Posts filed under ‘General’

NCUA To Hit Regulatory Pause Button

President Obama may have named Rick Metsger Chairman of NCUA’s Board(https://www.ncua.gov/newsroom/Pages/news-2016-may-metsger-appointed-ncua-chairman.aspx)  but Board member J. Mark McWatters  has  served notice that he is ready willing and able to play a decisive role in blocking regulations as long as he remains with NCUA.

The transition to a two member board provides the NCUA an opportunity “to avoid heavy handedness” and tailor rules to outliers  he explained in a column explaining his  in NCUA’s May newsletter. (http://www.ncuareport.org/ncuareport/april_2016?pg=7#pg7)  In  other venues he has been even blunter,  explaining in a speech before the National Association of Credit Union Service Organizations  that Matz’s departure presents an opportunity to hit the ” pause button” on new regulations.  At the same time,  McWatters has indicated an interest in instituting an 18 month exam cycle.  Chairman Metsger has also consistently demonstrated an interest in  mandate relief.  The exam cycle might be an area of common ground.

Much of this comes as welcomed news to credit unions, even if the truly onerous regulations are coming from the CFPB these days.  But remember, there are some things that credit unions want done.  For example, NCUA still hasn’t finalized regulations making fields of membership for federal credit unions more flexible.    And the guidance to accompany NCUA’s new MBL framework is something the industry will need time to understand and implement.

Remember too that this regulatory hiatus may continue for quite some time. We are in an election year and I don’t see anyone in a rush to replace Matz .This means that  if and when McWatters gets to move over to  the Export-Import Bank Chairman Metsger could be a very lonely man.

What happens if there is something that really has to be done? Only the shadow knows

May 5, 2016 at 9:13 am Leave a comment

It All Comes Down to Money

There are two reasons governments nationalize corporations:  (1) The company is losing money and it is considered too important to fail; or (2) it is making lots of money and the government wants to get its hands on it.  Fannie and Freddie have had such a roller coaster ride since 2008 that they have been victimized by both impulses.  Since credit unions have a vital stake in the future of the secondary market, they shouldn’t shy away from voicing their opinion.

Yesterday, Freddie Mac announced a $200 million loss for the first quarter.  It attributed the loss to those blasted GAAP accounting rules.  (If only companies could come up with their own financial statements without accountants getting in the way, the economy would be so much stronger.) Specifically they explained that interest rate volatility, combined with the way they book their derivatives, made things look worse than they actually are. Yada, yada, yada. http://www.freddiemac.com/investors/er/pdf/2016er-1q16_release.pdf

Freddie’s announcement raises questions about the continued wisdom of an aspect of US housing policy, which has thus far received too little attention.  In September, 2008 the Government handed the GSEs a lifeline and $187 million was drawn from the treasury.  Congress also empowered the FHFA to act as conservator or receiver of Fannie and Freddie, and to take over the rights of any stockholder, officer, or director.  The Government originally took preferred stock; but, stating in 2012, the Government started sweeping all GSE profits exceeding capital buffers.  Considering that the GSEs have made lots of money in recent years, this was a good deal for the Government.  In fact, it was such a good deal that the Treasury is being sued by private stockholders claiming that the Government is taking money that belongs to them.  Perry Capital LLC v. Lew, 70 F. Supp. 3d 208, 217-18 (D.D.C. 2014).

But, does this policy make sense if the GSEs are losing money?  “This development reinforces my concern over current federal policy regarding the GSEs, who have more than fully repaid the funds they borrowed during the 2008 financial crisis,” said Rep. Michael Capuano, D-Mass.  He is a member of the House Financial Services Committee, who has emerged as a level headed voice of reason on housing policy and was quoted in this morning’s American banker as saying. “Despite this, they must continue sweeping all their profits to the Treasury Department. The policy needlessly prevents them from building a capital reserve, which leaves taxpayers vulnerable in the event of a future crisis.” http://www.americanbanker.com/news/law-regulation/freddies-quarterly-loss-renews-cries-to-end-profit-sweep-1080807-1.html

Political News

A lot happened yesterday in NYS politics.  Long-serving Southern Tier State Senator Thomas W. Libous, whose career terminated following a federal perjury conviction, passed away after battling prostate cancer.

http://www.nytimes.com/2016/05/04/nyregion/thomas-libous-powerful-new-york-senator-felled-by-scandal-dies-at-63.html?ribbon-ad-

Hugh Farley has announced he is leaving the State Senate after 40 years.  For decades, Farley was one of the most influential banking policy makers as Chairman of the Senate Banks Committee.

And, of course, Sheldon Silver was sentenced to 12 years in jail, in addition to a hefty fine, and ordered to pay restitution of over $5 million.

May 4, 2016 at 9:29 am Leave a comment

Could the Industry be Merged Out of Existence?

On Friday, NCUA’s Office of Small Credit Union Initiatives released a series of video modules dedicated to “merging from the merging credit union’s perspective.”  It’s like the flight attendant reminding passengers that their cushion can be used as a flotation device as they are flying over the Atlantic Ocean.

These videos would have been more appropriately titled “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” If you think I’m exaggerating, watch the videos for yourself. 

The recurring themes are (1) there is no shame in merging; (2) merging when your credit union is relatively strong gives you more leverage than merging when you are weak; (3) merging can preserve and increase membership value; and (4) contracts can be negotiated to protect employees and services.  And did I mention that there is no shame in merging, especially for those of you whose board meetings are taking on the look of the activity committee of a Boca retirement village?  Module 2 ends with this uplifting quote from the CEO of a $900 million credit union:  “Most small credit unions are too proud to merge.  They see merger as a failure rather than a benefit to members. So they will only merge at the inflection point of a CEO retirement or financial stress.”

What bothers me about the videos isn’t their content:  NCUA’s ever so subtle nudge is a reflection of reality.  There are approximately 275 mergers a year.  Mature industries consolidate, particularly in the financial sector.  Besides, the trend is by no means unique to the credit union industry.  Just ask First Niagara.  People want cheap, effective products and services and the only way of providing this grab bag is to hold down costs and increase economies of scale.  And, let’s be honest, a credit union with a shrinking membership and no strategic plan for growing the base isn’t helping anyone by living off its excess capital.

What concerns me about the videos is that unlike the commercial banking sector, the credit union industry could literally merge itself out of existence.  As of December, there were 481 credit unions with $500 million or more in assets and a little more than 200 of those have assets of $1 billion or more.  From a purely economic standpoint, many credit unions with less than $500 million should consider merging.  But, the credit union industry is unique.  While it’s indisputable that the bigger credit unions can more cost effectively provide services and that many of our largest credit unions use their increased size to give people a better deal than they would get from banks, it’s doubtful that the industries not-for-profit cooperative model can survive politically as if the industry is comprised almost exclusively of billion dollar institutions.  It’s ultimately the small guys – even the endangered home-based CUs – that keep the industry viable.

The industry is unique in that it needs a healthy mix of asset sizes.  If a credit union has no chance to grow then, of course, merging makes sense and you should take a look at these videos.  But, I’m afraid that there are too many credit unions that are willing to give up without a fight.

For instance, there is a great generation of community conscience, tech savvy millennials: why are they in such short supply on credit union boards?  States like New York have made important changes to help credit unions grow by expanding their fields of membership: why have so few credit unions taken advantage of these changes?   Credit unions exemplify the cooperative model:  why are they so reluctant to form CUSOs to combine back office services?  With so many aging boards, why are there credit unions without succession plans? With so many Americans looking to make the most of their money, why are there credit unions that refuse low income status even though it would help them grow and help their members?

NCUA’s right.  There is no shame in merging, but there is shame in going down without a fight.   

May 2, 2016 at 8:49 am Leave a comment

Changes in STAR Exemption Impact Mortgage Escrow Accounts

Given its size and complexity, it’s not surprising that just about every year there is a provision or two in New York State’s budget that has unintended consequences.  Unfortunately for those of you with escrow accounts, this year there is a glitch that affects you (See A.9009-c, Part A).

Under New York’s STAR program, property owners are exempt from paying a portion of their school property tax on their primary residence (see generally Section 425 of the Real Property Tax Law).  The way the program has traditionally worked, the school property tax bill that the homeowner receives, usually in early September, reflects the amount of taxes they owe after the exemption is calculated, i.e. already taken out.  This means that escrow accounts reflect the amount the member owes. 

Here’s where things get complicated.  At the urging of Governor Cuomo, this year’s budget begins a transition converting the STAR tax exemption into a STAR tax credit.  Under the new approach, taxpayers will be billed on the full amount of their school tax assessment and then receive a tax credit reflecting the amount of their STAR exemption.  In other words, they will bear the upfront costs of the assessment and get reimbursed when they file their taxes. 

These changes are generally meant to apply to new homeowners, but because of the way the language was drafted if you weren’t in your new home on tax levy day of the 2015-2016 school year, they apply to you. 

As an astute reader of my blog recently pointed out, this change creates a whole bunch of issues for mortgage escrows.  For instance, since the amount in escrow has to reflect the amount of taxes due, members will have to put more money into their escrow account than they will need.  Furthermore, holders of escrow accounts will presumably have to return this extra money to members. 

This is one we will be keeping an eye on.  Stay tuned.

April 27, 2016 at 8:45 am Leave a comment

What Is Goldman Up To?

My brother in-law loves to say that everyone has an angle.

I’ve been pondering this admonition the last couple of days with the  news that Goldman Sachs is following up its recent acquisition of approximately $17 billion of GE Capital Bank deposits and it’s online  retail deposit-taking platform by offering online savings accounts  to the masses. Consumers are now being offered savings accounts with no minimum deposits and no transaction fees as well as very competitive  certificates of deposits.  GS is also considering offering consumer loans. (https://www.gsbank.com/en.html).

According to the Fed, which approved the acquisition in March, Goldman Sachs, has  approximately $859.9 billion and is already the fifth largest insured depository organization in the United States by assets.   In  understated bureaucratic ease,  it describes Goldman  as a wholesale  bank “whose activities are focused on high-net-worth individuals, institutional clients, and corporations.”  According to NBC news it takes about $10 million to open a wealth management account .

Something doesn’t seem quite right to me. It’s as if Donald Trump started staying at Econo Lodge.  Plus with low interest rates and regulations squeezing fee income this seems like a strange time to start slumming it with retail banking.  What’s behind this sudden interest?

One reason for the move towards consumer banking is undoubtedly diversification.

My guess is that another prime reason is that Goldman Sachs feels that the real future growth in consumer banking is going to come   from the integration of financial tech firms into the stodgy old banking industry. According to the WSJ there has been an “exodus” of Wall Street talent, including from Goldman, to the West Cost. With the acquisition of GE’s online bank, has a scalable  platform with which it can compete against the tech based bankers of the future.

As banks morph into tech companies and tech companies morph into banks where does this leave traditional brick-and-mortar banks and credit unions? If I knew the answer to that question I’d be in Vegas.

Here are some links if you want some more information.

https://www.federalreserve.gov/newsevents/press/orders/orders20160321a1.pdf

http://www.thestreet.com/story/13118214/1/wall-street-exodus-to-silicon-valley-isnt-just-about-the-money.html

 

April 26, 2016 at 9:37 am Leave a comment

Uber Model Alive and Well after Settlement

Late last week, Uber announced it had settled two class action lawsuits brought by drivers claiming, among other things, that the ride sharing service was violating the labor law by classifying drivers as independent contractors.  For those of you with either a direct or indirect stake in the taxi industry through the financing of medallions, the settlement of these lawsuits is another blow.  Here’s why.

The Uber model is based fundamentally on the assumption that the company is nothing more or less than the provider of an App that enables individuals in need of a ride with those willing to provide one.  In Uber’s view of the world, ride sharing allows the mom on the way to the store to make a few extra dollars by taking Sally down the street along for the ride.  Under this best case scenario, our mom is an independent contractor picking and choosing what rides to take as she makes her way through her busy day.

To critics of Uber and other ride sharing services, the mom is not so much an independent contractor as a poorly paid employee.  For instance, under Uber’s model drivers who consistently turn down rides can be dropped from the service and each ride comes with a suggested price and gratuity. 

If the critics are correct, the Uber model is illegal and the traditional taxi medallion model is alive and well.  This is why the settlement is such a big deal.  Uber agreed to pay drivers up to $100 million and end its practice of automatically removing drivers who refuse too many rides.  At the same time, the drivers will continue to be classified as independent contractors in Massachusetts and California. 

Uber is by no means out of the woods.  Similar lawsuits are still pending.  And just last week California’s Commissioner of Labor ruled that an Uber driver was an employee rather than an independent contractor.  But this ruling is being appeal and is not binding on anyone beyond the employee involved. 

While the settlement of the Massachusetts and California cases leaves the independent contractor issue undecided, in my ever so humble opinion, anyone looking for the courts to provide a silver bullet, at least in the near future, when it comes to regulation of ride sharing businesses is likely to be disappointed.  For those of you who feel that the system should be better regulated in order to put medallion taxi and ridesharing service on an equal footing, the places to look for relief are State legislatures.

April 25, 2016 at 8:29 am Leave a comment

On The Middle Class And Payday Loans

The latest issue of the Atlantic is required reading for anyone interested in (1) Figuring out what’s on the mind of  your middle class members and (2) Understanding just how complicated it is to regulate payday loans. The two issues have more in common with each other than you might think.

The first Article is titled “The Secret Shame of Middle-Class Americans.” it delves into why an estimated 47% of Americans have virtually no savings to cope with an emergency.

A warning: Depending on your viewpoint  may cringe as you read it; conclude that the middle class doesn’t stand a chance or stop reading it in disgust.  You may cringe because it is a  first person account  of   Neal Gabler,  a successful  writer and former film critic, who   talks about his financial plight with the cathartic honesty of a recovering alcoholic at an AA meeting.  You may conclude that the middle class doesn’t stand a chance because its aspirations continue to grow faster than the economy that funds them and if you  stop reading in disgust it is probably because the article is the latest example of people looking to blame forces beyond their control for the fact that they sped too much. While I’m sympathetic to the last argument, it’s getting impossible to ignore the fact that there are more and more structural hurdles to staying in the middle class .

He argues:

“I am not crying over my plight. I have it a lot better than many, probably most, Americans—which is my point. Maybe we all screwed up. Maybe the 47 percent of American adults who would have trouble with a $400 emergency should have done things differently and more rationally. Maybe we all lived more grandly than we should have. But I doubt that brushstroke should be applied so broadly. Many middle-class wage earners are victims of the economy, and, perhaps, of that great, glowing, irresistible American promise that has been drummed into our heads since birth: Just work hard and you can have it all.”

Here is a link:

http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

Whether Americans really have it worse than their parents did is debatable, but perception feeds reality. How else to explain the rise of Bernie Sanders on the left and Donald Trump on the populist right without recognizing that there  are many people  who feel that the system is stacked against them: They are looking for someone who feels their pain and promises easy solutions to complicated problems

Which brings me to the second article on payday lending.  On the surface payday loans are odious financial products: They are most attractive to the people who can least afford them and they often entrap desperate consumers into even greater debt.  They seem like the type of product that the CFPB was made to regulate.  As you know,  a preliminary proposal has already been put out and proposed regulations may finally come this Spring.

On the other hand the article makes a compelling argument that payday loans do serve a purpose. After all, increasingly it isn’t just the traditional person of modest means who is one emergency away from financial disaster.  According to the article, your typical payday lender operates on very small margins: interest rate caps and increased regulations, such as underwriting requirements will push many of them out of business.  Where would these desperate borrowers go?

Will credit unions and banks be willing and able to fill in the void? Probably not “We are all cognizant that we should do it, but it is very challenging to figure out a business model that works,” Tom Kane, the president of the Illinois Credit Union League explains in the article. In any event, the credit-union industry is small—smaller altogether, Kane points out, than JPMorgan Chase, Bank of America, or Wells Fargo alone. “The scale isn’t there,” he says

Here is a link:

http://www.theatlantic.com/magazine/archive/2016/05/payday-lending/476403/

 

April 21, 2016 at 9:04 am Leave a comment

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Authored By:

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

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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