Posts filed under ‘General’

Does Knowing Your Members Really Make a Difference?

One of the very first mantras I learned when I became a full time resident of credit union land was that credit unions really know their members. The implication, of course, is that credit unions make better loans than their commercial banking counterparts because of these personal relationships. But does the personal touch really make a difference?

Recently, University of Kansas business professor Robert D. Young reported on findings based on a ten year review of Small Business Administration (SBA) loans made by banks. His findings suggest that the answer is a resounding yes.

Young and his colleagues reviewed indexes of social capital, which are generally measures of how integrated people are in their community such as participation in religious and civic groups. They found that “SBA loans between banks and borrowers in high-social-capital towns are 20% to 25% less likely to default than SBA loans made where social capital is low.” The theory is that in tight knit communities it is easier for lenders to gather information about borrowers and borrowers tend to be a better risk. His findings also suggests that social indexes are actually a better indicator of default risk than are a business’ credit score. A couple of quick points about this research.

First, it is certainly an area rich with possibility for credit unions. One of my favorite stories from a long time credit union executive is how he learned the basics of lending by going around with his father to collect loans owed by firemen. His father knew most of his borrowers personally and at the end of the day if they weren’t able to make the occasional payment he knew that they would pay it back when they could. The more that hard research can back up these anecdotes with hard statistics, the easier it is for all credit unions to make the case for expanded lending powers.

Politicians and judges have done a lousy job balancing lending flexibility with anti-discrimination laws. Everyone says they love George Bailey’s approach to lending, but as long as lenders can be held liable for lending decisions that have the effect of discriminating against a minority group, the use of soft underwriting criteria is implicitly discouraged. It’s actually safer to use a computer program with set criteria and apply it across the board.

Finally, these findings suggest that social capital lending criteria works best in small communities. We all know that banks are growing larger and that credit unions are the only true remaining community banks. But, as credit unions get larger, how do they ensure that they balance the need for growth against the need to continue to really know their members.

August 26, 2015 at 8:49 am 2 comments

Further Proof That MBL Reform Would Help Small Businesses

If you are one of those hopeless idealists who actually think that facts, as opposed to the exercise of pure political power, make a difference in credit union efforts to raise the cap on Member Business Loans, then a recent report issued by Filene is a must read. Its most important finding is that “increasing the percentage of total assets that credit unions may lend to businesses should be beneficial to local communities,” particularly where there are already larger bank and savings institutions.

David A. Walker is a long-serving business professor at Georgetown University, who previously served as the director of research for the Office of the Comptroller of the Currency as well as a senior financial economist for the FDIC. In order to gauge the impact that raising the MBL cap would have on business lending activities, he analyzed 120 federally insured credit unions nationwide that were up against the cap in 2012. Specifically, 84 had business loans between 9.5% and 12.25% of their assets; 15 had a percentage below 9.48 and 21 had a percentage above 12.25. The report has special resonance in New York since 12 of the credit unions are based in this state. If you have a Filene password you can access the full report at https://filene.org/research/report/room-to-grow-credit-union-business-lending

One of the big policy debates in recent years has been the extent to which a decline in bank lending to small businesses has been the inevitable result of a down turn in economic activity resulting in fewer businesses needing loans, as the banks argue; or the result of tougher bank lending standards. Based on Walker’s research, a strong argument can be made that small businesses have been squeezed by banks and would benefit from greater access to credit union loans. Most importantly, he points out that in the profiled credit unions, credit unions actually lend out a greater share of their assets in Member Business Loans in counties where banks and savings institutions are larger.

Banks love to argue that behemoth credit unions are gobbling up Member Business Lending at the expense of smaller community banks. Walker’s research strongly suggests that this is more fiction than fact. He notes that “it is not the largest credit unions that lend the largest percentage of their assets to businesses.” The 120 credit unions studied had a median asset size of $170.8 million. In contrast, the 10 largest credit unions had a median size of $8.8 billion in 2012.

This next part is my own extrapolation. The data also suggests that small business lending is particularly beneficial during an economic downturn. The profiled credit unions shifted a larger percentage of their loan volume from consumer to business loans. Between 2010 and 2012, their business lending portfolios increased faster than their credit card loans, real estate loans and auto loans. This is further proof for the proposition that since credit unions are generally much more dependent on local community lending than are regional and national banks, they are more willing to offer business loans during economic downturns than are their commercial banking counterparts.

So the next time you talk to your friendly neighborhood Congressman, you can point out that a vote for raising the MBL cap is a vote for helping small businesses grow, keeping the economy strong, and making sure that local money is spent locally. To me, raising the MBL cap is a no-brainer; but then again, I don’t have to worry about running for re-election.

FHFA Benchmarks Raised

As mandated by Congress, the Federal Housing Finance Administration (FHFA) has adopted affordable housing benchmarks for Fannie Mae and Freddie Mac for 2015 through 2017. Specifically, both GSEs are given the goal that 24% of their purchases be of low-income homes. A low-income home is one to borrowers whose income is no greater than 80% of the area’s median income. The benchmark increases the goal by 1% over the 2014-2015 period.

I’m taking tomorrow off, have a great weekend.

August 20, 2015 at 8:58 am Leave a comment

Why Don’t People Care About Cyber Security?

There are an increasingly large number of examples of  America  changing from a “Can do” to a “Can’t do” or “Won’t do” nation.

The latest example is the news that “more than twice as many taxpayer accounts were hit by identity thieves than the agency first reported, with hackers gaining access to as many as 330,000 accounts and attempting to break into an additional 280,000.” (WSJ http://www.wsj.com/articles/irs-says-cyberattacks-more-extensive-than-previously-reported-1439834639).  Many of you will undoubtedly deal with  the consequences of these breaches first hand.

The IRS’s underbelly is its system for accessing consumer tax information online.   We learned earlier this year that hackers had broken into the system and gained access to taxpayer info but what we learned yesterday was that the break in was much more extensive and far-reaching than the IRS first believed.  The type of information the hackers gained access to is ideal for establishing a fake identity. It potentially includes   line-by-line tax return information and income reported to the IRS.

(The IRS points out on its website that the break ins underscore the need for consumers to “think twice before posting publicly personal or financial information on social media or the Internet.”  As someone who proudly doesn’t have a Facebook account this last bit of advice makes sense to me but I’ve given up thinking that people can be kept from informing  hundreds of their closest friends  about how they are getting through their day.)

It used to be that when America was confronted with great challenges it confronted them head on.  I’m thinking of the Erie Canal, WW II and the Race to the Moon just to name a few. In contrast, where is the resolve to truly confront cybersecurity threats? According to Frank Abagnale  Jr. of “Catch Me If You Can” fame, who spoke at the Association’s convention a few months ago,  there are things that the government could do but isn’t doing to better protect the American public’s information.

And there is much more going on here than bureaucratic inertia.    Congress still hasn’t passed meaningful cybersecurity legislation that breaks down barriers to information sharing and makes all industries, not just financial service providers, legally responsible for guarding against cyber theft.

Meanwhile the American public seems indifferent to the chronic invasion of its privacy by hackers.  If terrorists compromised our computer networks as successfully as the Chinese have there would be calls for sanctions, Congressional hearings would be held and presidential candidates would be questioned about more important things than what they think of  Donald Trump.  Stories about cyber break-ins hardly get noticed for more than a day or two.

Cyber crime makes every business less efficient and more expensive to run.  It makes every consumer vulnerable to theft and makes us all less safe.  Can it be prevented? Not entirely but it certainly can be deterred.

In the meantime regulators continue to prod banks and credit unions to prioritize cybersecurity even though the best efforts of every financial institution won’t solve a thing in the absence of a comprehensive government led defense to protect our personal information.

So it goes.

August 18, 2015 at 9:27 am 1 comment

On EClosings And Donald Trump

The Bureau That Never Sleeps unveiled the latest fruits of its messianic zeal to make the world a more consumer friendly place on Wednesday  by releasing  the results of a pilot study it performed to analyze the  impact  that greater use of electronics could have on the mortgage closing process.  For those of you considering expanding the use of technology in closings the report is an informative case study  that will help your credit union integrate technology into your closing processes. It’s a good piece of work and very much worth a read.  For those of you looking for the Holy Grail of consumer awareness, more research has to be done before you convince me and other skeptics that digitization equals a substantially more informed consumer.

The CFPB prides itself on being a data driven organization.  It has been intrigued with the potential consumer benefits that could come with  electronic closings virtually since its inception and it wanted to  analyze the impact that technology could have on consumer empowerment and understanding of the closing process as well as how it make closings  more efficient.    It recruited seven financial institutions with varying degrees of sophistication to integrate technology into their closing processes.    Interviews were conducted with participating consumers.

Here are my takeaways:

Its overarching finding was that borrowers who participated in e-closings reported a greater sense of empowerment and knowledge about their closings than did consumers   who went through traditional paper closings.  Interestingly perception didn’t match up that squarely with reality.   The findings also suggest that many consumers participating in e-closings think they are much more informed than they actually are.

A   great point in the report is that expanded use of technology isn’t an all or nothing proposition.  You can decide what parts of the process will remain computer free and what parts could be improved by going paperless.  For example, you may not be comfortable with digital notarization but that doesn’t mean you can’t push for the more frequent use of email to send out closing documents.

it’s possible that more efficient e-closings may generate savings.  Closings went quicker when borrowers got their closing papers days before closings via email and were provided with links to CFPB background information. Consumers identified errors before closings and understood what they were doing.   This finding makes it even less likely that the Bureau will come to its senses and further modify its mandate for final disclosures to be received three business days before CONSUMMATION.

Finally, one of the greatest obstacles to technology is unease on the part of compliance people that the law actually does authorize electronic notaries and mortgage documents.  This is one area where the legislature has apparently moved faster than business. I think I will do a future blog about electronic signatures.

I can hardly wait….

Here is a link.

http://files.consumerfinance.gov/f/201508_cfpb_leveraging-technology-to-empower-mortgage-consumers-at-closing.pdf

 

I can’t resist a quick note about the first primetime Republican debate last night.  After all, its one of the reasons today’s blog is so late.  I watched it and went to bed too late since I had to vent   First I’m pretty sure there are more people wanting to get the Republican presidential nomination than I have friends.  Oh well.

Second ,  Donald Trump is performing an invaluable service to the American public by proving  that you  can be  really rich, Really crude  and really dumb.

Third there was also precious little talk about economic policy-I only heard one mention of Dodd-Frank reform, As amusing as Donald Trump is,  at some point his poll numbers will drop as people get serious about picking the person for the most important job in the world.   The presidency is going to be won by the person who best identifies with the economic anxiety being experienced by Americans across almost all of the socioeconomic spectrum and offers a coherent plan to get things back on track.  The serious candidates all missed an opportunity to make their pitch last night but the ones who came closest to the mark were Ohio Governor John Kasich and Florida Senator Marco Rubio.

August 7, 2015 at 10:31 am Leave a comment

Dear Chairman Matz:

I just got done watching your congressional testimony about NCUA’s budget operations. Between you and me, you shot yourself in the foot with what Congressman Mick Mulvaney called your “crazy talk” defense of NCUA’s refusal to re-institute budget hearings. Listen, I love people who stick to their guns. In the dictionary there is a picture of me next to “Beater of Dead Horses.” But there is a point at which you have to admit you’re wrong, or at least concede that continuing a fight isn’t worth it and move on. We are well past that point when it comes to a request for a single budget hearing on NCUA’s budget proposals. Declare victory, admit defeat and schedule one today.

First let me explain that I am a fan of the work you have done at NCUA. You’ve implemented substantial mandate relief, restructured the corporate system and have more aggressively pursued compensation for the banker malfeasance than any other agency in Government. You have a good story to tell, so why not just reinstitute a budget hearing and get into telling it?

Do you realize you just told Congressmen, people who appropriate money for a living, that budget hearings are a waste of time? That was bad enough but you also opined that any credit union CEO in favor of them is being manipulated by the Trades and not representing the best interests of their members.

Do you really believe that credit unions aren’t representing the interests of members when it comes to advocating for budget cuts? I was a little surprised by this comment but not quite as surprised as Congressman Mulvaney, who asked you a second round of questions to clarify this “crazy talk.”

You didn’t back down one bit. In fact, you suggested that credit union members should want NCUA to have a larger budget because it helps protect their money. So let me get this straight: the more money NCUA is allowed to spend without any oversight the more efficient it will become? I get it: that must be why so many third world dictatorships with bloated bureaucracies, well-fed dictators and starving populations spend their tax dollars so prudently.

I know you have been around credit union CEOs and members longer than I have, but they strike me as a fairly frugal lot: you don’t go into banking to spend money you go into it to save. Can’t you at least see how it just might bother people as a matter of principle that the agency they fund is consistently raising its budget even as they scrimp and save on theirs? After all, this is an industry where every basis point matters. Can’t you see how spending over a million dollars so that NCUA can have its very own Cone of Silence might raise a few eyebrows? Unlike the Treasury, the NCUA is not exactly a linchpin of the world economy.

Congressman Mulvaney had a good question for you. Since NCUA doesn’t get its funding from Congress, and you don’t want to get industry input on NCUA’s budget, then whom exactly should you be accountable to when spending other people’s money? I would love to determine my salary and have the Association pay the bill, but somehow I don’t think my boss would go for that.

I’ll let you in on a secret if you promise not to tell anyone. If I was to list the 10 biggest issues facing credit unions, NCUA’s budget process would be number 15 on the list. I also think it makes sense to increase spending on financial oversight after the country has a meltdown caused, in part, by a lack of financial oversight. But, this is precisely why you should hold a budget hearing and remove this silly distraction.

Look at what happened today: you came across as slightly arrogant and somewhat indifferent to the concerns of Congressmen, many of whom said they love credit unions. Listen, there is a lot of important stuff to be done. I’m afraid that this budget issue is going to take on a lot more importance than it deserves. Do me a favor and schedule one budget hearing. It might not be all that informative, but it won’t be a waste of time if only because it would demonstrate that you know the people who are taxed to pay NCUA’s bills deserve the opportunity to discuss NCUA’s budget in a public forum.

You repeatedly told Congress that you learn a lot more about credit unions than you would listening to hand-picked lackeys of the Trades drone on about NCUA’s budget for a few hours every year. I know you love to get out and meet people, but small talk over stale cheese and mediocre wine at credit union get-togethers just isn’t the same as a formal on-the-record discussion. My guess is you can find the time to do both.

P.S.

I noticed how you managed to make additional budget cuts at yesterday’s Board meeting hours before your Congressional appearance. I’m sure this is just a coincidence. After all, public oversight really doesn’t lead to better budgets, right?

July 24, 2015 at 8:13 am Leave a comment

Why Dodd-Frank Is A Failure

Today marks the fifth anniversary of one of the great failures of American History: The Dodd-Frank Act:

It’s 800 plus pages mandate 400 regulations spawning hundreds of thousands of pages of single spaced postings to the Federal register that have had to be interpreted and implemented. This is one reason why it is difficult for all but the largest credit unions and banks to grow. Meanwhile, some of the most important mandates intended to curb banking excess have yet to be implemented.

An unelected Bureau now is the final arbiter of the propriety virtually every consumer financial product and service.  It has used its enormous power to explain to us what a Qualified Mortgage is and how you really know when someone can afford a home.  Welcome to the Nanny State on steroids.

To be fair, Congress faced big problems when it finally got around to passing the Dodd Frank Act almost three years after Fannie and Freddie went bankrupt in September 2008 signaling the start of the greatest economic downturn since the Great Depression. Millions of Americans lost their homes and their jobs to the free market even as the Captains of Capitalism obtained a trillion-dollar taxpayer supported bailout almost as large as their collective egos.

Credit unions were caught in the tsunami and are still paying back the bill.  With so many problems to fix, Congress could be forgiven for dedicating so many pages to fixing so many problems.

If only this were true: Five years after Dodd Frank the reckless banks that brought the economy to the edge of disaster are bigger and more powerful than ever; The country is more not less dependent on Fannie and Freddie to meet its housing needs and the American worker is caught in a catch 22 economy: For economic growth to take off we need more people willing to take on more of the debt that got us into this mess in the first place.

Look at the facts:  Fortune reports that the six largest banks in the nation controlled 67% of all the assets in the U.S. financial system in 2013. That amounted to $9.6 trillion, up 37% since 2008.

The size of these corporations is rivaled only by their avarice.   JP Morgan still kept Jamie Dimon as its CEO and Board Chairman even though he described a trader’s $6 billion failed bet as a “Tempest in a teapot.” That’s one hell of a teapot.  If you are a twenty something investment banker the lesson of the last five years has been that regulators and prosecutors come and go but as long as you make money and pay the occasional penalty you can pretty much do anything that generates a profit.

As for the CFPB, If you feel the country needs a national consumer watchdog you are entitled to your opinion but you are deluding yourself if you feel the country is less likely to suffer another financial collapse because it exists.  The mortgage regulations are a classic example of defending  against the last war.  As long as banks are too big to fail consumers will always be victims of their failure.  Money always moves quicker than regulators. Not too many Americans knew what a mortgage Backed Security or a credit default swap was five years ago; the next crisis will be triggered by a new-fangled financial contraption that can’t possibly fail, until it does.

Ironically it remains to be seen just how much “safer” the housing market really is today.  Over the last five years  housing advocates have been basking in their delusion that you can both give a home to everyone who wants one  and decrease delinquencies and foreclosures;  all it takes, we are told,  is consumer tested disclosures and more compliance trip wires Your average servicer now must be a de facto compliance officer.

By the way the American housing market is more not less dependent on Government support than it was in 2008. According to the NY Fed private-label residential mortgage securitization, which funded more than one-third of mortgages over 2004-2006, has remained close to zero since 2008. Fannie Mae and Freddie Mac’s market share of the secondary market is almost twice what it was during the height of the housing boom.

The Free Market works because of its unique ability to permit failure and reward success. Like any other man-made mechanism it’s not perfect and when it breaks down its Government’s job to fix it.

When Teddy Roosevelt broke up the corporate trusts he made this a better country. In the aftermath of the Great Depression, Congress swiftly   passed legislation   separating commercial and investment banks, created national share insurance so that banks could fail without putting savers at risk, created a more transparent stock market and authorized a system of federal credit unions.   These changes helped lay the groundwork for an economy that would make   the Baby Boomers the richest generation in history.  All this was being done as some of the biggest names on Wall Street were being brought before Congress and even prosecuted.

In contrast, five years after Dodd-Frank Banks are too big to truly prosecute let alone fail.  We have a political class more interested in posturing for Super Pac donors than it is at making the hard compromises necessary for real reform.  They were sent to Washington by an electorate “educated” on   talk radio and the internet. The American public is more interested in debating legalizing pot and how big a buffoon Donald Trump is than it is in debating whether it is any safer today than it was five years ago.

Great countries don’t act this way: Declining ones do

 

July 21, 2015 at 9:30 am 1 comment

When It Comes to Car-Sharing If You Can’t Beat ‘Em Join ‘Em

Conventional wisdom tells us that if the motto of previous generations was that “good fences make good neighbors” the motto for the millennial generation is “share and share alike.”

Look around you and everything from bedrooms to clothes to cars is being made available by your neighbor for rent. Personally, it gives me the creeps, but my car is rarely neat enough to let anyone but my closest friends and family ride in it.

Will this trend impact lenders? I have written posts about how ride-sharing services like Uber pose risks for credit unions because, as the law currently stands, a car being used as a taxi isn’t insured in the event of an accident. Good luck getting that car loan paid back.

But there might be a way to not only guard against the sharing trend, but profit from it. Car-sharing poses insurance risks similar to ride sharing. An App is used to connect people willing to loan their car to people who need a quick rental. It’s taking off in cities — where it’s not uncommon to find residents who don’t own a car but who may need one in a pinch. Ford has started a pilot program with which it will offer a ride sharing App to people who need to rent a car for as little as an hour. It is available in Portland, D.C., San Francisco and Chicago. It’s targeting car buyers who obtained Ford Financing.

(http://www.americanbanker.com/news/consumer-finance/fords-car-sharing-experiment-and-the-future-of-auto-finance-1075238-1.html)

Here is the part that I find so clever. According to the American Banker, the project will enable Ford to examine the costs and benefits of car sharing and “augurs a future-not too far off-in which auto lenders take into account the revenue a vehicle’s car owner can generate by renting a vehicle.” In other words, my concern is that your collateral is being put at risk; but lending models are already being developed that may enable your credit union to make more loans to more members precisely because they participate in the sharing economy.

For the record, I am not convinced that the sharing economy reflects a fundamental shift in consumer habits. For my money, it simply reflects how desperate people are to squeeze every dollar they can out of this economy. I don’t care if you are 25 or 50, once you have a secure, well-paying job renting out your car to a total stranger looses its appeal. But, for now the sharing economy is alive and well and there are ways to capitalize on this trend.

Has a deal Really Been Reached With Greece?

If you have turned on the news this morning or read a paper you have heard that Europe had reached a deal to keep Greece in the group of countries that use the Euro. These headlines are entirely premature. By Wednesday, the Greek parliament must agree to a long list of austerity measures that sound just as severe as those rejected by the Greek voters a little more than a week ago. Maybe there is more in this for the Greeks than is being reported but, if not, we may very well be seeing the last act before Greece drops the Euro and jilts the world economy.

July 13, 2015 at 10:11 am 1 comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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