Posts filed under ‘General’

Meaningful Financial Aid Reform

Regulators are once again proposing restrictions on the way federal student loan aid is distributed and banks are once again crying foul. It’s a predictable and increasingly tiresome sideshow that keeps us from focusing on the real problem confronting our higher education system: the skyrocketing cost of a college degree.

Before I get on my soapbox, here is the informational part of today’s blog. According to the U.S. Department of Education, there has been a proliferation of agreements between financial institutions and colleges whereby financial institutions offer prepaid cards and debit cards on which students can receive their federal student aid. These cards can also be co-branded with the college’s logo. According to the Government Accountability Office, 11% of colleges and universities participating in federal student aid programs have entered into these kinds of agreements and 40% of all post-secondary students are enrolled in such institutions.

On Friday, the U.S. Department of Education proposed regulations to clamp down on these contracts. According to the Department, the proposed regulations would prohibit institutions from requiring students or parents to open specified accounts into which credit balances are deposited; require institutions to ensure that students are not charged overdraft fees on an account offered by a financial institution with which the school has a contractual relationship; require colleges and universities to provide a list of options from which students may choose to receive credit balances; and require institutions to ensure that payments made to a student’s pre-existing accounts are as timely as and no more onerous to the student as those accounts marketed to the student. The regulation is published in today’s Federal Register.

Banks responded quickly to this proposal saying that these existing arrangements offer students a cost-effective means of accessing their funds and suggesting that the Education Department may be overstepping its jurisdiction by prohibiting overdraft fees.

Now I am climbing on to my soapbox. For more than a decade now, advocates for higher education reform have complained bitterly about the cozy relationships that some colleges have entered into with financial institutions. For instance, Governor Cuomo drew national attention as Attorney General for his investigation into the relationship between academic institutions and banks.

There is nothing wrong with any of these proposals, but let’s not delude ourselves into thinking that banking practices are to blame for the skyrocketing cost of a college education. According to the College Board, the average cost of tuition at a public, four-year college for an in-state student is $9,100. The average tuition at a four-year private college is $31,231. Remember this doesn’t cover living expenses, books and beer money. I wish the groups advocating for the type of regulations proposed by the Education Department would call for an investigation into the skyrocketing cost of getting a college degree in this country. Increasingly, it seems to me as if the children of middle class parents are being held hostage by institutions of higher learning: pay us whatever we ask for or risk your child’s future.

May 18, 2015 at 8:39 am Leave a comment

Just How Strong Is The Economy?

With apologies to those of you who hate sports analogies, some recent research produced by the Federal Reserve Banks of New York and Chicago demonstrates that we are living in a wedge shot economy:  it looks great from about 150 yards out but as you get closer things aren’t quite as good as they seem.  Suffice it to say that Fed officials have a tough decision to make about when to raise short term interest rates.  If the economy is gaining strength, the time to start raising rates is now or the economy could overheat.  Conversely, imposing interest rates on a feeble economy is the financial equivalent of bloodletting.

Just how sluggish is the economy?  The first bit of analysis comes from the Federal Reserve Bank of New York’s Liberty Street Blog, which, by the way, is a site well worth bookmarking for anyone interested in following economic trends in a digestible format.  It analyzed the most recent Quarterly Report on Household Debt and Credit and its findings go a long way toward explaining why the housing industry has lagged as a stimulus to economic growth even as the worst of the Great Recession fades in the rearview mirror.

Credit card spending is rising for people across the credit score spectrum but even the most credit worthy borrowers are holding back on housing debt.  New mortgage originations are 70% lower than they were in 2013.  In addition, since 2008, the “lions share” of new mortgages have gone to persons with credit scores of at least 720.”  This presumably older and cash heavy demographic isn’t snapping up McMansions at bargain prices either.  Instead “[t]he upsurge in originations by creditworthy borrowers in 2012 and 2013 consisted mostly of refinances and added relatively little to outstanding balances, thanks to record low mortgage rates.”  In other words, the people with the best credit and most money to spend are cutting back on home buying just when the economy needs it most.  Truly patriotic Americans would be taking on debt for the good of the nation.  Just joking.

Then there is the more heated debate about just how good a job the economy is doing creating jobs for people who want them.  Economists will tell you that every economy has a natural rate of unemployment.    Policymakers have to determine what that rate is and raise rates once slack is out of the economy.

Look at the headlines and an economy with an unemployment rate of 5.4% adding more than 200,000 new jobs is enough to make any self-respecting inflation hawk break into a cold sweat.  After all, do we really want a repeat of the late 70’s with its toxic mix of high interest rates, high inflation and disco?

But what if demographics have changed the potential workforce and there is a lot more slack in the economy than the headline numbers suggest?  If this is the case, it is a best premature and at worst counterproductive to raise rates.

The latest researchers to wade into this conundrum are from the Federal Reserve Bank of Chicago.  In a recent report, Changing Labor Force Composition and the Natural Rate of Unemployment, they argue that changing demographics mean that the economy has a naturally lower level of natural unemployment than it did just 15 years ago.  Consequently, policy makers can wait longer before dampening economic growth.  They argue that demographics are destiny and that a growing supply of college educated job applicants and unemployed teens will create an economy better able to accommodate workforce expansion. According to their calculations, the natural rate of unemployment is currently slightly below 5% and will, if present trends continue, decrease to around 4.4% to 4.8% by 2020.

The problem I have with this argument is that it assumes that a college degree will always equal employment and that teens will naturally be absorbed into the workforce as they age. I hope they are right, but, increasingly, I have my doubts.

On that cheerful note, get to work and keep working.

May 14, 2015 at 10:27 am Leave a comment

Is A Woman Director A Big Deal?

The news that Sylvia G. Ash has been named the first woman chair of the Board of Directors in Municipal’s 99 year history has a symbolic importance that we should all take a moment to consider this morning. We spend so much time thinking about how to make our businesses, communities and government better that we sometimes lose sight of the fact that change does come and it tends to be for the better.

Municipal was formed 99 years ago, making it the oldest credit union in the state. This means that when it was formed, women didn’t have a Constitutional right to vote, could be discriminated against on the basis of their gender, and had few legal rights independent of their husbands. An 1889 article published in the Banking Law Journal entitled “Can a Woman Legally Hold the Office of Director in a National Bank?” gives you a sense of just how radical this idea would have been. The author boldly proclaimed “I am clearly of the opinion that women are qualified to and may legally act as directors of national banks. . . This would, of course, also lead to the conclusion that, in the absence of any state statute to the contrary, they could also lawfully act in the directorate of state banks.” This is the type of legal analysis that used to pass for bold and progressive back in the day.

Ms. Ash is also African-American. Federal law didn’t ban racial or gender discrimination in employment until the mid-1960s. Finally, Ms. Ash is also an accomplished attorney and Judge who, incidentally, graduated from Howard University, where Thurgood Marshall also got his law degree. At one point, Howard University was responsible for graduating half of the nation’s African-American lawyers.

In a small way, the selection of Ms. Ash helps demonstrate that times really do change, ideas matter and advocacy makes a difference, at least in the long run. Some of you might be reading this and saying to yourself that this would have been big news in the 1960s, but not in 2015. My point is that if we don’t appreciate how far we’ve come, we won’t have a particularly good sense of how best to continue the journey.

May 13, 2015 at 8:40 am 1 comment

I Wish I Could Be Punished Like That

Nothing to do with credit unions but yesterday Tom Brady was suspended four games for having his footballs deflated prior to the AFC championship game.

Let me get this straight: He won the game and won the Super Bowl.  His punishment is to spend four extra  weeks on the couch at home watching  the games with his super model wife  Gisele Bundchen rather than being scowled out by  Bill  Belichick as he  gets  attacked by a bunch of 300 pound defensive lineman with 4-4 speed out to cripple him? Sign me up.

Target Settlement Can Go Forward

Effectively saying his hands were tied, a federal judge in Minnesota refused to block a proposed settlement between Mastercard and Target from going forward.  Under the agreement  $19 million  is being set aside for  eligible banks and credit unions to  settle their claims for operational costs and fraud-related losses on MasterCard-branded cards affected by the data breach. Upon accepting the offer, each issuer will release MasterCard, Target and its acquiring banks from all claims related to the data breach.

The settlement takes effect  if  90% of eligible issuers opt into it by May 20th . A group representing smaller banks and credit unions argued that  the court should block the settlement because it does not adequately compensate smaller issuers or explain the consequences of the settlement.

“The agreement between Target and MasterCard is nothing more than an attempt by Target to avoid fully reimbursing financial institutions for losses they suffered due to one of the largest data breaches in U.S. history,” said an email from the banks’ co-lead counsels, Charles Zimmerman of Zimmerman Reed and Karl Cambronne of Chestnut Cambronne according to today’s American Banker. The attorneys have previously argued that the settlement is a “sweetheart” deal that provides issues with paltry settlements.

The judge was by no means unsympathetic to these concerns however he decided that  the banks’ “issues with the settlement are understandable, but they are also not susceptible of a legal remedy,”  according to the paper.

The institutions seeking to block the settlement were  Umpqua Bank, Mutual Bank, Village Bank, CSE Federal Credit Union, and First Federal Savings of Lorain.

Flanagan Takes The Helm

When a Speaker is chosen for the House of Parliament in  Great Britain  he  is ceremonially  dragged to his new seat.  After all, If the Monarch was displeased with parliament the first person attacked was the speaker.

Suffolk County Republican Chairman John Flanagan was chosen as the new head of the New York State Senate replacing Dean Skelos who was recently arrested  on corruption charges.

I got to know the Senator when I worked in the Assembly Minority and he was the Ranking Member of the  Ways & Means Committee. He was by no means dragged to this position but he faces some extremely tough challenges leading a conference were Republicans hold a one seat majority and public confidence  is shaken.

That being said,  he’s a great pick.   He has been either a close observer or intimately involved with the budget process for more than two decades, having served as the ranking member of the Assembly’s Ways & Means committee and as Chairman of the Senate’s Education Committee.   If you want to know how Albany works  then you have to know education.

As for our issues,  His district is populated  some of the state’s most successful credit unions and he approaches issues with an open mind. My guess is  that those of you who get to meet him will be impressed.

May 12, 2015 at 9:40 am Leave a comment

What to do About the Invisible Man

There are 26 million Americans who engage in so little financial activity that they are invisible to the Credit Reporting Agencies, according to a report released by the CFPB Tuesday. The reports indicates that while many of the invisibles are young, a disproportionate number of them are clustered in poor, minority neighborhoods. What the CFPB could not report on, and what I think is a huge piece of the puzzle, is how many of these invisibles are using financial tools such as pre-paid cards and payday lenders. What do we make of this research? I’m not quite sure.

In a worst case scenario, 26 million Americans don’t have access to the most basic building blocks of our economy. When I think of my own uncles and grandparents coming over from Germany in the 1920s, I think of cleaning ladies who stashed away nest eggs and husbands who were able to start small businesses in Brooklyn. We’re not talking titans of industry. For these individuals, their advancement to the middle class would have been impossible without access to a bank.

Flash forward to the modern day. In a best case scenario, pre-paid cards will become a large enough part of the financial mainstream so that new ways of assessing credit will shortly be developed and marketed. This is already happening. Big Data is so intrusive that algorithms are already being developed to assess the likelihood that someone would repay a loan based on activities that seemingly have little to do with traditional banking.

But let’s say the report reflects a more disturbing trend. If you believe, as I do, that America has to be the land of opportunity in order to be America, then any institutional impediments to upward mobility have to be eliminated to the fullest extent possible. If pre-paid cards become gateways to an individual’s first banking account and a more sophisticated credit history, then they can do much good. But in a worst case scenario, what the CFPB’s report underscores is that we are institutionalizing a system of financial haves and have nots. My relatives had to go to a bank to deposit a check, there wasn’t an alternative.

Today, it is too easy for the young consumer or new immigrant to avoid traditional banking all together. At the end of the day, a prepaid card isn’t the way to get a college loan. Any discussion of inequality and mobility has to include a discussion of how best to entice poor people into the financial system.

May 7, 2015 at 7:47 am Leave a comment

The Next Best Thing?

Recently, a friend of mine attended a credit union conference in California. He told me that a panel discussion led by large credit union CEOs identified peer-to-peer lending as the biggest challenge facing the credit union industry. As a general rule, I believe that anyone who agrees with me is right, so these CEOs are on to something.

The good news is that peer-to-peer lending has the ability to make borrowing cheaper for the American Consumer; the bad news is that this misunderstood phenomenon is moving at the speed of the Internet. It’s time for regulators to start regulating peer-to-peer lending, and yes, that includes limiting its reach.

In its pristine form, peer-to-peer lending can evoke the banking equivalent of a barefoot child picking daisies in a meadow on a sunny day. Instead of Joe Hardworking Consumer and Sally Hardworking Mom having to go to the big bad bank for that debt consolidation loan, or to get financing to turn their great idea into a small business, they can turn to an online lending site that is only a click away on their smart phone. Their fellow consumers can get a decent return by fronting them money while Sally and Joe get a better rate than they ever would at a financial institution. In the utopian view, technology has done away with the need for a bank, or credit union for that matter, to connect lenders and savers.

Now, for reality. Believe it or not, your average consumer doesn’t have that much extra money to lend to a neighbor. Increasingly, behind most of these lending sites are some of the same personalities and investment banks that brought us the last financial mess. For instance, the latest high priest of financial innovation in the peer-to-peer lending market is Lawrence Summers. Yes, this is the same Larry Summers whose resume includes advocating for the innovation in the Clinton Administration that laid the groundwork for the “too big to fail” banks that now are too big to be effectively regulated and forcefully advocated for the Obama Administration not to be too tough on them once the consequences of these policies brought us the Great Recession.

In a recent speech, Summers, who sits on the Boards of two peer-to-peer lending companies, argued that while regulators need to ensure there are adequate disclosures put in place for peer-to-peer lending activities, regulators should not move too quickly to restrict lending activities lest they squelch this brilliant innovation.

To me, Summers and his ilk are the Blues Brothers of financial innovation: they constantly want to get the old band back together, even if it ends in disaster. Peer-to-peer lending has its place, but here are the questions regulators should already be asking.

  • Should capital requirements be imposed on investment banks that specialize in holding peer-to-peer loans?  This question is crucial since peer-to-peer lending isn’t being driven by Libertarian idealists, but by investment bankers who see the next great investment opportunity.  These gurus argue that analytics now make it possible to predict repayment ability better than ever before.  This is true, but I still don’t want trillion’s of dollars of unsecured loans floating around the economy next time things go bad as lenders have no collateral to absorb the losses.
  • Should we make sure that peer-to-peer lenders have skin in the game?  In other words, we don’t want to create another origination platform for banks more interested in securitizing packages of loans than they are in credit quality.
  • Should the number of personal loans that can be taken out by any one consumer be capped?

April 28, 2015 at 7:53 am Leave a comment

Does A Job Applicant’s Credit History Matter?


New York City is about to impose restrictions on employers that will help answer this question.

Last Thursday the City Council passed by a 47-3 vote legislation that bars employees from   requesting or using   for employment purposes the consumer credit history of an applicant for employment or   otherwise discriminating against an applicant or employee “with regard to hiring, compensation, or the terms, conditions or privileges of employment based on the consumer credit history of the applicant or employee “

“Surly there must be an exception for the financial services industry?” you say. After all we are talking about the capital of world finance where unethical financial gurus can hide billions of dollars easier than I misplace my cell phone.

Not really.  The prohibition against credit reports does  not apply to an  “employee having signatory authority over third-party funds or assets valued at $10,000 or more; or  that involves a fiduciary responsibility to the employer with the authority to enter financial agreements valued at $10,000 or more on behalf of the employer.”

Since there is no categorical exception for banks and credit unions those of you in the city seeking to utilize this exception will have to parse the quoted language on a case-by-case basis. I would suggest it is worth doing so only for the most senior positions with the most direct control over your credit union

Another exception applies to  a position “with regular duties that allow the employee to modify digital security systems established to prevent the unauthorized use of the employers or client’s networks or databases.”

This does seem broad enough to cover a good portion of but not all of your I.T. staff but it is also vague enough to raise some troubling questions.   For example, does the exception apply to persons whose duties authorize them to modify data security networks, or, more broadly, to individuals whose jobs enable them to access sensitive computer networks? If the  narrower definition applies than you won’t be allowed to do credit checks on the Edward Snowden wannabes of the world who have no compunction against gaining unauthorized access to employer systems.

If you’re saying to yourself that, since you live outside of the Big Apple, you don’t have to worry about this measure you are wrong.  Similar bills are already floating around the state legislature and the support for this measure will provide a real push to getting a similar measure approved on the state level.

Supporters of this proposal argue that credit checks don’t have any kind of direct relationship to a person’s competency.  Over the last eight years many people have had their credit battered by flat wages and layoffs having nothing to do with how well they do their job.  I get that. But at the end of the day,  when you work for a bank or a credit union, you do take on an added obligation to handle money properly whether you are a teller, branch manager or a CEO.  Credit unions should be able to decide for themselves what they need to know when evaluating applicants free of government micro managing. Here is a copy of the bill which is awaiting the Mayor’s signature.

Cyber Sharing Bill passes House

A strange thing is happening in the House of Representatives: It’s starting to pass substantive bills with bipartisan support.  Is our long national nightmare of legislative ineptitude coming to an end?

Yesterday,   the House passed HR 1560 which extends liability protections to businesses that voluntarily share cyber threat information. The legislation positions   the government as a central clearinghouse for cyber threats.

The bill is consistent with a growing shift in emphasis away from cyber threat prevention and towards more quickly responding to cyber-attacks after they occur.  (Your credit union will be subject to a data breach; the question is how quickly will you spot it?) The quicker a network of potential targets can talk to each other the quicker they can respond to data breaches. Here is a copy of the bill which has not yet been passed by the Senate.


April 23, 2015 at 9:29 am Leave a comment

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Authored By:

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

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