Posts filed under ‘General’
Yesterday, NCUA unveiled more than a dozen distinct changes to its Field of Membership (FOM) regulations. It will take a few days to figure out the precise impact these changes, some of which are highly technical, will have on credit unions. But, regardless of their ultimate impact, NCUA’s proposal is crucial when viewed in the context of the larger challenges facing the industry.
Let’s face it, credit unions are constrained by a legislative and regulatory framework designed in the early part of the 20th Century. Limiting credit unions to distinct employee groups, distinct communities, and distinct associations made sense in an era where most communities had a manufacturing base and the suburbs had not yet changed the concept of community. Today, the Internet creates world-wide communities and the traditional model of an employee picking up his paycheck on Friday night on his way out of the local mill is obsolete.
Consequently, there is no bigger challenge facing the credit union industry writ large than removing restrictions on who it can serve. Against this backdrop, NCUA deserves credit for taking a fresh look at its existing FOM regulations. But let’s remember that it was only in 2010 that NCUA, under pressure from banker litigation challenging its flexibility when approving community charter expansions, imposed many other restrictions that NCUA is now proposing to tinker with. For example, before 2010, credit unions could provide a “narrative” explaining why a proposed service area constituted a well-defined local community. A 2010 amendment did away with this flexibility, instead mandating that credit unions fit proposed expansions into pre-defined statistical areas.
Yesterday’s proposal doesn’t bring back the narrative option, but by making some of those technical changes I was referring to, it potentially gives credit unions greater flexibility to serve communities, particularly in underserve areas.
Keeping an eye on all of these efforts, of course, is the banking lobby. Its core effort over the last two decades has been to restrain the growth of credit unions by retraining FOM flexibility. The framework that results from this proposal can’t be so flexible as to bear little resemblance to the federal Credit Union Act or result in community charter expansions that can be attacked as arbitrary.
This is why it is so important to view these regulations not as an end in themselves, but as part of a larger effort to educate the public and elected representatives about why charter reform is so important. NCUA deserves credit for this proposal. But the type of changes the industry most needs can only come through legislative action. In the meantime, this is one of those key proposals where substantive feedback, particularly from individual credit unions, is absolutely crucial.
The President yesterday signaled he is in inclined to slam the door shut on even sensible reforms of the Dodd-Frank mandated mortgage reforms. It looks like we will have to wait for the next President to make legislative adjustments to mortgage reforms. (https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr1210h_20151117.pdf)
HR 1210 (http://thomas.loc.gov/cgi-bin/bdquery/D?d114:1:./temp/~bdYfE2:@@@D&summ2=m&|/home/LegislativeData.php) introduced by Congressman Barr would extend Qualified Mortgage protections to any creditor who holds a mortgage in portfolio. Currently, QM protections are given to institutions with $2 billion or less in assets that originate 500 or fewer mortgages a year and hold the loans in portfolio for at least three years. The precise protections afforded QM loans will be determined by the courts but the basic idea is that if a creditor demonstrates that a loan is a QM loan, then it is protected against lawsuits.
In his statement threatening to veto the bill, President Obama asserts that the bill would “undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards.” True enough, institutions would, for example, be able to extend loans to borrowers without worrying about debt-to-income ratios. In other words, larger institutions would find it easier to make the type of loans that got us into this mess in the first place.
The problem is that the real cause of the reckless underwriting standards that caused the mortgage meltdown was a business model in which mortgages were originated to be sold and bought to be packaged into bonds. No one really cared about credit quality because no one thought they would be the ones holding these ticking time bombs when the ticking stopped. What I like about HR 1210, at least conceptually, is that it seeks to address this core problem by letting the free market determine what risks are appropriate. After all, credit unions and small banks are allowed greater underwriting flexibility because they have a direct stake in making sure loans get repaid. So long as larger institutions are willing to take on the same responsibility and are willing to accept the consequences that come when they make the wrong choices, why shouldn’t they have the same flexibility?
There are many important concepts imbedded in Dodd-Frank but its execution is very much a work in progress. Frankly, I don’t expect the President to chip away at legislation that has emerged for better or worse, mainly for worse, as one of his primary legacies. Hopefully, the next Administration will be more willing to reexamine what has been done in the name of a safer mortgage market. I just hope two years isn’t too long a wait.
Credit unions got a temporary stay of execution yesterday on one of the most importantly regulatory proposals that no one really wants to think about. The Financial Accounting Standards Board decided to put off until early next year final action on new accounting standards that would radically alter the way your credit union accounts for anticipated losses. ( Perhaps the Board didn’t want to deal with such a weighty issue around the time of the office holiday party. You know how crazy accountants can get when they get a few in them? Good Times )
Just how big a deal is this proposal? With the caveat that I am so bad at accounting that family legend has it that it was apparent at the age of ten that I would not be taking over my father’s accounting practice, if the FASB goes forward with this proposal it will have a more direct financial impact on most credit unions than the risk based capital reforms we have spent so much time fretting about. Currently losses have to be recognized when they become Probable. The FASB is moving towards an approach in which losses would have to be accounted for based on expected losses using a broader range of data such as the historical performance of similar contracts. It raises the real possibility that more money will have to be put aside to guard against potential future losses earlier in a loan’s life to guard against losses that may or may not materialize. As the exposure draft explains:
“the estimate of expected credit losses would be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the assets’ remaining contractual cash flows. An estimate of expected credit losses would always reflect both the possibility that a credit loss results and the possibility that no credit loss results.” That sounds expensive to me
And I’m not the only one. In its comment letter the normally understated CUNA predicted that the proposed changes would cause an immediate and drastic increase to the ALLL accounts of credit unions. it contended that this increase, which could double or even triple current ALLLs, would result directly in a reduction of retained earnings for many credit unions.
Even with yesterday’s delay it is still anticipated that the new standards will be finalized in the first quarter of next year and take effect in 2019. You don’t have as much time as you think. If I were you I would be getting a preliminary accounting assessment of how this proposal could impact your CU before your accountant starts hitting the holiday party circuit.
Here is some additional information
ihttp://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176160587228&acceptedDisclaimer=trues a link to the proposal and FASB’s announcement
(For those of you who received this morning’s post, by EMail as you can see there was a glitch with the headline)
NY’s Department of Financial Services yesterday sent out a unique letter to key state and federal regulators, including the NCUA, urging them to start implementing a more rigorous and robust cyber security framework and implicitly warning them that New York will go ahead with efforts to strengthen oversight of cyber security with or without their help.
According to Anthony J. Albanese, Acting Superintendent of Financial Services, “[t]here is a demonstrated need for robust regulatory action in the cyber security space, and the Department is now considering a new cyber security regulation for financial institutions. The Department believes that it would be beneficial to coordinate its efforts with relevant state and federal agencies to develop a comprehensive cyber security framework that addresses the most critical issues, while still preserving the flexibility to address New York-specific concerns.” The letter is intended to “help spark additional dialogue, collaboration and, ultimately, regulatory convergence among our agencies on new, strong cyber security standards for financial institutions.”
This is usually the type of memo circulated behind closed doors. My translation of the Department’s action is that it is frustrated by what it believes is insufficient federal action to address cyber security. New York is willing to coordinate its efforts but is ultimately moving forward with or without the feds.
The letter explains the steps that New York is considering taking, including imposing increased requirements on institutions for cyber security policies and procedures; oversight of data held by third parties; multi-factor authentication requirements for consumers and employees who have access to sensitive data; a requirement for institutions to have a chief information security officer; the adoption of standards reasonably designed to ensure the security of all applications utilized by an institution; and quarterly audits and protocols for providing regulators notice of cyber security breaches.
The letter doesn’t spell out precisely what entities would be subject to this framework, but by calling on a public dialogue the Department clearly wants it to apply to both state and federal institutions among the widest possible scope of industries. The proposals aren’t surprising since the Department has consistently expressed concern in recent years that too little is being done to monitor cyber security in general and third party oversight in particular.
What surprises me so much about the letter is that it amounts to a public rebuke of federal regulators. After all, the purpose of the Federal Financial Institutions Examination Council (FFIEC ) is to coordinate regulatory oversight of these issues. In fact, it recently issued a guidance on detecting cyber security threats.
Where the dialogue ends up is anybody’s guess. It will be interesting to see just how long New York waits before implementing a more rigorous security framework with or without the blessing of federal regulators.
Speaking of the FFEIC, two days ago it issued a revised Management booklet, which is part of the FFIEC Information Technology Examination Handbook (IT Handbook). The handbook has been updated to incorporate cyber security concepts as part of information security. See more at: http://www.ncua.gov/newsroom/Pages/news-2015-nov-revised-management-booklet.aspx#sthash.7NLsdTx7.dpuf
According to the NCUA Examiners Guide (Chapter 11) a good ALLL policy includes “Descriptions of qualitative factors (e.g., industry, geographical, economic and political factors) that may affect loss rates or other loss measurements.”
Good luck complying with that one. We face more economic uncertainty today than at any point in the last decade. Plausible arguments can be made that in the next two years we could be in an economic downturn, a robust expansion, or continuing in this current slog. No one knows.
Take the Fed. Will they or won’t they raise rates? I blogged about a speech by Chairman Yellen a little more than a month ago in which she laid out a convincing case for raising rates now to guard against future inflation but that speech was quickly swamped by lackluster economic indicators. The Fed is as confused as anyone. The statement it released earlier this week would seem to indicate that a rate increase is coming just in time for Christmas but with so many unknowns, ranging from China’s economy to home sales, all this could change. The world is so interconnected and so unstable that “geographic factors” half a world away are impacting your credit union. And remember the question is not just when the Fed will raise rates but by how much and over how long a period?
Then there are the political factors. Here the news is a little better. By getting a budget deal done and raising the debt ceiling raised before riding off into the sunset John Boehner did the country a huge favor. By not being able to put the country in default or shut down the Government the matches have been put out of the reach of the Congressional children. Besides Paul Ryan is a great pick. I’ve given up on thinking that Washington will do anything to help the economy but I’m pretty sure it can’t hurt it.
Where does all this leave us? To me the more flexibility you have the better. We just don’t know how sensitive all those new members you have will be to even slight interest rate increases and the search for yield today could leave you squeezed for profits tomorrow. Hope for the best and prepare for the worst.
Here are some links to some of the material to which I am referring so you can decide for yourself.
One of my faithful readers emailed yesterday and asked me what I thought of the cyber security legislation that passed the Senate earlier this week. So here goes: Quite simply any action that shows Congress is waking up to the need for federal action aimed at creating a more robust cyber security infrastructure is a step in the right direction, but since the core challenge of making merchants more responsible for how they protect consumer information remains. credit unions will see little direct or immediate benefit if this legislation becomes law.
Senate bill 754, The Cyber Security Information Sharing Act of 2015, passed with strong bipartisan support and takes some important steps designed to make it easier for the government and the private sector to respond to and deter cyber threats. For example Homeland Security, the Director of National Intelligence, the Department Of Defense and the Justice Department would have to promulgate procedures for the “timely sharing” of classified cyber threat indicators. The bill would also setup a framework that would allow companies to voluntarily monitor each other’s information systems. Companies that exercise these powers are shielded from lawsuits, including those alleging violations of antitrust law.
Now all of this might be real important stuff for fortune 500 companies, including the largest banks that are such tempting targets for hackers, but none of it addresses the concerns of credit unions wondering why merchants don’t have to pick of the tab for data breaches caused by merchant negligence.We not only need more information sharing but we also need to make sure that all businesses have to adopt common sense procedures to protect the personal information of consumers.
The bill also makes the civil libertarian in me that much more concerned about how easy we are making it for the government and business to spy on us in the name of national security but that goes beyond the scope of this post or the concerns of credit unions. Stay dry out there.
Here is a link to information about the bill.
With news that the departing Speaker of the House has reached a tentative deal to both raise the debt ceiling and avoid a government shutdown, you will undoubtedly hear howls from so called conservatives decrying a lack of political conviction by the relative handful of Republicans who actually are willing to compromise to get things done for the good of the country. You will undoubtedly hear these so-called conservatives lament that if we only had more Republicans like Ronald Reagan all would be good in the world.
So today I have a guest blogger, Ronald Reagan, who recalled that when he became California’s Governor in 1967:
“There were still some hard feelings toward me left over from the campaign, when I’d gone out of my way to say I thought the professional politicians in Sacramento and I were natural enemies: My loyalty was to the people, not the political establishment, and I had said so fairly pointedly. Although that sentiment never changed, I realized after a while that to accomplish what I wanted to do swimming upstream against a current of opposition legislators, I’d have to do some negotiating with them….
When I began entering into the give and take of legislative bargaining in Sacramento, a lot of the most radical conservatives who had supported me during the election didn’t like it. “Compromise” was a dirty word to them and they wouldn’t face the fact that we couldn’t get all of what we wanted today. They wanted all or nothing and they wanted it all at once. If you don’t get it all, some said, don’t take anything….
I agreed with FDR, who said in 1933: ‘I have no expectations of making a hit every time I come to bat. What I seek is the highest possible batting average.’
If you got seventy-five or eighty percent of what you were asking for, I say, you take it and fight for the rest later, and that’s what I told these radical conservatives who never got used to it.”
If Reagan was around today, these sentiments would put him in danger of losing the primary and being out of office by the very people who invoke his name.
If you want to know why it seems impossible to get meaningful action on credit union priorities it’s because a dangerous extremism has infected a portion of the Republican Party and made compromise all but impossible. To these individuals, the country is in such bad shape and it is so opposed to a President it elected twice that a unified party would bring about a “conservative revolution.” Revolutions don’t happen in this country and we need government to get things done that only government can do.
For the complete quote go to (http://www.wsj.com/articles/notable-quotable-reagan-on-compromise-1445379280?alg=y)