Posts filed under ‘General’
I found myself getting more and more annoyed by a well-researched and well written paper on CU merger trends recently highlighted in the CU Times. The authors argue convincingly that, given pressures facing the industry, mergers can have positive consequences for members of the merged credit union in terms of services and financial stability. In fact, to these authors the benefits of consolidation are so obvious that they are ultimately dismissive of those of us who see in this consolidation trend the seeds of the industry’s demise.
The authors don’t dispute estimates that within 20 years there might be a total of 1,500 credit unions. Instead they argue, “what’s the big deal? If these numbers do indeed come to fruition and population growth remains relatively steady, it would mean that one in three people in the U.S. would belong to a credit union by the end of this period (Pilcher, 2012). So why all the gloom and doom? So what if less than ten percent of credit unions will have less than one hundred million in assets twenty years from now? The industry is experiencing the biggest boom in its history in terms of assets and members, but to hear some individuals within the industry talk about it, you would think that we were two decades from suffering the same fate as the savings and loan industry.”
First, I agree with some of what the author is saying. Consolidation is inevitable. Mature industries consolidate and credit unions aren’t immune from this reality. Plus, businesses either grow or die; there is no in between. When I see credit unions hoarding their capital without a realistic plan for growth, I know it’s only a matter of time before the urge to merge kicks in.
Where I part company with these researchers is their belief that credit unions can survive so long as they continue to provide great service and products. They argue that “All sides can agree that credit unions were initially organized to positively affect the lives and financial situations of those residing within each organization’s respective field of membership, and this is the lens through which the impact of mergers on the movement should be analyzed.”
This simply isn’t true. There are many banks that do a great job of positively affecting their members’ lives. Credit unions were sanctioned and given a not-for profit mission because everyone needs access to financial resources, particularly those of modest means, and that a cooperative structure allowing people with similar needs to pool their resources together is a sensible way of achieving that goal.
We won’t keep our tax exempt status because we are cooperatives; we will keep our tax exempt status if we are cooperatives that do things that banks can’t or won’t do. To be clear, larger credit unions have ample resources to meet this challenge but only if they don’t content themselves with providing the same services as banks or better. As they grow they have to somehow keep their committed to an ethic of realizing that the little guy is still out there and he needs a helping hand.
With that, I am putting the blog on its annual hiatus. See you after Labor Day.
I had a great time the other night hanging out with the Association’s Young Professionals Commission. I even got to celebrate the birthday of one of their newest members. Regardless of age, one of the questions that always comes up at such gatherings is what issues are lurking out there to sneak up on the unsuspecting credit union. The one I keep coming back to is HMDA and yesterday Fannie and Freddie took a huge step to help those of you who have to comply with this data reporting regulation be ready when the expanded mandate becomes effective in January of 2018.
The uniform residential loan application which you may know as either Form 1003 or Freddie Mac Form 65 is a standardized document that has been around for 20 years. So many mortgages are connected in some way to Fannie and Freddie that the application is used by almost all lenders in the country. Yesterday, the GSEs announced that they have created a new, redesigned URLA form. Most importantly, for my purposes, the form includes the expanded data fields that impacted lenders will have to fill out to comply with the HMDA regulation. In addition, if the GSEs are correct, the new form will be easy to integrate into your existing lending systems and better suited for an online application process. For those of you dinosaurs who still rely on paper, the updated URLA will still be available in a hard copy.
Even though the form doesn’t become effective for over a year, you can use it as an easy way to cross reference the information you collect now against the information you will need to gather in the relatively near future. Don’t underestimate just how much more information you will have to collect. According to a summary provided by the CFPB, the new HMDA reporting requirements include data points for applicant or borrower age, credit score, automated underwriting system information, unique loan identifier, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, and loan originator identifier as well as other data points. The HMDA Rule also modifies several existing data points.
The good news is that the CFPB narrows the scope of the institutions to which HMDA applies. Starting in 2018, if your institution didn’t originate 25 covered mortgage loans in each of the preceding two years, or at least 100 open-end lines of credit in each of the preceding two calendar years, HMDA doesn’t apply to you regardless of your asset size. Still, this is not the type of regulation you want to keep to the last second. The CFPB and Congress want this additional information for a reason and I doubt regulators are going to have much patience for those of you who aren’t prepared for this mandate. The new and approved application is a great way to get ready to comply.
Another Day, Another Merchant Data Breach
In case you missed it, on Thursday, outdoor clothing retailer Eddie Bauer announced it was a victim of a data breach involving point-of-sale credit and debit card transactions between January 2 and July 17, 2016. And here you outdoor types thought your biggest worry was the Zika virus. Here’s the good news.
The general public has clearly caught on to the fact that merchants and not financial institutions are often the parties responsible for the data breach. Why else would Eddie Bauer explain that the security of customer information is a “top priority” and that they have been working closely with the FBI and cyber security experts to resolve the issue?
It wasn’t too many years ago when the merchant playbook was to barely acknowledge that a breach occurred let alone suggest that it bore some responsibility for mitigating its effects. I’m in an optimistic mood this morning. Now that the public understands that merchants share in the responsibility to protect data breaches it should be easier to convince legislators that merchants should pay their fair share when it comes to the costs imposed on card issuers every time a store is breached.
Get off of my cloud. I’m dreaming?
Uber Class Action Settlement Rejected
With apologies to those of you who hate football metaphors, the various pending lawsuits against Uber are the legal equivalent of a hurl into the end zone with time expiring. That being said, those of you hoping to derail ride sharing, or at least put it on equal footing with the traditional taxi industry, received at least a temporary stay of execution last week when a federal judge threw out a proposed settlement of a class action lawsuit alleging that ride sharing services were violating the labor law by treating drivers as independent contractors as opposed to traditional employees.
According to the Washington Post, U.S. District Judge Edward Chen concluded that the proposed $100 million settlement was only 10% of what lawyers for the drivers estimate that Uber could owe them and provided only $1 million towards state penalties that could add up to more than one billion dollars.
This lawsuit against Uber is absolutely critical. If a precedent is established imposing traditional labor obligations on Uber then the ride sharing model crumbles quicker than a Ryan Lochte robbery allegation. By the way, the proposed settlement is yet another great example of the class action system disproportionately benefitting lawyers, precisely when the CFPB is on the verge of institutionalizing such litigation.
Where Has U.S. Productivity Gone?
It is an article of faith among politicians, along with truth, justice and the American Way, that America has the most productive workforce in the world. This may still be true, but Federal Reserve Vice Chairman Stanley Fisher used a speech on Sunday to highlight worrying signs that something is going wrong with productivity. For example, business productivity has declined for the last three quarters, its worst performance since 1979. Furthermore, output per hour increased only 1-1/4 percent per year between 2006 and 2015 as opposed to gains over 2 1/2% per year between 1949 and 2005.
Why does this matter? For one thin we won’t see the economy really takeoff as long as productivity is sluggish and your members won’t be seeing meaningful wage. Furthermore, a long-term decline in productivity translates into greater wage inequality. The Vice Chairman would like to see Congress do more to stimulate the economy. I would like to see the Yankees make the playoffs. Both events are theoretically possible, but highly unlikely.
I’m more than a little surprised by the amount of attention research released earlier this week by the Pew Charitable Trust is getting. Survey results indicate that overwhelmingly consumers across genders, generations and the political spectrum want access to the legal system and believe that banks should not be allowed to deny it.
Incidentally, the Web page reporting the results provides a link for persons to support the CFPB’s proposed regulations forbidding financial institutions from including arbitration clauses that forbid consumers from joining class action lawsuits. What a coincidence.
Its survey of 1008 people reveals that 95% of respondents want to be able to be heard by a judge and jury if they find out that they have been charged a fee for a service for which they are sure they didn’t sign up. Keep in mind that the opinions I express are mine and mine alone, Pew does some great work, but this one really misses the mark.
First, the premise of the question is all wrong. Of course, 95% of respondents want access to the courts, just as I am sure they’d like the option of buying a Mercedes-Benz. But the real question is if they could choose between a system that encourages swift, equitable and cost-effective solutions or one in which trial lawyers can potentially make millions of dollars for settling similar cases while the class member receives almost enough money to go to the movies, which would it be?
What annoys me so much about the arbitration debate is not the attempt to deal with arbitration’s inequities, but the CFPB’s pig-headed belief in and glorification of a class-action system that is far from perfect and at best is a very crude instrument to incentivize consumer protection. For instance, legal fees based on a percentage of the amount awarded to a class of plaintiffs creates an incentive for attorneys to settle before trial so as not to run the risk of getting nothing for their efforts. Furthermore, I don’t believe that the vast majority of consumers are anxious to go to court every time their financial institution does something they don’t like. What they want is to be treated fairly and equitably.
This is why I continue to believe that there is a middle ground in this whole debate. Financial institutions should be able to mandate that disputes get settled through arbitration as opposed to class action. But only if the arbitration provisions provide basic due process protections. Courts reviewing these protections should have more flexibility to invalidate arbitration findings based on inadequate due process. Unfortunately, both sides are speaking past each other with the only result being that the only big winners in this whole dispute will be plaintiffs’ lawyers.
Anyway, for the type of changes I’m talking about, Congress would have to act. It’s so much easier to simply have the CFPB handle consumer protection on its behalf.
Bad news continues to trickle out about the taxi medallion industry.
Section 39 of New York’s Banking Law gives the DFS authority to regulate “unsafe and Unsound practices.” In the last couple of days there have been several reports about a supervisory order issued on July second by the NY DFS in consultation with the NCUA, which orders Melrose Credit union to swiftly take several steps to improve management oversight and develop a plan to reduce its exposure to medallion loans.
Most importantly, the credit union, which has specialized in making taxi medallion loans for several decades, was given 90 days to develop a plan, that must be approved by the regulators , to “prudently reduce and manage its taxi medallion loan concentrations in New York Philadelphia and Chicago to the extent feasible given market conditions, the existing loan portfolio and the credit union’s authority to restructure or refinance loans. “
In addition, the credit union is tasked with developing a classified action plan to reduce the credit unions portfolio of poorly performing assets. Specifically the credit union must either reduce charge off selloff or improve these classified assets.
With the order regulators also have taken firm control of the credit union’s management structure, including mandating that it hire a new CEO (which it has already done) and s senior lending officer. All senior hires are now subject to DFS approval.
While the order has understandably gotten a lot of attention, it also underscores just how far we still have to go before its even clear how the medallion issue will resolve itself. For instance, any plan to reduce medallion concentrations, no matter how well researched, will be little more than glorified guesswork until the medallion industry stabilizes. That won’t happen until we know just how big an impact Lyft and Uber are likely to have and we won’t know that until we know what the legal framework for the ridesharing industry is going to be.
In the immortal words of Mike Tyson “everyone has a plan till they get punched in the face” It’s likely that the last punch hasn’t been thrown.
Fed Minutes Released
I’m less interested in reading the minutes of the Fed Open Market Committee meetings then I used to be. To me, they show just how uncertain the guardians of stable economic growth are about the state of the economy.
It’s a lot like going for a checkup and being told by your doctor that he’s pretty sure you’re in great shape… but, then again, you just might be at Death’s Door depending on how healthy you really are…which is anybody’s guess. The doctor says he should know more in a couple of weeks, which is the same thing he told you two weeks ago.
For those of you who are interested in the minutes here they are.
Wake up kids, the purpose of this blog is to remind you that summer is almost over and there is a ticking regulatory time bomb right around the corner. The good news is that we expect further guidance on this regulation in the near future.
I am referring to regulations expanding the scope of the Military Lending Act. When Congress first passed this Act, regulators decided to clamp down on payday loans, refund anticipation loans and vehicle title loans provided to active-duty military personnel and their dependents. In 2015, regulators decided it was too easy to evade the restrictions placed on these loans, so the MLA now extends to most consumer credit transactions. Compliance becomes mandatory in October, but restrictions on credit card accounts become mandatory in October 2017.
Even if you don’t lend to many military members, this regulation will have an operational impact on your credit union. First, when you do make a covered loan to a member of the military, such loans are subject to a military APR of 36%. This APR is calculated differently than the traditional APR under Regulation Z. Most notably, it includes application fees.
You already have an obligation under the MLA to identify military personnel. But since many of you do not offer vehicle title loans, for example, this requirement wasn’t of great concern. But now, with the expanded number of loans covered under the Act, you should know what procedures you are going to use to identify covered persons. Two options provide you with a safe harbor to demonstrate compliance. One option is to access an MLA database maintained by the Department of Defense. A second option is to obtain a consumer credit report.
On that note, I hope you had a nice weekend. Now get to work!
I’ve written extensively about the hazy state of pot regulation in this country and how it has virtually paralyzed credit unions and banks that might otherwise be willing to provide services to pot businesses. So I think it is worth noting that sometime today, the DEA will reportedly be rejecting a high-profile petition seeking to remove Cannabis from the Government’s most restrictive drug classification.
New York is one of approximately half the states in the Nation and the District of Columbia that has voted to legalize marijuana to one extent or another. But banks and credit unions have been justifiably reluctant to provide financial services to pot businesses. This is because marijuana remains unequivocally illegal under the federal Controlled Substances Act. In fact, pursuant to the Act, the DEA classifies marijuana as a Schedule I drug, its most restrictive classification. Critics have argued for decades that this restriction makes it almost impossible to perform the type of scientific research that would determine what medical benefit, if any, pot has.
As explained in this analysis by the Brookings Institute, rescheduling would “not suddenly legalize marijuana” or “solve the policy disjunction that exists between states and the federal government on the question of marijuana legality.” Those same researchers noted, however, that a successful rescheduling petition would have effects on drug policy since it would be interpreted as recognition by the federal government of accepted medical uses for marijuana. This is why advocates ranging from U.S. Senators to the National Conference of State Legislatures have endorsed rescheduling.
On a practical level, such a shift may have allayed the fears of regulators who are reluctant to allow financial institutions to enable pot businesses to access the Federal Reserve Banking system. The decision leaves the status quo intact. The next big event in the pot wars will come when the Court of Appeals 10th Circuit rules on an appeal from a state-chartered credit union in Colorado that was denied access to the Federal Reserve System and Share Insurance by the NCUA.
America’s Uneven Housing Recovery
Another issue which I have obsessed about in this blog is the state of America’s housing market and the causes that may lie behind its relatively sluggish rebound during this so-called recovery. Lest you think these are just the concerns of a curmudgeonly blogger with a glass half-empty perspective, you should read the lead story in today’s Wall Street Journal, which explains that the recovery that began in 2012 has “left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans.” This is not an op-ed penned by Bernie Sanders, but a front page article that is worth a read.
Hanging with the kids tomorrow. See you Monday.