Posts filed under ‘General’

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. http://legistar.council.nyc.gov/LegislationDetail.aspx?ID=1709692&GUID=61CC4810-E9ED-4F16-A765-FD1D190CEE6C

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.      http://thomas.loc.gov/cgi-bin/query/F?c114:2:./temp/~c114VL7VIk:e2869:

 

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

Preparing For The Next System Failure

In the movie “The Day After Tomorrow”  the climate gets so severe  that millions of people have  to flee to Mexico in search of warm weather.  I was thinking of this plot line as I drove down to North Carolina for my Niece’s wedding this weekend after spending some time in DC.  You have  to get to Southern Virginia before you see any real signs of Spring.

It felt unnatural to be intentionally heading North on Sunday afternoon.    That being said, my wife was getting tired of my mutterings about insurance funds and megabanks so it is time to get blogging again.

Last Monday I noticed that the retired Captain Ahab to the credit union’s industry’s Moby Dick was  up to his old  tricks.  With some excellent research Keith Leggett  reported that the NCUA sent a Whit Paper to Congress a couple of years ago seeking legislative authority to create a more complicated and ultimately larger share insurance fund for the credit union system.(http://creditunionwatch.blogspot.com/2015/04/ncua-white-paper-on-reforming-ncusif.html )  CUNA  has provided a link to the document. Maybe it’s because I was viewing all this from a distance, but a   system that ties insurance fund assessments to both the size and complexity of a credit union’s operations makes sense to me…in theory.

First let’s be honest and admit that the existing share insurance fund didn’t adequately shelter credit unions from the financial Tsunami. If we didn’t get a loan from the treasury Department to payback the debt of the failed corporates the industry would be an empty shell of itself.

Second as the split between larger and smaller credit unions grows larger and larger it make sense that  the  larger more sophisticated credit unions  that pose the greatest risk to the Share Insurance Fund take on  a  greater burden.

Third this should be a long-term plan. The last thing credit unions need right now is another compliance burden.  Let’s establish an RBC framework and then work as an industry and  present Congress with a unified sensible plan for share insurance reform.

Fourth-I love when credit unions complain about NCUA’s compliance burdens and  muse about converting to banks.  There is not a single credit union that would want to be subject to the FDIC’s insurance fund requirements.   Not only are they more complicated, but the FDIC has  the type of discretion that makes credit unions nervous.  Let’s make sure that,  if and when Congress does take up share insurance reform , NCUA isn’t given unfettered discretion to devise what it considers to be a safer system.

Beyond hubris… For those of you who may have missed it Jamie Dimon, who has spent more time negotiating with prosecutors over the last year than a Manhattan public defender, once again  feels secure enough in his banking genius to use a letter to shareholders to explain that most large banks did great  during the Great Recession; that mismanagement of small banks was the real cause of bank failure and that over regulation of banking geniuses like himself is laying the groundwork for the next financial crisis.  This is a lot like an alcoholic blaming Alcoholics Anonymous for his addiction: After all  If  he didn’t have to acknowledge he had a problem he could have kept on drinking.

As Camden  Fine of the Independent Community Bankers wrote in this excellent American Banker piece (http://www.americanbanker.com/bankthink)last week:

Ridiculing the smaller financial institutions that have to answer to the free market — that do not enjoy an absolute taxpayer backstop against failure — is beyond hubris. It shows a complete unwillingness to accept responsibility. It shows that Wall Street, infantilized by privilege, has learned nothing from what it wrought in those panic-stricken months in 2008 and 2009 and in the years of economic doldrums that have followed.

That is not only infuriating to those of us who have had to survive on our wits instead of billion-dollar backstops — it is fundamentally dangerous…”

Amen Brother! Why aren’t credit unions yelling from the rooftops that more has to be done to hold  large  banks to account for their recklessness? If we have learned anything over the last seven years it is  that our industry will pay a disproportionately heavy price for the mismanagement of the banking system by the megabanks.     This is not about demagoguery it’s about survival.

 

April 14, 2015 at 9:18 am Leave a comment

New Credit Scoring Means New challenges For CUS

FICO), Lexis –Nexis Risk solutions and Equifax yesterday  described  the details of a pilot program currently underway to examine the creditworthiness of those who aren’t eligible for credit because there is no way of  scoring them under traditional models.  According to the press release the pilot program allows 12 of the largest credit card issuers in the U.S. to use alternative data to identify creditworthy individuals who would otherwise be unlikely to obtain traditional credit. (http://www.fico.com/en/fico-lexisnexis-risk-solutions-and-equifax-joining-to-generate-trusted-alternative-data-scores-for-millions-more-americans-04-02-2015).

There is more here than meets the eye.   For one thing I didn’t realize just how many Americans are completely off the credit scoring radar. These “unscorables”  don’t engage with  the banking system and therefore can’t be scored .  Yesterday’s press release put that number at 15 million but this may be on the low side.  No matter what numbers you rely on, what everyone agrees on is that a disproportionately large segment of this group is composed of poorer minorities who are flocking to prepaid cards.

In order to assess the credit worthiness of these unbanked persons of modest means additional data has to be mined. The pilot program announced yesterday uses information such as cable and utility bill payments.  These are potential members who have so far chosen to opt out of the financial system all together.  Does the industry have an obligation to aggressively court these members? I say yes.  Alternative scoring models can help.

So why am I a little squeamish? I’ve talked about how  “Big Data” has the ability to both revolutionize lending and create a host of legal challenges that simply weren’t anticipated when  fair lending laws were passed,  For example,  let’s say that this pilot scoring system proves  to be a reliable indicator of creditworthiness.  How many years will lenders have to start using this new model without being accused of violating lending laws?  After all, FICO has now demonstrated that traditional scoring systems have the effect of reducing credit to poorer often  minority. credit worthy applicants and that an alternative system can be used.

Then there are the broader policy implications. Is extending credit to people who have so far chosen to live without it or who can’t afford it under traditional measures really a good thing?  In 2007, on the eve of the Great Recession, America had a personal savings rate of 1.7%. Today it has skyrocketed to 5.5%which still puts us well behind most developed nations.   In addition,  your average 401K barely has enough in it to pay a retiree’s bus fare for his ride to his job at Walmart.

The financial industry will be devising more and more creative and accurate ways of reviewing credit worthiness for years to come.  Used wisely and monitored by regulators within the appropriate legal framework,  much good can come of this innovation. Conversely, right now the technology is racing too far ahead of the policy. Just because an alcoholic can pay for his drink doesn’t mean he should be having one.  As a nation we are too dependent on credit and enabling the poorest among us to take on debt doesn’t seem to be the best way of encouraging thrift.

On that note,  your faithful blogger is off next week to take the family on a visit to the nation’s capital and Southern Pines, North Carolina,  to go to my niece’s wedding and finds some warm weather.  Enjoy the holiday.

April 3, 2015 at 9:57 am Leave a comment

Do Nice Guys Really Finish Last?

If you are a board member helping select candidates to be your next CEO or you’re an Executive filling a slot on your management team, are you more likely to hire George Bailey or Mr. Potter? Be totally honest. George Bailey is a much nicer guy, but who’s more likely to be running a growing credit union ten years down the line? For that matter, should character even matter when making hiring decisions?

These questions came to mind recently after reading an intriguing bit of research in the most recent Harvard Business Review. According to at least one recent survey, the higher character ratings a CEO is given by his staff the better a company tends to perform.

According to the research, CEOs whose employees gave them high marks for character had an average return on assets of 9.35% over a two-year period. That’s was almost five times higher than the return generated by Executives given the lowest ratings. The cynics might be wrong after all.

The findings are based on research performed by a leadership consultancy. They identified what they considered to be the most universally identified moral principles – integrity, responsibility, forgiveness and compassion. They then sent anonymous surveys to employees at 84 companies and not-for-profits and followed up by interviewing many of the Executives. The highest performing Executives, both based on their character and financial performance, were given high ratings on all four principles. For example, they were described as standing up for what’s right, expressing concern for the common good, letting go of mistakes and showing empathy.

On the flip side, the ten worst performing management teams – euphemistically described as self-focused – were described as warping the truth for personal gain and caring mostly about themselves “no matter what the cost to others.”

Ultimately, it may be impossible to objectively quantify character.   After all, we would all have a intriguing enough to ponder next time you start looking for a top executive.

NYS Budget Plan Set

Late last enough, the smoke rose from the State Capitol. It’s been reported that a budget plan has been agreed to for the 2015-2016 State Fiscal Year. It doesn’t look like this will have much of a direct impact on your credit union. More generally, budget negotiations in NYS begin and end with an annual struggle over state aid to education. The “framework agreement” reportedly includes a school aid increase of $1.6 billion and ethics reforms.

On that note, enjoy your Monday. They say Spring will arrive any day now. I am not holding my breath.

March 30, 2015 at 6:44 am Leave a comment

A Social Media Nightmare?

The CU Times recently reported on the misfortunes of $1 billion Max  Credit Union in   Alabama. An employee is suspected of posting information about a members’ negative balance to a social media site accompanied by the hashtag “perks of my job.”

The credit union’s misfortune underscores just how important it is to have a comprehensive social media policy that not only clearly explains appropriate employee conduct but addresses the amount of public access your credit union wants to grant to its own website.

As regular readers of this blog  know,  the National Labor Relations Board has been on a crusade for several years now to protect the rights of employees, be they unionized or not, to utilize social media to engage in concerted activity to discuss workplace concerns. Earlier this year the NLRB ruled that the same type of protections also applied to employees discussing workplace issues using a company’s email system.

Would you be prepared if  what happened to Max  happened at your credit union?

How would you go about disciplining the employee? The good news is that even the NLRB recognizes that the disclosure of confidential member information is not a concerted activity for which employees are protected,   For example,  in a 2012 memorandum opinion it upheld a pharmaceutical company’s policy prohibiting discussion of proprietary issues by employees using  social media  because an employee  “ would reasonably understand that this rule was intended to protect the privacy interests of the Employer’s customers and not to restrict Section 7 protected communications. ” Similarly your credit union should  have a narrowly drawn policy prohibiting  the dissemination of member information.

This is obvious enough but let’s say your credit union is victimized by an employee disclosure and one of your loan officers responds with a post on his Facebook page saying that “while the disclosure of personal information is foolish, Let’s face it, the credit union’s standards are so low now  that anyone who breathes can  get a loan or open an account.”  An irate member brings the post to the credit union’s attention saying it’s disparaging and demands the credit union discipline the employee.

This is the type of concerted activity that you better hold your fire on and talk to your attorney about before taking any action. On the one hand deteriorating underwriting standards are clearly a matter of workplace concern.  On the other hand,  the post does suggest that many members at the credit union have bad credit. Is it protected speech?  In my hypothetical you are going to want to know the context in which the comments were made and whether other people responded by expressing similar concerns. When it comes to disciplining someone based on social media comments these are the types of questions you should be asking yourself.

So far I have been talking about your ability to regulate employee conduct when they are using their own social media.  In the case of the Alabama credit union more than 60 comments have been posted to the credit union’s website some of them defending it.   Has your credit union ever discussed the parameters of public access to its website or Facebook page?  Remember you don’t have to give anyone the authority to post comments and you certainly can screen comments before publication.  Conversely pretending an event hasn’t happened is a  lousy PR strategy in an age when news about  any credit union can make national headlines within hours.  Regardless of the size of your credit union I would personally discuss what your social media strategy is and will be should you be faced with an embarrassing disclosure.

Here is a link to the article and the NLRB ruling to which I was referring.

http://www.cutimes.com/2015/03/20/facebook-firestorm-burns-credit-union

http://nlrb.gov/news-outreach/news-story/acting-general-counsel-issues-second-social-media-report

 

 

 

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March 24, 2015 at 9:25 am Leave a comment

Are you storing your email like Hillary?

Its great having the Clinton’s back in the spotlight.

Their penchant for going right up to the line of propriety and wallowing in the gray area of the law (e.g. how do you define “is” anyway?)  provides so many entertaining blog worthy teaching moments that I’m sure Hillary’s relentless drive for the Presidency will be of great benefit to blogger and reader alike.

In case you missed it, earlier this week the former First Lady held a press conference to dispel any notions that she was knowingly   doing something inappropriate when she had a personal server installed at her private residence so she could store her State Department email on her personal account.  (Can you imagine Putin responding to an email from Secretaryofstatechick at yahoo.com?)

Anyway, shame on those of you who thought that she was trying to pull a fast one.  The prestigious   law school graduate, and  former high-powered lawyer with  the most experience in and around government of any presidential candidate since John Quincy Adams didn’t realize that it might be wrong to put government email on her personal server and decide for herself what emails should be saved, destroyed and parceled out.

In fairness to the Lady Who Would be Queen, the question of how much email to retain and for how long is one that vexes businesses of all shapes and sizes including credit unions every day.  Compliance people hate it because there are few bright line rules about how long email should be retained. Instead   one of the best guides to use in crafting your credit union’s email retention procedures  are   the factors considered by the courts  overseeing lawsuits.  Why? Because unless you plan on never getting sued by a former employee or ending up in a contract dispute with a vendor the courts are going to expect you to be able to provide basic information that the party suing you needs to prove its  case. The more reasonably you maintain your email today the more  slack a court may be willing to cut you tomorrow when determining whether you or the disgruntled plaintiff should bear the cost of discovery. There are also specific recordkeeping requirements for specific regulations but basing your record retention exclusively on these requirements doesn’t do enough to provide your credit union with an appropriate record retention framework.

As a general rule a party being sued bares the cost of complying with discovery requests-as those of you who have ever tried to get an attorney to reimburse your credit union for the cost of complying with an information subpoena are well aware.  However with the explosion of electronic storage courts have become sensitive to the fact that, depending on a corporation’s size, electronic record retention  and retrieval of email and other documents can become prohibitive.  Furthermore, it isn’t reasonable to impose the same retention requirements on a $50 million credit union and Bank of America.  As a result in weighing discovery requests and apportioning retrieval costs federal courts and, increasingly, New York’s state’s courts have examined the following criteria:

“1. [t]he extent to which the request is specifically tailored to discover relevant information;

“2. [t]he availability of such information from other sources;

“3. [t]he total cost of production, compared to the amount in controversy;

“4. [t]he total cost of production, compared to the resources available to each party;

“5. [t]he relative ability of each party to control costs and its incentive to do so;

“6. [t]he importance of the issues at stake in the litigation; and

“7. [t]he relative benefits to the parties of obtaining the information”

U.S. Bank Nat. Ass’n v. GreenPoint Mortgage Funding, Inc., 94 A.D.3d 58, 63-64, 939 N.Y.S.2d 395 (2012)

 

I underlined 4  5  and 6 because,  as you update  your email retention or broader record retention policy a key point to keep in mind is that the courts expect you to have a reasonable policy reflecting the characteristics of your credit union.  In this day and age you won’t avoid the cost of retrieving email because your policy is to save money by not archiving email on any of your servers for more than one day.  Conversely it’s perfectly acceptable to delete email where the cost of storing it becomes prohibitive and the likelihood that the information will ever need to be retrieved is slight.

One more thing to really make things more entertaining.  Hillary’s mistake also underscores the reality that, in the age of the smartphone, drawing a neat line between an employee’s “work” and “personal email”   is all but impossible.  It is likely to be the source of many a contentious legal battle.  Your policy should put employees on notice that “their” email may not be “theirs” if they are using a company smartphone or using their smartphone to conduct personal business

I wanted to scare you a little with this blog.  Your record retention policy is one of the most important policies your credit union can have and deciding how to manage all that email is a crucial component of that policy.  This is not an area where you should cut and paste another credit union’s policy and go onto more important work.  Instead you should involve your IT staff, your HR person your compliance officer and yes even a lawyer in devising a record retention policy that reflect your credit union’s unique attributes.

March 12, 2015 at 9:56 am 2 comments

What Selma Should Mean To Credit Unions

This weekend the nation marked the 50th anniversary of the march on Selma. The “bloody Sunday” riots jolted the nation into passing the Civil Rights Act in 1965 by making it impossible for the entire nation to ignore the fact that racial inequality and injustice were ultimately incompatible with American ideals. It also got me thinking about the role that financial institutions play in bringing about equality.

Regardless of your political persuasion, I would hope that all of us could agree that a secure place in which to place one’s money and get a loan at a fair price is fundamental to achieving equality. Last week marked the 150th anniversary of the chartering by Congress of the Freedman’s Savings and Trust Company. Within weeks of Congress’ passage of the 13th Amendment abolishing slavery, abolitionists realized that freed slaves needed a place to save and grow their money.

Unfortunately, the creation of the bank also symbolizes just what a complicated and winding road the march toward racial equality can be. Despite its noble ideals, the bank was closed down in 1874. The meager savings of tens of thousands of African-American depositers were lost – remember this was in the age before Share Insurance. According to Comptroller Thomas J. Curry, the bank failed as a result of expanded investment authority it was given in 1870 which allowed it to invest half of its deposits in riskier assets.

In some ways, credit unions are the descendants of this noble but failed effort. I like to point out to people that when Congress authorized federal credit unions during the depths of the Depression, or when states like New York authorized credit unions decades earlier, these institutions weren’t being created because policy makers assumed that people were being treated fairly irrespective of their race, color or creed. On the contrary, credit unions are an implicit recognition that there are distinct groups of individuals who are systematically being denied access to mainstream finances. By allowing these groups to legally pool their assets and not be taxed for doing so, the hope was, and in some respects still is, that individuals can gain the economic strength that helps bring about the political equality that the marchers in Selma were seeking 50 years ago.

How are credit unions doing in aiding minority groups? It depends what statistics you check. For example, according to a 2014 NCUA report, 11% of all federally insured credit unions were classified as minority depository institutions. Half of these were run by African-Americans and have about 871,000 members. Interestingly, Texas (96), California (68) and New York (56) had the highest concentration of aggregate minority depository institutions.

Look a little further though, and the numbers are not quite as encouraging. For example, 94 of these depository institutions have CAMEL ratings of 4 or 5. In addition, 239 of these institutions are, in the words of the NCUA report, “experiencing challenges in meeting operating costs.” A large part of the reason some of these institutions are struggling no doubt reflects the trends buffeting the industry as a whole. If you are not large, or growing quickly, chances are you are struggling. But I would suggest another reason these institutions face obstacles is because helping people of modest means is more expensive than cherry picking the middle class consumer, which brings me to the punch-line of today’s blog. Credit unions do have a unique statutory obligation to people of modest means. This is an obligation that credit unions shouldn’t and can’t run away from. This is why I cringe every time I hear credit unions point out that helping persons of modest means isn’t their only obligation or that it is simply too expensive to cost-effectively provide banking services to this population. Let’s make sure we have the statutory and regulatory flexibility we need to provide financial services and then make sure that every credit union strives to meet this obligation, otherwise, we are doing nothing but hiding behind our ideals.

March 9, 2015 at 8:50 am 1 comment

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Authored By:

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

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