Posts filed under ‘Economy’
Are we facing another subprime crisis, this time with auto lending? Are there steps the Legislature should take to clamp down on poor lending practices? Those were the basic questions considered by NYS’s Senate Banking Committee yesterday at a hearing dedicated to analyzing subprime auto lending trends. While legislation may not necessarily be imminent, some key Legislators and regulators are clearly growing concerned with what they are seeing, particularly when it comes to dealer practices.
First, the statistics certainly suggest that we are seeing the nascent signs of car lending abuses. For example, the New York Federal Reserve Bank reported that the dollar value of car loan originations to people with credit scores below 660 has roughly doubled since 2009, while originations for other credit score groups increased by only about half. In addition, a series of articles by the New York Times has highlighted both a growing demand for auto loan securitizations and the questionable practices of some dealers more interested in getting borrowers to agree to the most expensive loan possible with little regard to whether or not the consumer can actually repay the loan.
It was against this backdrop that DFS Superintendent Lawsky suggested that one step the Legislature could take to address these concerns is to allow the DFS to have more direct oversight over auto dealers. As he explained to the gathered Senators, the existing system allows the DFS to scrutinize loans once they are purchased by banks, but this provides little protection to the consumer who walks into the dealership in need of a car.
Another trend highlighted by the Superintendent is the growing securitization of car loans. Echoing sentiments similar to those expressed by the Association in its testimony, the Superintendent pointed out that securitization creates a misalignment of incentives, whereby a lender is more interested in originating a car loan for sale to Wall Street securitizers than it is in ensuring that the borrower can afford to make the car payments.
My sense is that we will not see the Legislature further regulate car lending practices in the near future. But unless, as evidence suggests, some of the abuses are being reigned in, expect legislation dealing with auto lending practices to be a priority next January. In the meantime, it is important for everyone to analyze the extent to which the trends that motivated the Legislature to hold this hearing are anecdotal incidents that reflect pent up demand for automobiles as the economy gradually improves or systemic defects in the auto lending process that legislation could fix.
To its credit, for almost a decade now NCUA has been emphasizing the need for due diligence when entering into third party relationships. Unfortunately, based on what I have seen, the quality of credit union oversight varies widely with too many credit unions continuing to place too little emphasis on a properly drafted contract which commits vendors to upholding privacy standards and establishes a framework whereby your credit union monitors vendor performance.
So, I’m not surprised with the results of a survey released last week by New York’s Department of Financial Services. The Department surveyed 40 financial institutions about their vendor management activities. Its findings are likely to result in proposed state regulations outlining vendor relationship requirements. It concluded that:
- Nearly 1 in 3 (approximately 30 percent) of the banks surveyed do not require their third-party vendors to notify them in the event of an information security breach or other cyber security breach.
- Fewer than half of the banks surveyed conduct any on-site assessments of their third-party vendors.
- Approximately 1 in 5 banks surveyed do not require third-party vendors to represent that they have established minimum information security requirements. Additionally, only one-third of the banks require those information security requirements to be extended to subcontractors of the third-party vendors.
- Nearly half of the banks do not require a warranty of the integrity of the third-party vendor’s data or products (e.g., that the data and products are free of viruses).
As I see it, one of the biggest problems is that businesses think of the contract as one of those last second details to be addressed after a vendor has been selected. It doesn’t have to be this way. For your larger vendor contracts you should ask your finalists to provide you with copies of their base contracts. You have leverage you should use if you find that one vendor has better terms than another. Furthermore, if one vendor is more committed than another to insuring data security then you can and should take this into account when making your final decision. Finally, you are being penny wise and pound foolish if you don’t pay for an attorney who has experience with vendor contracts and who is aware of pertinent regulatory requirements. By the way, the Association is willing and able to provide these services.
Is the Fed Getting Cold Feet?
The recent spate of lack luster economic news may keep the Fed from raising interest rates when it meets in June, according to an interesting WSJ article today. If this reporting is correct, a consensus is emerging that with inflation still below its 2% target range and employment still lagging, it makes sense to wait until later in the year before deciding to pull the trigger on the first rate increase since the Fed placed short term interest rates near 0 in December 2008.
Two quick thoughts, this is another great example of the Groundhog Day economy we have been stuck in for some time now. Economists confidently predict every Fall that the economy is finally on solid footing only to back away from the predictions following tepid economic growth in the first quarter. For what it’s worth, this blogger still believes the Fed will raise rates ever so slightly in June, if only to shift the debate away from when interest rates will rise to how high they should go. Low interest rates have artificially inflated equities for several years now by making the market the only place to get an adequate return.
On that note, have a nice weekend.
Two things happened yesterday that will impact your credit union. What remains to be seen is how great an impact they will have.
Most importantly, the Federal Reserve’s Open Market Committee gathered yesterday for its first meeting since January. Reports indicated that the Fed is losing patience. To be more accurate, meetings of the Federal Reserve’s Open Market Committee are accompanied by a statement providing clues as to where the Fed thinks the economy is headed. In its January statement, it explained that “[b]ased on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” If, as expected, the Fed removes this line from today’s statement, it is a sure sign that it will be raising interest rates for the first time since 2008, probably no later than June.
For almost a decade now, regulators have been warning against the dangers posed to financial institutions over-exposed to a sudden spike in interest rates. I have always thought these fears were exaggerated, but the Fed’s policy statement will signal the start of what could be the most volatile period of rate gyrations you have had to deal with in quite some time. Remember that in June of 2013, a statement by then Chairman Ben Bernanke indicating that the Fed would soon be moving to raise interest rates resulted in the average rate for a 30-year fixed rate mortgage to surge more than 100 basis points between June and September. Ironically, the Fed ultimately did not raise rates at that point, and mortgage rates tumbled yet again. The question is: will the Fed’s statement today touch off another analogous period or has the market already baked in an anticipated rate increase?
The second thing that happened yesterday you should keep your eye on is the CFPB’s announcement that it is beginning a “public inquiry” into credit card industry practices. Since the inception of the CFPB, your faithful blogger has always thought that it would take steps to fundamentally amend Regulation Z, not only for mortgage lending, as it was charged to do under the Dodd-Frank Act, but for all open-ended lending.
The CFPB is charged with conducting a biennial review of the CARD Act. As part of this review, the Bureau is seeking public comment on credit card practices for purposes of presenting a report to Congress. Pure speculation on my part, but if I were a consumer advocacy organization, and I wanted to change the way consumer lending is done in this country, I would sure want to lay out my blueprint while a Democratic President is still in office. Stay tuned.
Yes we can and it’s the most important metric that the Fed will look at as it moves closer to a likely decision to start raising short-term interest rates by the middle of the year. That is my main takeaway from the recently released minutes of the Fed’s Open Market Committee, the group that decides what short-term interest rates should be.
Falling energy prices are pushing inflation further below its 2% objective. Falling pump prices keep more money in people’s wallets but they also make a wide range of products cheaper to make and sell. Normally this is good news but a downward spiral of prices-of the type Europe is seeking to avoid-can have just as pernicious an impact on economic growth as inflation can. Margins get so squeezed that companies can’t cost effectively grow. So you can bet that the Fed won’t raise rates until it knows that inflation is on the way. As the minutes explained:
“A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern”.
Here is a link to the minutes for those of you having trouble sleeping,
Compensation for mortgage “victims?”
Does this bother you as much as it bothers me? Or am I just still in a bad mood because the good people of Albany this morning drove as if they lived in Miami and have never seen snow falling?
When it comes to assigning blame in the mortgage meltdown I’ve never been a big fan of the “Consumer as victim” line of argument. I’ve always considered the American home buyer more of a willing co-conspirator than a victim of the of the mortgage mess. Like Buffalo Springfield says “Nobody is right if every body’s wrong.”
The latest example of how the Government’s flailing inconsistent and at times incoherent response to the Mortgage Meltdown missed the mark comes from the OCC. In a January 2013 settlement between federal bank regulatory agencies and 13 mortgage servicers servicers provided $3.6 billion in cash payments to borrowers whose homes were in any stage of the foreclosure process in 2009 or 2010. The payments ranged from several hundred dollars to $125,000 plus lost equity. The shoddy practices of these servicers such as robo-signings- allegedly exacerbated the huge nationwide increase in foreclosures.
Did servicers act sloppily? Absolutely. Were there large numbers of homeowners who wouldn’t have faced foreclosure but for these practices? Absolutely not. People lost their homes because they couldn’t afford them.
So I’m not all that surprised by this News Release issued yesterday afternoon by the OCC. It appears that Nearly 600,000 checks mailed to borrowers of these 13 servicers remain outstanding, and have now expired. The checks have been reissued. “As part of the agencies’ ongoing efforts to reach these borrowers, the paying agent was directed to conduct additional searches of updated addresses. The current mailing represents the third attempt directed by the agencies to provide checks to in-scope borrowers.”
As someone who subscribes to the glass half-empty view of the U.S. economy, even I have to admit that Friday’s jobs report is a good indication that we will probably be seeing the Fed raise short term interest rates by the middle of this year.
The most important number to look at in terms of the employment numbers are those that assess wage and workforce participation growth. On both of these fronts, the news was moderately encouraging. Average hourly earnings rose by $0.12 to $24.75 in January. This is encouraging if only because average hourly wages actually dropped by $0.12 in December. Over the last twelve months, wages have grown a tepid 2.2%, but at least it is headed in the right direction.
As for my favorite statistic, the workforce participation rate, this increased to 62.9% in January, following a slight decline last month. Similarly, it’s actually a good sign that the unemployment rate ticked up slightly to 5.7%. This means that more people are actually looking for work. Remember the unemployment rate just represents the number of adults actively looking for work. The more long term unemployed you have, the less reliable it becomes as an indicator of economic growth.
Hanging together, or Hanging Separately
What to do as the big get bigger and the small stay small? As I’ve talked about in a previous blog, the Great Recession accentuated the divide between big and small credit unions. It’s an understatement to say that a disproportionate amount of the industry’s growth is coming from credit unions with $500 million or more in assets.
As a result, now more than ever before, credit unions have to combine resources. A great example of how this can be done comes from an article in today’s Wall Street Journal reporting that a group of small banks are joining together with Lending Club to expand their ability to offer consumer loans.
Participations are clearly a key element in any strategy to combine resources. In addition, websites like Lending Club are radically changing underwriting models. Increasingly, if banks and credit unions aren’t willing to provide uncollateralized loans, there is someone on the Internet who will. Of course, these raise huge compliance issues, most notably indirect lending doesn’t absolve a bank or a credit union from assessing the quality of a loan in which it participates. In addition, with credit unions, such loans can raise membership issues as well.
Still something needs to be done quickly. The WSJ points out that in 1994, banks and thrifts with less than $10 billion in assets held about 69% of U.S. consumer loans; that number has dropped to 9% as of 2014.
Last, But Not Least
I have advocated in this blog space for NCUA to provide live broadcasts of its board meetings. After all, for those of us who track regulations for a living, real time information about where the board members stand is a helpful indicator of what to expect in the future. Therefore, I want to give a belated thumbs up to the agency for announcing last week that starting with its February 19th board meeting, it will begin broadcasting these get-togethers live. Watch out C-SPAN.
Now that the blog’s done, I am going to have to tackle all that snow in my driveway. Amazingly, the snow didn’t magically disappear between the time I went to bed and got up. . .it’s days like this that I wonder why I live in the Northeast.
NY Attorney General Eric T. Schneiderman yesterday announced an agreement with Citibank under which it has agreed to change its policies for prescreening account applicants so that “applicants are not rejected for accounts based on isolated or minor banking errors, such as paid debts or a small overcharge.” Specifically newspaper reports indicate that Citibank will only decline applicants if they have two or more reported incidents of account abuse in recent years. A similar agreement was reached with CapitalOne earlier this year.
I know there are credit unions that use ChexSystems and similar services . Their use is not illegal and the AG’s announcement is certainly not binding on other financial institutions; however the writing is on the wall and it wouldn’t be a bad idea to examine the criteria your CU uses to disqualify applicants from membership. To their critics ChexSystems and other similar companies disproportionately impact the poor unbanked since these applicants are at greater risk of having bounced a check, for example. My personal advice would be that you disqualify applicants based on a clear pattern of account abuse.
I have also argued in a previous blog that credit unions have a unique obligation to the unbanked and underserved. Disqualifying potential members based on past misconduct could undermine that goal at institutions where membership is too restrictive.
Here is a copy of the press release
The limits of Operation Choke Point
In recent years regulators and the DOJ have become increasingly aggressive about pressuring the banking system not to facilitate legal banking activities that may ultimately aid down stream illegal conduct. . For example, New York’s DFS criticized the NACHA system for facilitating electronic payments of Pay Day Loans and some banks stopped opening accounts for gun dealers.
Yesterday the FDIC pushed back against these overly aggressive tactics. In a letter to FDIC insured institutions it encouraged them to ” take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk. Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of customer accounts or individual customer operating in compliance with applicable state and federal law.”
It further assured them that “Isolated or technical” BSA violations “do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance.”
I wonder if NCUA will be issuing similar Guidance? Here is a link
The state of Monetary Policy
The FOMC issued a statement following its two day powwow in the nation’s capital. Even though it gave itself the typically abundant supply of qualifiers and caveats the best reading of the statement is that the Fed remains likely to raise short term interest rates in the middle of the year.
To me the most telling line in the statement is that “on balance, a range of labor market indicators suggests that under utilization of labor resources continues to diminish.” Why is this important? Because Chairman Yellen has consistently expressed the view that the most commonly used measures of unemployment haven’t provided an accurate snapshot of employment conditions facing American job seekers and the under employed. The generally upbeat assessment of the broader economy tells me that the Fed currently is inclined to believe that the economy is now strong enough to withstand slightly higher interest rates as a hedge against the inflation bogey man.
Here is a link to the statement.
And their off…
With Assembly Democrats moving ahead with plans to officially remove Sheldon Silver as Speaker as early as Monday jockeying for the position has begun in earnest. The Capitol Tonight Morning Memo is reporting that, Manhattan Assemblyman Keith Wright, who was considered a possible candidate for the Speakership, endorsed Bronx Assemblyman Carl Heastie. Also Rochester area Democrat Joe Morelle, who will likely be Acting Speaker pending a vote on a permanent replacement for Silver, announced Wednesday that he wants the job permanently. Another candidate is veteran J Assemblyman Joe Lentol.
The financial industry’s push for a faster more efficient payment system in this country is finally gaining some traction. The question is: are the changes coming fast enough to satisfy consumer demand now that Apple has inserted itself into the payments system?
Yesterday the Federal Reserve issued a report on updating the payments system. It concludes that:
“the U.S. payment system is at a critical juncture in its evolution. Technology is rapidly changing many elements that support the payment process. High-speed data networks are becoming ubiquitous, computing devices are becoming more sophisticated and mobile, and information is increasingly processed in real-time. These capabilities are changing the nature of commerce and end-user expectations for payment services. Meanwhile, payment security and the protection of sensitive data, which are foundational to public confidence in any payment system, are challenged by dynamic, persistent and rapidly escalating threats. Finally, an increasing number of U.S. citizens and businesses routinely transfer value across borders and demand better payment options to swiftly and efficiently do so.”
The Fed’s next step is to use the report as a framework for further discussion within the financial industry about what steps can be taken to quickly implement needed changes. If all this sounds a bit too slow it’s because events are quickly outpacing the Fed’s ambitions.
Currently NACHA, which implements the ACH electronic payment system, is seeking comment on a proposal to implement Same Day Settlement for ACH transactions. Although the CFPB has already sounded the consumer alarm, NACHA’s proposal is, in part, a recognition that banks could lose control of the payments system if they don’t start innovating at the speed of Apple.
For example, a day after the Fed’s report we may get our First glimpse of how well Apple is doing getting people to use IPhones to make point-of- sale transactions. Apple may very well be on the verge of doing to banking what it did to the music industry: Making the system used to deliver financial goods and services more important to consumers than the actual service provider-i.e. a stodgy bank or credit union. People are going to expect quicker more efficient payment systems and migrate to those financial institutions that are ready to provide them. Here are some links for additional information.
Are we ready for a Grexit?
In his State Of the Union address President Obama correctly proclaimed the U.S. economy is the strongest in the world. The problem is that says more about the weakness of the world economy than it does about the strength of ours.
Those of you looking for signs that the economy isn’t out of the woods yet need look no further than Greece. The first piece of a worst case scenario has fallen into place with the election of the left-wing Syriza party in a decisive victory on Sunday. Greece’s economy is way too small to impact the world but the party has a clear mandate to renegotiate the austerity measures it has been labouring under in return for financial aid from the European union.
The election sets up a game of chicken in which Greece could implicitly threaten to walk away from the EuroZone and the Euro currency if the austerity measures aren’t scaled back and Germany threatens to call Greece’s bluff. If this does happen no one knows what impact this would have on the Euro or the world economy and no one wants to find out. In the meantime expect even more downward pressure on bond yields.
This article link offers an interesting perspective on what lays ahead