Posts filed under ‘General’

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.


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.


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

Is CU vendor management a cybersecurity threat?

I finally got around to reading a Government Accountability Office report released last week assessing the effectiveness of financial regulators in overseeing   the  cybersecurity infrastructures of banks and credit unions. After reading the GAO’s conclusions, I was as surprised as a Japanese soccer fan who missed the first seventeen minutes of last night’s World Cup Final.

Well, maybe not that surprised.  After all, the US scored four goals  in twenty minutes which is more unusual than the Mets scoring four  runs in in a nine  inning  baseball game or maybe  in a week.  Still the GAO’s conclusions are important if a bit overstated.

Its first recommendation was for regulators to do a better job of collecting cyber-threat data and sharing it more quickly among themselves and with financial institutions. No surprise there.

Its Second proposal was to urge Congress to give NCUA the same authority to directly examine third- party vendors already exercised by the other financial regulators including the OCC.   It contends that. ”Without authority to examine third-party service providers,  NCUA risks not being able to effectively monitor the safety and soundness of regulated credit unions.” The GAO contends that this lack of direct vendor oversight is particularly harmful to smaller credit unions which both lack the authority and resources to have in-house IT staff or the financial leverage to demand changes to vendor practices.

First, a reality check.  In an  age when some banks have IT budgets larger than most credit unions and  government coordinated  attacks on US financial institutions are commonplace,  to suggest that one of the key actions that Congress needs to take for cybersecurity  is to give NCUA greater vendor oversight  overstates the case.  GAO has argued for increased vendor oversight by NCUA for more than a decade now and so far Congress has turned a deaf ear.

That being said, and with the caveat that the opinions I put forward are mine alone, I’ve come to believe that the GAO and NCUA have a point. Why shouldn’t NCUA have the same power to directly oversee vendors as do the other financial regulators?

Giving NCUA this power would take away a potential cudgel from the banking industry.  The retired but still blogging Keith Leggett has already highlighted the GAO’s report in his Credit Union Watch blog. The credit union industry is one negligent vendor and a cyber attack away   from being put on the defensive over cybersecurity. If this happens it will be a self-inflicted wound.

What exactly is the big deal anyway? If credit unions are using established vendors these vendors are most likely working with banks and are already subject to examiner oversight.  If they are using CUSO’s they shouldn’t be afraid of demonstrating the safety and soundness of these organizations.

One more thing NCUA is right about: Enhanced vendor oversight would help protect smaller credit unions from cyber threats precisely when small and medium sized institutions are becoming more attractive cyber targets.

None of this is to say that vendor oversight is an industry panacea. In fact. if NCUA was given this authority tomorrow it is doubtful that it  would have the manpower or expertise to maximize its benefits  According to the GAO,   NCUA  has 40 to 50 subject-matter IT examiners, as well as 12 IT specialists in regional offices and 4 in headquarters. These staff focus primarily on the largest credit unions.  In addition, “regular” examiner staff consult with the specialists on IT issues that arise at reviews of other institutions. The report points out that those examiners with the most expertise are examining the largest institutions.  While this makes sense given limited resources it also means that small and medium size credit unions don’t get the benefit of expert IT examinations.

NCUA plans to offer web-based training to help get examiners up-to-speed, but given the importance of cyber-security this isn’t exactly reassuring.  To be fare the problem of staff expertise is hardly unique to NCUA.  The Federal Reserve, which regulates more than 5,500 institutions, has 85 IT examiners who have information security or advanced IT expertise and focus primarily on examinations of the largest institutions.

NCUA also does not do well at what the GAO calls “data analytics” but I call data collection.  Surprisingly, it does not “maintain a centralized database on data breach reports—each region holds the data—but periodically reviews incident reports.”  It told GAO that it “has been has been working to expand its analytic capabilities in this area.” I would hope so.  This seems kind of basic to me if we want to know if there are credit union specific vulnerabilities and what can be done about them.


July 6, 2015 at 9:39 am Leave a comment

Is Vacation Mandatory?

I would have to double check with the Compliance Department, but I’ll bet that at least twice a year a credit union tells us that an examiner is in their office and has told them that they must require their employees to take at least two consecutive weeks of vacation. Is the examiner right, they want to know.

My decisively equivocal answer to that question is, not exactly, but a from a safety and soundness standpoint, it makes a lot of sense. First, you won’t find a statute or regulation specifying the amount of vacation time your employees must take. The most authoritative documents I’ve seen on the subject are two legal opinion letters issued by New York’s Department of Financial Services. In 1995, the Department issued a general industry letter to financial institutions in which it opined that the State considered it “prudent business practice for every bank” and branch to have vacation policies that at a minimum mandate that “those officers and employees involved or engaged in transactional business or having the ability to change the official records of” an institution take at least two consecutive weeks of vacation each year. This letter would only be binding on state-chartered credit unions and even then, only strongly encourages credit unions and banks to have mandatory vacation policies.

As for NCUA, Section 4-6 of its examination manual, which assesses a credit union’s internal controls, tells examiners to find out whether or not officers and employees in “sensitive positions” take two consecutive weeks of vacation each year, “if practical.” The manual doesn’t define what practical is, but it clearly provides a bit of wiggle room for that smaller credit union to point out that it doesn’t have enough staff to mandate vacation time policies. Chapter 18 of the Guide lists an employees unwillingness to take vacation as a money laundering red flag.

The reason for these policies is obvious enough. Two weeks should give you more than enough time to figure out if an employee is engaging in illegal activity at the credit union. (And here you thought your employer just wanted you to be well rested). Still, it is clear that on both the state and federal level, credit unions that ignore the role that vacation policies play in protecting them from being used for illegal activity may raise legitimate safety and soundness concerns.

This idea seems simple enough, but this is another example of how your IT and compliance activities have to be coordinated. For example, in 2005, a Type-A bank employee asked the DFS if its vacation policy recommendation meant that she couldn’t access e-mail while on vacation. Let’s face it, some of us are more addicted to email than Donald Trump is to his own ego. The DFS explained that while employees can access email while on vacation, financial institutions should ensure that this discretion does not allow employees to blur the lines between routine email communications and communications effecting transactions.

The distinction the Department was trying to make is all the more difficult in 2015 when many employees are allowed to bring their own smartphones to work and passwords can access the most important of databases. So what conclusions should you draw from all this? First, although examiner concerns have traditionally been geared toward employees who can execute transactions, it seems to me that in this day and age, virtually all your employees have that power. As a result, while there is no statute or regulation mandating your employees take a significant, consecutive amount of time off each year, such a policy makes sense. Besides, it’s a good mechanism to ensure that your credit union isn’t dependent on one employee to perform a core function.

Second, for these vacation policies to be most effective from a safety and soundness standpoint, your IT Department should know who has access to what credit union resources at any given time. Even if you don’t rigorously enforce a vacation policy, one of the most basic steps you can take from a cybersecurity standpoint is to limit access to employees who actually need it.

Finally, don’t assume that your employees would never embezzle from your credit union. The sad reality is that good people do bad things all the time. Your typical embezzler is not a 26 year old kid whose been working at the credit union for a year; but is the trusted middle-aged executive with bills to pay.

Come to think of it, I better put in for vacation time between Christmas and New Years.  See you on Monday and Happy Fourth of July!

July 2, 2015 at 8:32 am Leave a comment

A Modern Day Greek Tragedy

Remember those Greek tragedies we all had to read in High School? The basic plot lines always had the protagonist with a fatal personality flaw, which he didn’t recognize until he met his end. Over the weekend we moved closer to a real-life Greek financial tragedy and this one may impact the United States economy.

About the only thing that the German and Greek economies have in common is that they share a common currency:  the Euro.  For the past five years, the Greek financial system has been kept alive by loans from a consortium of international creditors. These loans have come at a steep price. Led by Germany, creditors have demanded structural reforms in Greek government spending. Although these reforms were starting to demonstrate some benefits, with the Greek unemployment rate over 25%, late last year, Greeks voted to hand over power to a party opposed to further Greek concessions in return for financial aid.

On the one hand, the Greeks bet that the Germans would agree to modify the demanded reforms rather than let the Greeks default on the debt payment and walk away from the Euro. On the other hand, the Germans knew that the Greeks overwhelmingly support membership in the Euro Zone and assumed that the Greeks would ultimately agree to continue structural reforms to maintain their financial system. This game of international chicken took a dramatic turn for the worse over the weekend.

With Greek debt payments due tomorrow, European creditors rejected Greece’s latest offer to restructure its debt. To everyone’s surprise, Greece’s Prime Minister, Alexis Tsipras, called for a referendum to decide whether or not to agree to European demands. Considering that this referendum is scheduled for July 5, this move is strange enough. But what really has Europe digging in its heels this morning is the fact that Greece’s Prime Minister is actually urging its citizens to vote against European demands. He apparently believes that a public rejection by his countrymen will give Germany no choice but to agree to better terms.

Early signs are that this gambit is going to backfire. To prevent a further run on Greek banks, limits have been placed on the amount of money that can be withdrawn from bank accounts and according to press reports, now the European public and its politicians are unified in their opposition to Greek demands. If Greece votes no on the referendum, it will have no choice but to do away with the Euro and start printing its own currency once again.

All very interesting, Henry, but why should I care? Importantly, this will have an impact on the U.S,. Economy, the only question is how great the impact will be. Already this morning, the yield on 10-year U.S. Treasuries is down and the stock market appears poised for an early tumble. In a worse case scenario, Greece exists the Euro and the debt of other European countries such as Italy and Portugal skyrockets as investors question Europe’s commitment to supporting the Euro. This body blow to the European economy would weaken economic growth for the United States and for China as well. In a best case scenario, five years of this Greek tragedy has given private creditors more than enough time to unwind their exposure from a so-called Grexit. Europe suffers a temporary setback but is ultimately strengthened as Greece no longer hangs like an Anvil over Europe. Either way, it’s safe to say that the single most important economic event over the summer will not occur in the United States.  Hopefully, calmer heads will prevail between now and tomorrow.

June 29, 2015 at 8:17 am Leave a comment

Are You Marketing for the Digital Age?

It’s never good when a blog post puts you to sleep and even worse when it’s one you have written, so as important as NCUA’s proposed MBL changes are, an article in today’s American Banker (subscription required) convinced me to return to that subject tomorrow. The article reports that some of the nation’s biggest regional banks (roughly defined as banks that have grown too large as to be described as “community banks” with a straight face) are moving to enhance their image by producing online video content. According to AB, “Regions Financial hired an Academy Award-winning filmmaker to direct a video series about financial planning, while U.S. Bancorp in Minneapolis is sponsoring a video about affordable housing that’s being produced by a prominent Los Angeles creative firm.”

Some in the credit union industry have also embraced this trend. Last year, Coop released a slick documentary style advertisement featuring the millennial singer/songwriter Daria Musk. We need to see more efforts like this.

Full disclosure: few things get me as fired up as what I consider the stale, unimaginative way in which the industry has branded itself. In the debate between those who think that credit unions emphasize their credit union roots too much and those who think they advertise them too little, I’m solidly in the too much camp. Your average consumer might be intrigued by the idea of a not-for-profit cooperative, but they are going to join only if it is in their financial interest to do so.

Let me put on my director of marketing wanna-be hat and explain why I think that digital production should be in the short term plans of larger CUs and the medium term ones of smaller CUs.

First, it takes advantage of the paradigm shift that has upended traditional media. Today the challenge is no longer finding a platform to get your message out, but getting people to view your message.  Anyone can upload a video to YouTube. The trick is getting people to watch it. It’s not as expensive as you might think to pay for a quality video. As one contributor to the article pointed out, the idea is to spend money on production instead of advertising space.

Second, without the constraints of a thirty second or a minute spot you can really get creative in associating your brand not just with a product but with an ethos. For example, the Coop commercial uses aspiring star Musk to identify credit unions with an independent, determined and cooperative spirit. This is a heck of a lot more appealing than repeating over and over again that credit unions are comprised of “people helping people;” at least to anyone under the age of eighty.

Third, you have to move your advertising to where the consumers are and more and more people, particularly younger ones, are streaming their content on demand and watching on their tablets. Even cable companies like HBO and ESPN are cutting the cable cord. Traditional TV watching is so eighties. According to a survey released by Nielson this past December, about 2.6 million households are now “broadband only.” That only represents about 2.8% of total U.S. households, but it is more than double the 1.1% of households that were broadband only last year. Now, don’t get me wrong — Americans aren’t turning off the tube to read Moby Dick – in fact, they are watching more video than ever, but unless you can pony up the money to broadcast during a live sporting event, the days when they can be force fed traditional advertisements are fast coming to an end.

You know that famous phrase by Marshall McLuhan that “the media is the message?” Increasingly, businesses are being judged not just by what they say but where they say it. Time to start planning those online videos if you haven’t already.

June 24, 2015 at 9:05 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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