landscape with its frozen mounds of exhaust-tinged snow and sub-zero temperatures makes me feel like I’m inhabiting a post-apocalyptic world, but a couple of days ago I got around to reading the FFEIC’s new appendix to its examination handbook dedicated to disaster preparedness entitled Strengthening the Resilience of Outsourced Technology Services. In all seriousness, it is a must-read for any credit union that has to have a business continuity plan (BCP) and contracts with third parties for services that should be integrated into this business plan. I bet that is almost every credit union.

Regulators have long emphasized the need for appropriate due diligence when entering into third-party relationships. In addition, Business Continuity Planning has been a major point of regulator emphasis  since 9-11; not to mention that “once in a century storms” seem to be coming every other year. This new appendix zeros in on the importance to financial institutions of insuring that appropriate vendor services are integrated into BCP plans and testing. As the regulators commented in releasing the appendix, “a financial institution should ensure that its third-party service providers do not negatively affect its ability to appropriately recover IT systems and return critical functions to normal operations in a timely manner.“

The appendix highlights four key points of emphasis for examiners assessing third-party relationships.

(1) Third-party management addresses a financial institution management’s responsibility to control the business continuity risks associated with its third-party service providers (TSPs) and their subcontractors.

(2) Third-party capacity addresses the potential impact of a significant disruption on a third-party servicer’s ability to restore services to multiple clients.

(3) Testing with third-party TSPs addresses the importance of validating business continuity plans with TSPs and considerations for a robust third-party testing program.

(4) Cyber resilience covers aspects of BCP unique to disruptions caused by cyber events.

I don’t want anyone to break into a cold sweat thinking that a new compliance requirement is necessarily being imposed on them. If you don’t outsource core operational functions to third parties this appendix shouldn’t concern you much. But if your credit union can’t operate effectively unless a vendor is also on the job, then you have an obligation to work with that vendor and make sure that it has a Business Continuity Plan that is compatible with your own.

Think about it: if your vendor backs up all your account information at a facility down the block from your credit union, your BCP plan has some serious holes.

Don’t Fire Until You See the Whites of Their Eyes

Yesterday, the CU Times reported that Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking, House and Urban Affairs Committee, would not rule out doing away with the credit union tax exemption as part of an overhaul of the tax code.

Shelby’s equivocation on the tax exemption underscores that tax reform poses dangers for credit unions, but his stance should hardly surprise anyone, nor should it send us scrambling to the ramparts as if the industry is in imminent danger. The fact is that in any push to overhaul the tax code a prominent veteran lawmaker like Shelby isn’t going to take anything off the table. There is a lot of negotiating to be done, if and when we ever get to a tax reform end game.

Should the industry be vigilant? Absolutely. But, in my ever so humble opinion (and I stress only my opinion), in recent years the industry has overreacted to the threat of tax reform with the result that it has not pushed aggressively enough for other parts of its agenda. There may come a time when we need to activate the grassroots in a major push to save the exemption, but that time is not here yet. In the meantime, let’s not let the bankers sideline our agenda every time they advocate for ending the exemption or draw too many conclusions every time a legislator gives less than 100 percent support for the industry.

Good News: You’re Small

In Congressional testimony yesterday, NCUA’s Larry Fazio announced that the agency would propose regulations providing regulatory relief to credit unions with less than $100 million in assets. Specifically, NCUA will be changing the definition of what constitutes a small entity credit union from one with $50 million in assets to one with less than $100 million in assets. Federal law gives NCUA the responsibility to consider the impact that proposed regulations have on smaller credit unions and to exempt such institutions from regulatory mandates when appropriate.

In January of 2013, NCUA amended the definition of the small entity from those with less than $10 million to those with less than $50 million in assets. At the time, NCUA estimated that this change meant that 67.8% of federally insured credit unions were designated as “small entities.” If NCUA follows through with its latest proposal, Fazio estimated that 77% of all credit unions would be eligible for enhanced regulatory relief.

Credit unions have already gotten a preview of how important such a shift could be with NCUA’s announcement that it is proposing to increase the threshold for Risk-Based Capital compliance from $50 to $100 million. In addition, credit unions with less than $50 million in assets were exempted from enhanced interest-rate risk policies. Going forward we won’t know for sure precisely what regulatory relief credit unions will entitled to until the regulation is finalized. At the very least, credit unions with less than $100 million in assets will be eligible for increased assistance from NCUA’s Office of Small Credit Union Initiatives and a framework has now been put in place to extend regulatory relief to a large majority of credit unions.

Now, don’t get me wrong. I think NCUA’s proposal is a great idea; but, the more the industry codifies distinctions between big and small credit unions, the more challenging it becomes to ensure that fundamental baseline distinctions between all credit unions and banks remain intact. You can bet a bank lobbyist will soon be arguing that if large credit unions are so different than small ones, why shouldn’t they be taxed. In addition, while regulatory relief is a welcome and important step by the NCUA, it will likely do little to halt the long term consolidation of the industry or the fact that those with $500 million or more in assets are the ones driving its aggregate growth.

As a result, I would like to see the industry couple the NCUA’s push for regulatory relief with an emphasis on recruiting the next generation of executives. I see a tremendous amount of enthusiasm displayed by people in their twenties and early thirties. I also see a fair number of people in their late fifties and early sixties nearing retirement. Mergers and consolidations are inevitable, but let’s make sure that credit unions don’t dissolve or merge because of a lack of potential leadership.

On that note, enjoy your day.

Loosening the small business lending faucet

It was inevitable that I would be delayed heading back to Albany yesterday; after all  how could Amtrak possibly be expected to anticipate and prepare for a Northeast snow storm ?

So As I waited and waited…and waited  in Pen Station  for a train to come to take me back to Albany  I had plenty of time to think about life’s big questions  like: Is  the Russian train system crippled by  snow storms?  Why in God’s name do you call for a pass   one yard from the end zone when you have the best short yardage running  back in football? And when exactly does the Sports illustrated swimsuit issue come out?

Another question I pondered was why Congress doesn’t do all it can to help the small businesses it professes to love so much? There has been ample evidence over the last six years that banks have made it more difficult for small businesses to get loans even though quantitative  easing made cheap money available by the truckload.

The latest evidence that banks remain gun-shy, albeit slightly more willing to invest in main street comes from the Federally Reserve’s quarterly survey of senior loan officers released yesterday. In the quarter ending in October lending  terms  to small businesses (Defined as businesses with  less than $50 million in assets,) remained unchanged at 91% of banks and “eased somewhat” at  a little more than 7% of institutions.  The numbers are slightly better at smaller banks but nine out of 10 loan officers at these institutions reported that lending  terms are holding steady.

Now I’m not out to criticize the banks.  They are understandably  still a little reluctant to lower commercial standards until they know that the economy is on a consistently  upwards trajectory.  My point is that this survey is yet one more example of how  small businesses  need all the loan  options they can get.  There are Credit unions that would love to provide loans but are hampered by having to manage an arbitrary MBL cap.  Hopefully Congress will recognize the value of raising the MBL cap,  its good for local business and its mandate relief that doesn’t cost the taxpayer a dime,

Here is a link to the survey which also provides a snapshot of mortgage underwriting standards.

http://www.federalreserve.gov/boarddocs/snloansurvey/201502/table1.htm

Student Loan Guidance

Since I took yesterday off I didn’t get a chance to tell you about a joint guidance to financial institutions giving banks and credit unions a cautious green light to offer graduated repayment terms on private student loans.  As the Guidance explains:

“ Financial institutions that originate private student loans may offer borrowers graduated repayment terms in addition to fixed amortizing terms at the time of loan origination. Graduated repayment terms are structured to provide for lower initial monthly payments that gradually increase.”

With student debt now exceeding $1 trillion even as the job market for graduates remains bleak and wages continue to stagnate I suppose any regulatory recognition that greater loan flexibility/creativity is called for when it comes to financing college but let’s not let the colleges and universities off the hook.  At some point tuition increases have to be brought under control or no amount of creative financing   is going to keep college affordable for all but the wealthiest of families.

Here is the Guidance

http://www.ncua.gov/News/Documents/NW20150129LoanGuidance.pdf

 

Here is a Newton like realization  had  waiting for my train to come: Your electronic ticket is only as good as your smartphone’s battery life.

 

Have a good day.

 

RBC 2 Reality Check

The son of a good friend of mine just got braces. He’s been complaining about it for the last week, which is understandable since the contraption will inhabit his mouth for the next 18 months. But a couple of days ago my friend told him the pity party is over, it is time to move on.

NCUA’s second risk-based capital proposal (RBC 2) has been out a little more than a week now and it is time for the industry to have a reality check. Over the past week, I’ve heard questions raised about the legality of the proposal, criticisms of the amount of money it’s going to cost credit unions to comply, and questions raised about why we even need RBC reform in the first place. It’s time for the industry to get serious though. There will be risk-based capital reform and rather than get mired down in the weeds of legal analysis or generic gripes about the cost of implementing this proposal, the industry’s time could be better spent coming up with constructive improvements to NCUA’s regulation which will, whether you like it or not, provide a framework for a more sophisticated RBC framework.

First, there is the legal argument. We have both a current and former member of the NCUA Board questioning the legality of NCUA’s decision to impose requirements for credit unions with $100 million or more in assets to be well-capitalized as opposed to just establishing requirements for complex credit unions to be adequately capitalized. As readers of this blog will know, I love to delve into questions about regulatory authority. But before anyone in the industry rushes out to start a lawsuit, let’s keep in mind that long before NCUA came out with its original RBC recommendation, the industry had been begging NCUA to establish an RBC framework. Rather than roll the dice on a lawsuit that credit unions could very well lose, the industry should be continuing to develop a truly workable and beneficial RBC framework.

And let’s not forget that credit unions have already accomplished a great deal in the area of RBC reform. Since the second proposal is understandably more complex, it’s too early to make definitive judgments as to just how much better it is than the original. However, the more and more I look at RBC 2, the more and more I realize that this is one of the rare situations where the sequel beats the original. (Anyone who tells me that Godfather 2 is better than the original is a philistine: case closed.) For example, one of the things I underestimated in initially commenting on NCUA’s plan was the extent to which adjustments to risk weightings helped even those credit unions with concentration risk concerns. Most importantly, by creating a category of commercial loans and collapsing concentration tiers, there are many credit unions that were literally devastated under the original proposal that will be able to continue to specialize in member business loans. This is particularly true since these credit unions will have three years as opposed to eighteen months to phase in new capital requirements.

Does this mean that the proposal is perfect? Of course not. During a webinar the other day, one caller suggested that NCUA consider further refinements to its weightings of CUSO investments by creating an aggregate threshold on investments that below which CUSOs wouldn’t be singled out for negative treatment. In addition, NCUA has to clarify precisely how much power it intends to give itself to require individual credit unions to maintain capital buffers beyond the minimum threshold established under these regulations.

There are a lot of legitimate questions that need to be answered, but let’s start from the premise that there will be RBC reform and that the industry can constructively make it even better than it already has.

Its time for Credit unions to Hang together or they will hang separately

Later  today the industry will have itself in a foam-mouthed- frenzy analyzing the NCUA’s latest attempt at devising a sensible risk-based-capital framework. I’ll be joining in the frenzy but let’s be honest: With or without RBC reform there are trends fundamentally reshaping the industry.

The Great Recession may very well mark a decisive turning point in the history of The Movement:  Increasingly only the big can survive and only the biggest can  prosper. One of the most basic steps the industry should take to counter this trend is to engage in more extensive collaboration that enables all credit unions to enjoy the benefits that come from economies of scale.

First the numbers don’t lie. According to a September 2014 Filene Report(Credit Union 2.0: An Opportunity to Build Collaborative Partnerships ) In 1969 there were 23,866 institutions. Since then there have been more than 13,000 credit union mergers and a smaller number of liquidations. Today there are approximately 6,700 credit unions, a number that will undoubtedly decline even more by the end of the day.

These numbers don’t begin to reflect the full impact of the Great Recession and its aftermath: Creative destruction is creating a system of “Haves” and “Have not’s” where only the strongest and the biggest survive.

According to NCUA Chief Economist John Worth in his December report on economic trends membership growth  at credit unions with $1 billion or more in assets exceeded 8 % recently and has averaged 6% over the last five years. In contrast membership growth for credit unions with $500 million or less in assets has fallen for each of the last four years

Loan growth at credit unions with $1 billion or more in assets exceeded 15 % over the last year but has contracted for the last five years at credit unions with $100 million or less in assets. In addition the ROA of the largest credit unions has averaged one hundred basis points for the last three years; This far exceeds growth for any other asset class. As Worth points out smaller credit unions are facing challenges that can’t be overcome by an improving economy.

These trends can’t  be reversed but they can be mitigated. The unique attributes of credit unions are going to be harder to see if the only institutions left are those over  $1 billion dollars.Collaboration can benefit all credit unions.  I know that this idea has been around for years but given the accelerated pace of consolidation it really is time to get serious.

For example in the age of Cloud Computing there is absolutely no need for credit unions, most of which offer a similar basket of services not to centralize their IT infrastructure. More robust systems can ultimately provide better and cheaper back office support and might even prevent smaller credit unions from being left behind  by the latest mobile and online banking trends.

Another obvious candidate is compliance. The burden is here to stay but you all face the same set of regulations. At the Association we are in the process of introducing a shared compliance model under which an employee hired by the Association takes on compliance projects for a group of credit unions. The model has already been adopted successfully in several other states.

A third step credit unions can take is to fully utilize their  state and federal trade associations. When times are tough and credit unions are looking for places to cut back I know that association dues is a tempting target  but this is penny wise and pound foolish. Every day I talk to staff people who teach me something about the credit union industry I didn’t know when I came in the door. These people are here for you. Used properly, an Association is one of the most cost-effective employees you have,

Finally if you have to merge than why not consider a merger of equals? In its September 2014 report Filene profiled relatively strong but small credit unions that realized synergies by merging. They were able to grow to meet member needs. If your credit union is stuck in the cross currents of economic change why not proactively make inevitable changes from a position of strength?

Recently the OCC released a report encouraging community banks to collaborate. What it said of community banks is certainly true of credit unions:

“As diverse as community banks are, they share the same commitment to supporting the communities they serve. With this in mind, the OCC sees an opportunity for community banks to share resources and expertise to the mutual benefit of all involved. Some community banks may have excess capacity or may have developed platforms or expertise that enable them to provide shared services to other community banks that may not have sufficient resources or demand. Other community banks may look to collaborate with fellow community banks that share the same core values as a cost-effective way to meet growing demands while retaining their individual identities.”

Here is a copy of the report

http://www.occ.gov/publications/publications-by-type/other-publications-reports/pub-other-community-banks-working-collaborately.PDF

 

When it comes to cyber-security: Change you can’t take seriously

All you need to know about the President’s speech laying out his proposals for enhanced cyber security and consumer protections is that as he was delivering it  the US Central Command’s twitter account was being taken over by Islamic State terrorists

Who says terrorists don’t have a sense of irony.

The truth is that even without the attack the president’s ’s cyber proposals are an impotent response to what is one of the nation’s biggest challenges: How to protect our electronic infrastructure. If we don’t start dealing with it soon we are putting our nation’s economic growth and privacy at risk.

At least rhetorically the President understands just how big the stakes are, In yesterday’s speech he pointed out that    “In one survey, 9 out of 10 Americans say they feel like they’ve lost control of their personal information.  In recent breaches, more than 100 million Americans have had their personal data compromised, like credit card information.  When these cyber criminals start racking up charges on your card, it can destroy your credit rating.  It can turn your life upside down.  It may take you months to get your finances back in order.  So this is a direct threat to the economic security of American families and we’ve got to stop it”

So what is the Government’s big solution? (1)A national standard mandating that companies would have to notify consumers of a breach within 30 days and (2)encouraging financial institutions to provide customers easier access to their credit scores. Neither of these are bad ideas but the President’s proposals are like eating leftovers when you were really looking forward to a brand new meal: Better than nothing but hard to get all that excited about.

Is this really the best the country of Bill Gates and Steve Jobs can do in the face of hackers determined to steal massive amounts of data from the American consumer as dictatorial quacks  browbeat studios into not   releasing  movies they don’t like? Since when did we become the Can’t Do nation?

For one thing states already have breach notification requirements. They make sense but by definition they don’t deter breaches. In addition, your average consumer is likely to take little solace from the fact that they will know that their debit card has been compromised a mere one month after a breach has been discovered,

According to the President thanks to the cooperation of major financial institutions including some credit unions a majority of Americans will now have free access to their credit scores. The problem is that the Fair Credit Reporting Act already requires credit reporting agencies to give consumers a free copy of their credit reports once a year if they ask for one. True it’s a lot easier for a consumer if their financial institution  tells them what their score is without being asked to do so but again all you are doing is closing the barn yard door after the horse has gone on the run.

Conspicuously absent from the President’s proposal is anything that would force businesses to do what banks and credit unions already have to do: Have policies in place to monitor identity theft threats and take steps to protect against vulnerabilities. Another proposal would be to give everyone some skin in the game by imposing a national law mandating reasonable care in the prevention of cyber theft. If you really want businesses to take cyber threats seriously release the trial lawyers and attorneys general. Time for the President to use the bully pulpit so that the American Government and public really realize how serious a challenge hacking poses.