Posts filed under ‘Economy’
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.
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.
I have some good news this morning. CFPB Director Richard Cordray announced yesterday that the Bureau was moving back the effective date of the integrated disclosure mortgage requirements from August 1st to October 1. (http://www.consumerfinance.gov/newsroom/statement-by-cfpb-director-richard-cordray-on-know-before-you-owe-mortgage-disclosure-rule/) The announcement comes after the Bureau had steadfastly resisted increasingly desperate calls from Congress and industry stakeholders to delay the effective date. In its statement, the Bureau explained that it was proposing the new effective date after discovering an administrative error that would have resulted in a two week delay in implementing the regulation.
The integrated disclosure rules require that closing disclosures be received by a home buyer three business days before a mortgage loan is “consummated.” The two month delay gives credit unions more time to prepare for these changes and it also gives us more time to clarify a core concern of New York credit unions: When a loan is considered “consummated” for purposes of NYS law. Stay tuned.
FED Holds Its Fire On Rate Hike…For Now
Even as it sees signs of an economy growing at a moderate pace, the Fed decided yesterday not to raise short-term interest rates. Instead it stressed, to the extent that it publicly stresses anything, that it will probably raise rates by the end of the year. It also is continuing to rollover its existing portfolio of Mortgage Backed Securities it purchased during its period of Quantitative Easing. (http://www.federalreserve.gov/newsevents/press/monetary/20150617a.htm)
If you are hoping for a reprieve from those razor-thin Net interest Margins don’t hold your breath. And remember, this period of historically low rates comes as the Bureau is expected to propose restrictions on overdraft fees in the coming months. Yes, expect running a credit union to be as challenging as ever.
One more depressing thought: This recovery, as anemic as it is, can’t last forever. What would the Fed or a divided Congress be able to do to fight another downturn? As the Economist pointed out in a recent editorial the economic recovery is entering its sixth year and if another contraction occurs, as a result of a Greek Default for example:
“Rarely have so many large economies been so ill-equipped to manage a recession, whatever its provenance… Rich countries’ average debt-to-GDP ratio has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is, but governments that want to splurge will have to win over jumpy electorates as well as nervous creditors.” (http://www.economist.com/news/leaders/21654053-it-only-matter-time-next-recession-strikes-rich-world-not-ready-watch)
Move Over Alex
Alexander Hamilton, the nation’s first Treasury Secretary, will have to share space on the $10 bill with a yet unnamed woman. The Treasury announced that, starting in 2020, it will either start issuing some bills with Hamilton on one side and the unnamed matriarch on the other or a mix of bills, some with Hamilton and some with his female counterpart. My vote would be Maria Reynolds who would serve as a reminder that our politicians haven’t changed as much as we think we have and yet we managed to grow into a great country.
As explained in this Huffington Post Blog from 2011:
“In the summer of 1791, Hamilton was the target of what a modern-day espionage novel would call a “honey trap,” set by a blonde 23-year-old named Maria Reynolds. Hamilton then became the target of outright blackmail, by the woman’s husband (who was quite likely in on the whole scheme from the beginning), while Hamilton continued to see Maria for more than a year. This information eventually found its way into the hands of his political enemies, who confronted Hamilton. Hamilton explained that he was not (as had been charged) been playing fast and loose with the nation’s money; but rather he had merely been playing fast and loose with another man’s wife, and paying him off for the privilege, out of his own pocket.”
Today he would be charged with Structuring to evade BSA reporting requirements.
Incidentally, Hamilton was also NYS’s first Chancellor of its Board of Regents and you can find his portrait in the Education Department building in Albany. (http://www.huffingtonpost.com/chris-weigant/americas-first-political-_b_1080813.html)
Believe it or not we are in the sixth year of an economic recovery. With recoveries like this who needs a recession?
On Friday the Commerce Department issued revised figures for the first quarter of this year and the quarter was even worse than we thought it was, which is quite the trick since everyone new that, aided and abetted by a miserable winter that kept consumers indoors, the first quarter was pretty bad. Now we know the economy actually shrank with Real GDP decreasing 0.7 percent in the first quarter of 2015, in contrast to an increase of 2.2 percent in the fourth quarter of 2014. According to the WSJ this is the third quarterly contraction since the recession ended in 2009. (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm)
What led to the decline? We imported more and decreased the rate at which we are buying things. Real personal consumption expenditures increased 1.8 percent in the first quarter, compared with an increase of 4.4 percent in the fourth. Durable goods purchases increased 1.1 percent, compared with an increase of 6.2 percent. Nondurable goods increased 0.1 percent, compared with an increase of 4.1 percent. Services increased 2.5 percent, compared with an increase of 4.3 percent.
On the bright side, the continued sluggishness of the economy continues to make those economists who see signs of inflation look clinically paranoid . The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.6 percent in the first quarter, a downward revision of 0.1 percentage point from the advance estimate; this index decreased 0.1 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 0.2 percent, compared with an increase of 0.7 percent in the fourth quarter.
No one likes to admit when they are wrong but at some point economists have to step away from their models, take a look around and realize that their habitual predictions of robust economic growth being right around the corner are wrong ; after all, their predictions have real world consequences for people trying to make a living.
The type of quote that really gets me fired up is this one also in the WSJ:
“Today’s GDP report will give the Federal Open Market Committee confidence that the soft-patch in [the first quarter] was likely driven by temporary disruptions as recent data has been more positive and the weaker bits can be attributed to weather, port disruptions, low oil price, a stronger dollar and residual seasonality.” –Bricklin Dwyer, senior economist at BNP Paribas. Not to be outdone, there are those within the Fed who view this latest Winter slowdown as a mere speed bump on the road to greater growth.
These guys are like weathermen predicting a sunny day even as its pouring outside their office. “Don’t worry” the economists keep saying. Their refrain is growing stale. As Tom Slefinger, Senior Vice President of BalanceSheets Solutions wrote in last week’s “Relative Value Report”:
“ the pattern repeats itself time and time again. Step 1: Start with a very optimistic forecast. Step 2: Revise your forecast lower to reality. Step 3: Repeat the same pattern the following year. So, in looking back over the past six years, the reality is the Federal Reserve and Wall Street have persistently failed to accurately predict future economic growth with an overly optimistic outlook proving to be consistently wrong”
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.