Posts filed under ‘Economy’
I think it was Vince Lombardi who once said that a tie is as exciting as kissing your sister and George Brett who added that losing is like kissing your grandmother with her teeth out.
Vince Lombardi was wrong. Yesterday, the Supreme Court of the United States issued its first 4-4 decision since the death of Justice Scalia. Although the ruling basically resolves nothing, it underscores two important issues that credit unions should be paying attention to (Hawkins v. Community Bank of Raymore):
- Does the Equal Credit Opportunity Act apply to guarantors? This is an unresolved issue with real practical significance for your compliance. The ECOA bans discrimination against loan applicants. For the last 30 years, federal regulation has defined an applicant to include guarantors. See 12 CFR Section 202.2(e); 12 CFR 1002.2.
In the case in which the Court deadlocked yesterday, the wives of two businessmen claimed that the bank violated the Act’s prohibition against discriminating on the basis of marital status by requiring them to personally guarantee their husbands’ loans.
The bank denied the allegation and argued that notwithstanding federal regulation, Congress never intended the ECOA to extend to guarantors. The 4-4 tie means that two federal appeals courts have come to opposite conclusions on this narrow but important issue.
- It may not be one of the high profile issues that gets partisans riled up into a foamed-mouth frenzy, but one of the key questions that will be decided by the newest Supreme Court justice will be how much deference courts should have towards federal regulation interpreting federal law. This case is fascinating to me in part because it involves a 30 year-old regulation.
Bernanke Endorses Going Negative as a Last Resort
In a recent blog I talked about the increasing willingness of central bankers to impose negative interest rates – i.e. to charge banks for holding money in central bank accounts – as a means of spurring lending. In this recent blog, former Fed Chairman Ben Bernanke endorses its possible use if and when the economy goes South.
“Overall, as a tool of monetary policy, negative interest rates appear to have both modest benefits and manageable costs; and I assess the probability that this tool will be used in the U.S. as quite low for the foreseeable future. Nevertheless, it would probably be worthwhile for the Fed to conduct further analysis of this option. We can imagine a hypothetical future situation in which the Fed has cut the fed funds rate to zero and used forward guidance to try to talk down longer-term interest rates. Suppose some additional accommodation is desired, but not enough to justify a new round of quantitative easing, with all its difficulties of calibration and communication. In that scenario, a policy of modestly negative interest rates might be a reasonable compromise between no action and rolling out the big QE gun.”
CFPB Increases Scrutiny of Student Loan Auto-Default
The CFPB used this quarterly summary of examination findings to highlight what it considers to be the unfair and deceptive use of so called auto-default provisions in student loans. As many of you know, private student loan contracts often have a relative as a co-signor or guarantor on the loan with the student. Since at least 2014, the Bureau has been critical of loan provisions under which the bankruptcy or death of a co-signor puts even current student loans in default. Since default typically results in the entire amount of the loan being due, these provisions can be a big deal.
According to the CFPB, these default loan clauses are illegal where they are ambiguous because reasonable consumers would not likely interpret the promissory notes to allow their own default based on a co-debtors bankruptcy. This is an issue that the Bureau would be well advised to provide additional guidance on. Co-signed student loans provide a mechanism for millions of students to off-set educational expenses. If the CFPB takes too hard a line on this issue, it could make it more difficult for students to get these loans.
Other issues highlighted by the CFPB include illegal debt collection practices, violations of the Remittance Rule, and inaccuracies about deposit account information provided to credit reporting companies.
How Low Can They Go
Last night’s PBS Newshour highlighted the question of just how low interest rates can go. The European Central Bank further lowered its already negative interest rates in a further attempt to spur lending. The report also highlighted this hokey but entertaining interest rate ditty. It’s worth a listen.
Talk About Bad Succession Planning
Since 2012, the Denver Broncos have been grooming Brock Osweiler to take over for the aging legend, Peyton Manning. This year, they waffled on whether or not to hand the reigns over to Rock, who started seven games, or go one more round with Manning, whose tank was running below empty. They did the safe thing, went with Manning, but now find themselves without a quarterback. A clearly P.O.’d Brock has signed with the Houston Texans. Let’s hope that not many credit union boards are making the same mistake.
This is the question I am pondering this morning after reading this recent piece of provocative analysis from the New York Fed about the graying of American debt and its implications for lending. You should all take some time to read it.
The researchers conclude that “[y]ounger borrowers hold lower per capita balances in every debt category save student loans, and older borrowers hold higher per capita balances in every debt category save credit card debt. Setting aside the influence of an aging population, it remains the case that in 2015, on average, younger borrowers held less nonstudent debt and older borrowers held substantially more debt of nearly all types, than comparably aged borrowers held in 2003.”
What are the causes of this dichotomy? One possibility posited by the researchers is that tougher lending standards in a post-2008 world favor loan applicants with higher credit scores. High credit scores tend to be closely related to age. Another possibility to consider is simply that older people have more stable sources of income and are therefore better credit risks.
In my ever so humble opinion, we have to allow for the possibility that younger people came of age in an economy where there were reminders of the negative consequences of debt on an almost daily basis. They are simply not going to be as quick to take out the credit card or take on the big mortgage as their parents were. Another obvious reason is that millennials have taken on a record amount of student debt.
No matter what its causes, if this trend continues, it has implications for anyone in the lending business. For instance, the researchers point out that the ready supply of baby boomers ready to take on loans will result in safer loan portfolios. The bad news is that with approximately 70% of the U.S. economy dependent of U.S. consumer spending, the fact that younger consumers aren’t as ready, willing and able to prime the economic pump is yet another sign that the economic doldrums that we are in are the new normal.
You also may want to start brushing up on your legal rights with regard to older loan applicants. For example, on the one hand, federal law makes it illegal to discriminate on the basis of an applicant’s age. On the other hand, if your credit union uses a judgment-based lending system, it may consider the adequacy of security offered when the term of the credit exceeds the life expectancy of the applicant and the cost of realizing the collateral. In one of my favorite lines of regulatory understatement, the official guidance to Regulation B explains that “an elderly applicant may not qualify for a 5% down, 30 year mortgage loan, but may qualify with a larger down payment or a shorter loan maturity.” (Staff interpretation Section 202.6(b)(2)(3)).
Two generations have been infatuated with themselves as the Baby Boomer Generation. Personally, I find it a little more than disturbing that an increasing number of aging Americans are willing to take on even more debt in their golden years. But, the fact that they are raises both challenges and opportunities for your credit union.
I don’t know whether to be more confident about the fate of mankind or even more scared for my daughters this morning.
OK maybe that is a little melodramatic, but think about it. Yesterday, it was announced that more than a thousand scientists from around the world worked together and were able to detect a gravitational shimmer in the fabric of the universe caused by the collision of two black holes more than a billion light years away.
In contrast, the limits of the dismal science euphemistically described as economics were on display as Janet Yellen explained that the economic outlook is a lot more uncertain that it was just a little more than a month ago when the Fed raised interest rates for the first time in almost a decade. What’s more, Yellen reported that the Fed has studied the feasibility of implementing negative interest rates in the event the economy tanks.
Central banks are so desperate to spur banks to put more money in the economy that some have actually started charging banks that place their deposits with them. The logic is that if banks have to choose between losing money and lending it out they will lend it out. Japan has taken this approach as has the European Central bank, the Danes, the Swiss and, just this past week, the Swedes.
All very interesting, you’re thinking, but how does this impact me? Well, most importantly, if the economy does get so bad that negative interest rates become a real policy consideration, it would be an absolute disaster for credit unions and community banks, for that matter. As the Economist pointed out this past week, negative interest rates are particularly dangerous for mutual institutions. First, they are more dependent on deposits to fuel their growth and are less likely to pass on the increased cost of storing their funds to consumers. Furthermore, with mortgage rates unlikely to substantially rise any time soon, credit unions and banks would see a margin squeeze of potentially unprecedented proportions.
Now, I am not suggesting that anyone panic. Yellen made it quite clear that negative interest rates will probably never be introduced, but the mere fact that she was unwilling to take them off the table shows how precarious the economy is right now. It isn’t too early to start making it clear to the Fed in no uncertain terms that a policy so damaging to credit unions that it would put many of them into their own personal black hole should never be seriously considered.
Those of us hoping that an analysis of the impact that Dodd-Frank regulations were having on credit unions and community banks would help bolster the case for regulatory overkill were sadly disappointed to read a recent report detailing the impact that Dodd-Frank. While acknowledging the concerns of small bank and credit union representatives, it concluded that it is too soon to definitively say whether smaller financial institutions are facing headwinds because of Dodd-Frank or macro trends unrelated to regulations. Nevertheless, the GAO was willing to note:
- The numbers of both full-time and part-time employees generally have decreased since the third quarter of 2010.
- Noninterest expenses as a percentage of assets are generally the same for credit unions of different sizes and generally have decreased for credit unions of all sizes since the third quarter of 2010.
- Smaller credit unions tend to have lower earnings as a percentage of assets than larger credit unions, but earnings at credit unions of all sizes generally have increased since the third quarter of 2010.
- Smaller credit unions tend to have fewer residential mortgage loans on their balance sheets as a percentage of assets than larger credit unions, and most of the smallest credit unions have no residential mortgages at all. However, residential mortgages generally have decreased as a percentage of assets for larger credit unions —those in the third, fourth, and fifth quintiles—but have increased for the smaller credit unions in the second quintile.
In fairness to the GAO, the TRID requirements have just kicked in. My concern is that if policy makers wait for definitive proof of Dodd-Frank’s negative consequences before taking more decisive action, they will be doing the equivalent of an autopsy instead of a medical intervention.
Here is a copy of the report:
Our Ground Hog Day economy is at it again. It’s Winter which means that it’s time for the economic intelligentsia to be reminded that the economy is not as good as they think it is. Yesterday came news that U. S. factories ended last year mired in their worst slump since 2009 and that Chin’s stock market is once again tanking http://www.wsj.com/articles/ism-manufacturing-index-falls-to-48-2-in-december-1451921036…..
As we speak the Governor is giving a preview of his State-of-the State Speech. It’s worth a listen particularly for those of you who are downstate.
I like to use my final blog of the year to look ahead to the trends that will most impact the industry next year. Here is my list of educated guesses.
Accounting for the next disaster. The Federal Accounting Standards Board is poised to finalize accounting standards that will directly impact how credit unions and banks account for potential loses. The proposal could have a bigger impact on credit unions than the Risk Based Capital rules, so get your accountant on speed dial.
Overdraft Overhaul. Are you ready to have your members opt in to all overdraft services? How about limits on the size and number of overdraft fees? What about new disclosures? All of these are possible when the CFPB formally looks to limit the use of overdraft services this year.
China Syndrome. World events have had more and more of an impact on the economic environment in which credit unions operate. My nominee for this year’s Greece is China. If the slowdown in the Chinese economy ends up being more sustained and severe than pundits currently suspect we could be looking at a recession in the U.S. and political instability in an increasingly nationalistic China for years to come. In a worst case scenario think Putin on steroids.
Political Fantasy. Donald Trump offers a blanket insult to everyone in America and his poll numbers skyrocket because of his level-headed even handedness. Not to be outdone, Senator Cruz insults the entire world. Jeb Bush performs surprisingly well in New Hampshire and gets enough momentum to stick around. Speculation rises that Republican Party elders hope that no one gets the delegates they need to secure the party’s nomination. In a brokered convention, Paul Ryan emerges as the consensus candidate and narrowly defeats Hilary after Trump and Ben Carson both run as independents. My point is, Silly Season is fast approaching. Don’t expect to see anything useful accomplished in Congress next year.
Will the industry hang together or hang separately? With dual membership requirements being phased out, I certainly hope that whatever new structure emerges continues to emphasize the need for a coherent and unified voice on credit union issues. I would hate to see a circular fire squad emerge that would benefit no one but banking lobbyists.
The year of Guidance. With the overhaul of MBL regulations and further regulatory tutorials on interest rate risk on the horizon, we will start finding out just how much more flexibility credit unions have when complying with general mandates as opposed to black and white regulations.
FOM Reform. NCUA’s proposed FOM reforms are out for comment and, although they are a step in the right direction, my guess is that the industry will find that not enough can be done by amending regulations. Congress needs to act, but don’t hold your breath. In the meantime, state policy makers are where credit unions will have to turn if they want greater FOM flexibility.
Fewer but Larger Credit Unions. Are credit unions an endangered species? No, but expect their number to decline and the survivors to get even bigger. In 2014, the majority of credit unions lost members. In addition, at the end of October, CUNA Mutual reported that there were 6,264 CUs in operation, down 36 credit unions from one month earlier. Year-over-year, the number of credit unions declined by 316, more than the 254 lost in the 12 months ending in October 2014. There is no good reason to think that this trend won’t continue or even accelerate. (https://www.cunamutual.com/~/media/cunamutual/about-us/credit-union-trends/public/dec_2015_cu_trends_report_media_file.pdf)
On a happier note, thanks for reading, Happy Holidays and I will be back blogging next year. Now it’s off to Grandma’s house I go.
To put this in perspective, the last time the Fed raised rates no one had an IPhone; Alan Greenspan was still being lauded as a Maestro for his stewardship of the Federal Reserve Board, which had recently been taken over by this guy named Ben Bernanke; Bernie Madoff was an investment genius, A-Rod didn’t take steroids and your faithful blogger had hair – kind of. Back then, the Fed raised the Fed Funds Rate 25 basis points to five and a quarter percent because “inflation fears” remained.
Who ever said the more things change, the more they stay the same was, of course, dead wrong. Now that the Fed has raised rates the new questions upon which to speculate are: How quickly will the Fed raise interest rates? By how much? The most unequivocal thing I will say in this blog is that now that the Fed has decided to raise rates it makes no sense to stop at 25 basis points. For my money we are looking at a series of raises that will raise rates by at least a point over the next year. The Fed has made its bet and now must play out its hand.
Allow me to digress.
I love poker. The most challenging hands to play are the ones that could go either way. Let’s say you are dealt a pair of eights with five cards left to be dealt. If you don’t bet too low you are inviting people to stick around and get one more card that might beat your hand; if you bet too much and someone calls you might find yourself losing a bunch of money when every subsequent card is higher than an eight.
The Fed has one of those high-risk/ high-reward hands that could go either way especially since it has a twin mandate to help maximize both employment and price stability. Look at the Fed’s hand: Unemployment is down to levels at which you would expect to see the Fed raise rates. After all, at some point all these newly employed workers have to put sustained upward pressure on wages, don’t they? Besides, all this cheap gas should boost spending even though it hasn’t had much of an impact yet, right?
Conversely, inflation is actually too low and shows no signs of taking hold in the near term. Janet Yellen must decide how much to bet in the form of higher interest rates: too low an increase and she has done nothing to tamper the possibility of the median term inflation spike that the Fed has decided must be guarded against; too big a raise and she might do more harm than good by stifling growth; sending the bond market tumbling and laying the groundwork for the next recession. It’s a tough call but the worst thing she could do is not act decisively.
In a speech in September signaling that rates would be on the rise by the end of this year, she explained all this not by talking about poker but by explaining that “[b]y itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public.” In the same speech, she commented “[i]f the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”
What does this mean for you? I was talking to a credit union executive the other day and I assumed wrongly that a rate hike would automatically be welcomed news. Not necessarily. The executive pointed out that if rates get too high, members might start shopping around for better rates. While the big guys might be able to absorb the cost of higher interest payments, many medium size and smaller ones might be further squeezed. Remember that the majority of credit unions lost members last year.
At what point will this increasingly fickle lot click on their iPhones and start searching for better rates? No one knows, but if I’m right the Fed is going to make it more tempting for them.