Posts filed under ‘Regulatory’

Are Mortgage Rules Hurting Home Ownership?

A recent GAO report points out that a “key challenge” of the Dodd-Frank Act mortgage regulations is to balance the goals of increasing borrower protections while not decreasing access to credit. How are regulators doing so far?

A report released by the Commerce Department yesterday demonstrates just how much homeownership rates have tumbled over the last decade. The national home ownership rate stood at 64.4 in the fourth quarter of 1992 and reached its zenith of 68.4% in the first quarter of 2007.  According to the numbers released yesterday, the homeownership rate now stands at 63.4%. The decline is even more dramatic for minorities. In the third quarter of 2006, the homeownership rate for African-Americans was 48% and 49.7% for Hispanics. Today those rates stand at 43% for African= Americans and 45.4% for Hispanics.

Do these declines reflect inevitable retrenchment following a housing bubble, as I would suggest, bad public policy, or racial bias in lending? This is going to be the most important and hotly debated public policy question over the next decade (surpassed in importance to the American public only by whether or not Tom Brady received a just punishment for his deflated balls?). How it is answered will impact your credit unions’ operations for years to come.

For example, with the Supreme Court upholding the use of disparate impact analysis, I guarantee you that judges will one day have to decide if the CFPB’s QM rules have a disparate impact on minorities. Given how aggressively the CFPB is utilizing disparate impact analysis, it’s even possible that the CFPB may one day make mortgage amendments based on its own findings about the impact QM rules are having on homeownership for minorities.

Let’s say you believe that all borrowers are being victimized by bad policy, irrespective of race. Is the key to increase legal protections provided to lenders so that the cost of lengthy loss mitigation regimes and foreclosures don’t get backed into home purchase prices? Maybe we need a more vibrant secondary market? If so, should we scrap Fannie and Freddie and have a single entity bundle mortgage loans or should the government get out of the secondary market all together?

All of these are legitimate questions and, even in Washington, facts matter. Fortunately, we are in the beginning of the QM experiment and policymakers can develop statistical models to help answer them.

This is why the GAO report released the other day should serve as a wakeup call to industry stakeholders, Congressmen and regulators regardless of what side you take in the housing debate. The GAO concluded that it is still too soon to determine what impact Dodd-Frank was having on the housing market but that regulators, including the CFPB, still have not adequately prepared for effective “retrospective reviews” of Dodd-Frank’s impact. It recommends that all the relevant federal agencies, including the CFPB, finalize plans to conduct such reviews.

To me this seems like a commonsense suggestion.

As for that other burning issue of the day, I too am outraged by the NFL’s decision to uphold its four-game ban against Tom Brady for his role in deflating footballs used in a playoff game against the Colts last season.  There’s something distinctly un-American when multi-millionaires can’t break rules with impunity and destroy incriminating evidence.  If the NFL’s approach to law enforcement was implemented in the banking world, where would investment banking be today?

July 29, 2015 at 9:14 am 1 comment

Are You Ready For More Flexibility, More Guidance?

On Thursday, the NCUA finalized regulations eliminating the 5% aggregate limit on fixed assets for federal credit unions.  It also established a single time period of six years from the date of a property’s purchase for an FCU to at least partially occupy the premises.  These changes would have been important enough on their own, but there is even more going on here than meets the eye.

When NCUA first proposed doing away with its fixed asset rules for FCUs, it proposed replacing them with a requirement that credit unions implement a fixed asset management program (FAM).  Commenters , including the Association, welcomed NCUA’s willingness to do away with the nettlesome fixed asset cap but expressed concern that the FAM requirement would end up being almost as burdensome to credit unions as the existing regulation.

In an example of the impact that comment letters can have, particularly when a three-member board is divided, NCUA eventually agreed to not only do away with the fixed asset cap but to eliminate the FAM requirement.  This might sound like incredibly dry stuff, but it is yet another indication that NCUA is fundamentally re-examining its regulatory approach away from prescription towards greater flexibility in complying with safety and soundness mandates.  The preamble states that the amendments reflect the Board’s recognition  that it should give credit unions relief from a prescriptive  limit on fixed assets but it stressed that investments in fixed assets  “are, and will continue to be, subject to supervisory review.”

NCUA will attempt to achieve a balance between oversight and flexibility by issuing more guidance.  Are we simply replacing one set of prescriptive rules with another that gives examiners more flexibility to decide what constitutes safety and soundness? This is the part of the preamble that I find so important.   .

In response to these concerns, NCUA explains  that the purpose of supervisory guidance and other interpretive rules is to advise the public of the Agency’s construction of statutes and rules that it administers”  It further explains that “supervisory guidance regarding FCU ownership of fixed assets is not intended to supplant FCU’s business decisions or to impose rigid and prescriptive requirements on FCUs on the management of their investment in fixed assets.”

The rationale in the preamble is similar to NCUA’s rationale for radically altering the MBL regulations.  It may take some getting used to for those of you who have grown used to   complying with very specific mandates.  As for those of you who are looking forward to increased flexibility, be prepared for thorough discussions with your examiner explaining why an approach taken by your credit union satisfies  safety and soundness concerns.

It is an experiment well worth trying. Its success will depend not only on examiners but on the willingness and ability  of credit unions to create individualized  compliance programs       Here is the final regulation.

NY’s Criminal Exacta

With Saratoga opening this past Friday maybe it’s only fitting that federal prosecutors secured an exacta last week   First, Deputy Senate Majority Leader Tom Libous of Binghamton was convicted of lying to federal investigators about his efforts to obtain work for his son from lobbying firms.  On Friday, State Senator John Sampson of Brooklyn, who once held the position of the Senate’s top Democrat, was convicted of Obstruction of justice charges.  Both Senators automatically lose their seats.

With Republicans holding a one seat majority in the State Senate-Not including  the Independent Democratic Conference- and the Governor apparently  committed  to pushing  hard for democrats to win   the  Libous seat when a special election is called,   the political class is looking forward to the first major election since John Flanagan was named Majority leader following the indictment of Dean Skelos on corruption charges earlier this year.    Cuomo was quick to praise Barbara Fiala, the former Department of Motor Vehicles commissioner  who has announced that she will be seeking the Democrat nomination.


July 27, 2015 at 9:33 am Leave a comment

Thursday Potpouri

Some Good News on Housing

As housing goes, so goes the economy. So the announcement by the National Association of Realtors that existing home sales increased in June at their fastest pace in over eight years is some of the best economic news I’ve seen lately. It is likely to give comfort to Fed members uneasy about whether or not to start raising short term interest rates this year. According to the NAR, sales of existing homes increased 3.2 percent to a seasonally adjusted annual rate of 5.49 million in June from a downwardly revised 5.32 million in May. Sales are now at their highest pace since February 2007 (5.79 million).

One statistic that I’ve been keeping an eye on is the number of first time home buyers. Their noticeable absence from the market has been one of the key indicators that the post-recession economy we are living in still feels like a recession to many Americans. The NAR report revealed mix results on this front. The percent share of first-time buyers fell to 30 percent in June from 32 percent in May, but remained at or above 30 percent for the fourth consecutive month. A year ago, first-time buyers represented 28 percent of all buyers.

What remains to be seen is how much of the increase in housing activity reflects growing consumer confidence and how much reflects buyers rushing to buy before the Fed ends this period of historically low interest and mortgage rates.

Here is the NAR Press release.

Live from DC. . .It’s the Debbie Matz Show!

NCUA Chairman Debbie Matz appears before a House Financial Services Subcommittee today at 2:00 PM to answer questions about NCUA’s budget and operations. In addition to questions about NCUA’s budget process-or lack thereof-CUNA anticipates that we might also get some information about the pending Risk Based Capital Reform. You can watch it live over the Internet or probably download it tonight if you are having trouble sleeping. Here is a link to the hearing.

You’ve Come A Long Way Baby(?)

Nothing to do with credit unions but there is a provocative article in the New York Times reporting on the changing attitudes that young professional women are taking as they enter the workforce toward achieving a work/life balance. According to the column “The youngest generation of women in the work force — the millennials, age 18 to early 30s — is defining career success differently and less linearly than previous generations of women. A variety of survey data shows that educated, working young women are more likely than those before them to expect their career and family priorities to shift over time.”

It seems to me that those businesses that are mindful of this attitudinal shift by, for example, embracing workplace flexibility and going the extra mile to keep young parents from slipping down the corporate ladder even as they dedicate more time to their families, might be able to attract and keep employees who they otherwise couldn’t afford.

July 23, 2015 at 9:07 am Leave a comment

Just How Independent Is That Independent Contractor?

Let’s say one of your best employees is leaving because her husband found his dream job as a yoga instructor in Idaho. You love her work and she loves working for the credit union. You both decide that she will do work for the credit union as a consultant. She won’t manage anyone and she can work when she wants as long as she gets the special projects assigned to her done on time. She is free to consult for other credit unions as well but probably won’t have the time. Is she an employee or an independent contractor?

With the subtlety of a bull in a china shop, the US Department of Labor yesterday released guidance clarifying the legal test to be used determine if our consultant is an independent contractor or an employee in disguise. If you hire independent contractors, then this guidance is a must read.

Under the Fair Labor Standards Act, if you “permit or suffer” an individual to work then that individual is your employee. (I’m not making this up: Congress says that if you are suffering at the hands of an employer you must be an employee).

Not surprisingly, this antiquated phraseology is not of much use to employers. Over the years it has fallen on the courts and regulators to determine how to apply this language. The purpose of yesterday’s legally binding guidance is to emphasize to employers that the Fair Labor Standards Act has an expensive definition of employee, one that the DOL feels has been misapplied to the detriment of millions of employees denied benefits as independent contractors.

According to the DOL, the ultimate issue to be analyzed in deciding whether or not our consultant is an independent contractor is not how much independence she exercises but how dependent the contractor is on the credit union. As explained in the guidance:

Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship…An entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent [on the business for which she is working].

To determine whether your employee turned consultant is an employee in disguise, you are going to examine these criteria: the extent to which the work performed is an integral part of the employer’s business; the worker’s opportunity for profit or loss depending on his or her managerial skill; the extent of the relative investments of the employer and the worker; whether the work performed requires special skills and initiative; the permanence of the relationship; and the degree of control exercised or retained by the employer.

Remember these are criteria to be considered, not elements that all have to be present for a person to be an employee. Ultimately, you have to weigh all of these factors and apply them to your situation. As you do so, remember that on both the state and federal level the regulators are emphasizing proper classification of employees in their oversight regimes.

One more thing. The IRS has an interest in seeing that you have properly paid your taxes, so it has its own test to decide whether that consultant you hired is an employee. The IRS still considers factors the DOL doesn’t consider relevant. You can find the IRS’s criteria at.

I will be back on Monday. I hope everyone enjoys their weekend.

July 16, 2015 at 10:06 am Leave a comment

Is All Debt Created Equal?

In May of this year New York’s A.G. Schneiderman reached a settlement with the three major national credit reporting agencies. While I am somewhat skeptical of the attention regulators are paying to the credit bureaus lately – implying that consumers are victimized by inaccurate reports as opposed to their own poor credit decisions – a recent blog post from Fico analyzing the impact of medical debt on credit scores, strengthens at least part of the AG’s case.

Fico’s research suggests that persons with previously unpaid medical debts are better credit risks than members with other kinds of unpaid bills. Specifically, Fico found that when the only “derogatory” information in a person’s credit file was a third party debt collection of a medical debt that was paid off, disregarding this information created a slightly more predictive credit score than integrating this information in the credit score.

In addition to the usual stuff, the AG’s settlement stipulates that Credit Reporting Agencies will now wait 180 days before a medical debt is reported on a credit report. Remember that your credit union is a credit “data furnisher,” so it isn’t directly impacted by this settlement. Nevertheless, the settlement suggests that medical debt collection efforts are receiving enhanced regulatory scrutiny. Fico’s research suggests the need for a more nuanced approach to these debts.

As an outsider to the credit union industry, one of the best ways for me to learn has been to talk and listen to industry veterans. I love talking to the person in charge of collecting delinquent loans in particular. At their best, they combine the empathy of Mother Teresa with the tenacity of a pit bull. They know intuitively what Big Data can confirm quantifiably: not all debt is created equal. I bet Fico’s research confirms what your debt collector already knew intuitively: financially responsible people get sick and medical bills pile up but a single illness doesn’t make someone a credit risk for the rest of their life.

July 14, 2015 at 10:02 am Leave a comment

What Is The Future Of Same-Day Processing?

Whenever I get a chance I like to remind credit unions of the big issues right around the bend.  It’s important to pullback the lens and look at the forest instead of the trees.

One of the biggest shifts on the horizon is the movement of NACHA towards mandatory same-day settlement of ACH transactions.  It’s important not only because of its operational impact but also because, when fully implemented, it could either provide needed compensation for credit unions or conversely become the next frontier of regulator micro management in the name of so called consumer protection.

Under existing NACHA rules,  ACH payments are settled by the next business day.  New rules, once fully  phased in over a three stage process starting  in September 23, 2016 ,  mandate that  NACHA network participants must  be able to process payments the day they are received if requested to so  by the financial institution that originates the transaction (The ODFI). Specifically same-day settlement requests received by Receiving Depository Financial Institutions by 1030AM Eastern Time will have to be processed by 1:00 PM and payments received by 3:00 would have to be processed by 5:00PM.

My guess is that your average consumer or business, when they give it any thought,  doesn’t understand why the banking system has any float periods in an age when money is moved at the speed of light.  They have a point. NACHA is moving towards a system in which customers are offered the option of faster processing; the increased cost and hopefully a little profit (God forbid!) will be paid by the consumer or business that wants faster settlement. For large banks and credit unions with a high volume of originations the idea is a no brainer.

A mandatory rule is really the only way to get the ball rolling   on this long overdue innovation.  In 2010 Federal Reserve Banks began offering an optional FedACH® SameDay Service but the Fed reports that, in the five years since its introduction, the FedACH SameDay Service has received a lukewarm embrace with fewer than 100 depository institutions currently using the service. The Fed points out that, while ODFIs may be able to realize value from the service through enhanced ACH product offerings, smaller institutions with less origination volume have been reluctant to invest the time and money it may take to upgrade their systems.

To help address this issue under the new rules RDFIs will receive a fee of 5.2 cents for every same-day transaction they process.  Only time will tell if this is enough.  If financial institutions are allowed to function like regular businesses it should be   easy to adjust this fee if institutions aren’t being fairly compensated.  Unfortunately,   as same day processing becomes the norm regulators, led by the CFPB, may seek to cap these fees if they think they are too high.

NACHA originally proposed a fee of 8.2 cents but reduced it in the final regulation.  In its comment letter on the NACHA proposal the Federal Reserve expressed concern that “Through its effect on fees to originators, the interbank fee will likely reduce usage of the same-day ACH service from what it would be absent a fee, and ultimately limit the benefits that end users derive from it.”

In other words, regulators are already suggesting that they and not consumers are best positioned to know what fees are reasonable.  It’s this kind of thinking that will give the U.S. the most regulated but antiquated payments system in the advanced world.

Is that really what consumers want?

Here is a resource  for more information.





July 7, 2015 at 10:16 am Leave a 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

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Authored By:

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

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