Posts filed under ‘Regulatory’

Industry Conditions Beg FOM Reform

Yesterday, Governor Cuomo wrote a strongly worded letter urging the Justice Department to block  the acquisition of First Niagara by Key Bank arguing that the merger would cost thousands of jobs and leave consumers no alternative but to seek out high cost alternative lenders.

On October 30th Key announced an agreement to acquire First Niagara.  According to the Albany Business review, First Niagara and Key employ approximately 2,000 workers in the Albany area.  Crucially, from the Governor’s perspective, about 30 percent of the banks’ branches overlap so there will be branch closings and job cuts.

“The consolidation is expected to result in thousands of lost jobs at the corporate and branch levels, with little hope these individuals will find alternative work in the retail banking field due to the oversaturated market conditions.  In addition, to the loss of jobs in local communities, consumers will face further limitations on branch access.  As it stands, tens of thousands of Buffalo area residents do not have access to reliable bank deposit services.  Eliminating branches will only exacerbate the existing problem.” [from the Governor’s letter, reprinted by the Review]. 

In addition, the loss of banking services “will likely push consumers to rely on non-bank alternatives, such as payday loans and check-cashing, which come with higher consumer transaction costs.”

I can’t help but think about the fact that even as dynamics within the industry understandably push banks like Key push to further consolidate the financial services industry, the Banking industry is strenuously objecting to NCUA’s proposed Field Of Membership regulations.  By giving community credit unions greater flexibility to expand to areas in and around Core Based Statistical Areas, and making sure that proper classifications are made when analyzing whether areas are underserved by other financial institutions, the FOM regulations would help areas like Buffalo and Niagara that were already in need of more banking options even before this acquisition was announced.

I have no way of knowing if the DOJ will block this merger, but I do know that Consolidation is inevitable and FOM reform could help consumers impacted by this trend.  


February 11, 2016 at 7:48 am Leave a comment

When it Comes to CECL, Don’t Panic

When it comes to the Federal Accounting Standards Board’s expected loan loss requirements anticipated to be finalized the first half of this year, pay attention but don’t panic…Yet.  That’s my takeaway after listening to an excellent round table discussion between regulators and community banks that took place last Thursday.

Under existing accounting standards, you are required to recognize losses when they become probable. Critics of this approach argue that it ends up underestimating the weakness of financial institutions.  For example, many  banks and some credit unions had low Allowances for Loan losses  immediately prior to the financial crash of 2008.  The Current Expected Credit Loss (CECL) Model is intended to address this problem by making banks and credit unions account for expected loan  losses over the lifetime of the loans by anticipating losses.  Supporters of this approach argue that it will force bankers to more realistically account for the fact that some of their loans will go bad.  No one disputes that under this approach over time you will have to put more money aside for  a rainy day since you will have to anticipate losses earlier in the lending process.

The Model makes little sense for credit unions. One of the main reasons why FASB wants to make these changes is so investors get more accurate, real time information about a bank’s financials.  But, as Susan Hannigan, a CFO at Jeanne D’Arc Credit Union in Massachusetts, pointed out at the round table, credit unions don’t have potential outside investors.  Furthermore, credit unions already monitor expected loan losses, but in a very unique way that comes from living in the community where the loans are being made or being dependent on a company’s continued growth.  But we are past a time for criticizing the proposal. Hopefully additional changes will be made but it is time to start seriously thinking about how credit unions should implement it before it takes effect probably in 2019.

Here is where I have some good news. The regulators were adamant that the purpose of the accounting standard changes is not to make small financial institutions invest in sophisticated modeling or change their hands-on approach to anticipating loan losses.  In fact, if your credit union’s primary modeling tool is an Excel spreadsheet and it works, you can continue to use it.  That being said, the participating financial institutions were quick to point out there is a potentially  huge disconnect between what the regulators say sitting around the table and what your enthusiastic young examiner will tell you is required.

As a non-accountant my advice would be to approach this issue methodically. Wait for the Standard to be finalized before listening to vendor pitches  and take a look at your existing practices.  Many of you already do a fair amount to account for expected losses, you just don’t reflect this due diligence on paper.

If all goes according to plan, the sky isn’t falling but you should certainly expect some rain.


February 10, 2016 at 9:33 am Leave a comment

King Richard Strikes Again!

King Richard is at it again.

In the latest example of the almost  dictatorial powers he exercises over virtually every consumer product in the country, CFPB Director  Richard Cordray  yesterday took to browbeating banks and credit unions by strongly encouraging them to offer cheaper account options that don’t include overdraft protections and admonishing them to do a better job reporting information to the credit bureaus. His performance demonstrates why Congress has to work with the next president to vest the Director’s powers in the hands of an appointed board.

In a letter to the CEOS of the nation’s largest banks the Director made the case for low-cost accounts:

“Right now, much of the industry presents consumers with a binary result – either an applicant passes a standard screening process to obtain an account after identifying any credit risks posed by the applicant’s history of misuse or mishandling of some prior account, or the applicant is blocked from accessing the banking system altogether. There is, however, a third possibility, which is to offer all applicants a lower-risk account (whether a checking account or a prepaid account) whereby the applicant cannot pose the same level of risk to the institution. Accordingly, the same applicant need not be screened out of the banking system by applying the same risk thresholds that are used to determine eligibility for a standard checking account.”

(Incidentally low-cost accounts have been around in New York since 1994 when the legislature passed a law requiring banks and credit unions to offer low-cost accounts. Today consumers meeting certain conditions are entitled to accounts with at least eight fee free transactions a  month.  N.Y. Banking Law § 14-f ;  3 NYCRR 9.7).  it’s not clear to me what exactly New York institutions should be doing that they are not doing already.)

In his speech he  combined this heartfelt appeal for cheaper accounts   with a warning that “Through our supervisory work, we have found that some of the largest banks lack the appropriate systems and procedures to furnish accurate information on millions of accounts”  As a result, the bureau issued  a bulletin warning banks and credit unions that they must meet their legal obligation to have appropriate systems in place with respect to accuracy when they report information, such as negative account histories, to the consumer reporting companies. More effort and rigor are needed to make sure  that the risks consumers actually pose to potential financial providers can be evaluated correctly.”

Why do I think the CFPB went too far yesterday? It prides itself on being a data driven organization. But  I find it incredibly hard to believe that the financial industry writ large is systemically ignoring the Fair Credit Reporting Act.  I find it even harder to believe that this systemic indifference is so pervasive that it  is a root cause for  why there are so many unbanked consumers  in this country.

It also prides itself on being heavily influenced by advocates of behavior economics such as Cass Sunstein the author of Nudge.  But  The CFPB is no  longer nudging; it is telling institutions what products they should offer and why.  It is becoming increasingly clear that the  Bureau  is driven only by the data that leads it in  the direction it wants to go.

At its core , there is a lack of understanding that banking is like any other business.  It costs money to safely hold people’s money and those costs have to be accounted for.




February 4, 2016 at 9:32 am Leave a comment

The Snail’s Pace of Payment System Reform

I love it when people send me emails or comments on my blog because there are many times as I sit here and comment on the news that I feel as if I am living in a parallel universe. 

Case in point is the announcement that the Federal Reserve Past Payments Task Force has agreed on the criteria that will be used to “assess faster payments solutions.”  It is the Fed’s hope that the 36 effectiveness criteria identified by the 320 member task force will act as a guide for innovation in the payments industry.  The criteria are grouped into six broad categories addressing the ubiquity, efficiency, safety and security, speed, legal and governance of a faster payments system.  Each one of these criteria comes complete with a further explanation of individual criteria.

Can someone say paralysis by analysis?  Don’t get me wrong.  I have been pointing out for a while that the laws and regulations surrounding the payment system are woefully outdated and growing more so by the day.  But, this is an issue that requires swift and decisive leadership.  In contrast the Federal Reserve is acting as if it can methodically develop a payment system that will be adopted by the industry as a whole. 

In fact, the modern payment system is evolving organically and regulators can only hope to influence its development if they stop pretending like they have years to come up with perfect solutions.  For example, our existing regulations don’t address viability for peer to peer lending.  They were developed in an age before Smart phones made it possible for consumers to remotely deposit checks and technology companies engrafted themselves onto payment systems.  

In short, there is plenty of practical work to be done and done quickly.  In a best case scenario, the material being developed by the Fed will help standardize the adoption of technology by giving developers a sense of what their payment solutions are going to be expected to achieve.  But even this seems like a pipe dream to me.  In an age when major banks are already investing billions of dollars into developing their own block chain technology even this seems like a fanciful dream.

February 3, 2016 at 8:40 am Leave a comment

Why You Need To Comment On The FOM Proposal

In the movie The Untouchables, in which Kevin Costner plays an idealistic Eliot Ness trying to take down Al Capone within the law, an exasperated, street-wise beat cop played by Sean Connery explains that to take down the mob,  if they put one of your guys in the hospital, you put one of their guys in the morgue.

News Flash: The banking lobby is out to kill the credit union industry or at least maul it beyond recognition.  This is one of those times when it’s important to fight back for the sake of fighting back.  I am usually not a big fan of comment letters for the sake of comment letters but this is an exception.  And if you get a chance, tell your Congressmen and Senators that the Bankers have gone off the deep end.

The ostensible issue triggering the latest scrap is NCUA’s proposed amendments to its Chartering and Field of Membership manual to give federal credit unions greater flexibility in expanding their fields of membership. As highlighted by an article in this morning’s American Banker, the bankers are going downright apoplectic over the proposal, implying that NCUA is trying to circumvent the law and putting tax dollars at risk. We have heard it all before.   (

In reality, many of the proposed changes, though important, are not the type of fundamental changes that would provide huge benefits for all credit unions. This is not a criticism of NCUA simply a recognition of the fact that it is adhering to the laws that bankers are suggesting they are seeking to violate.  The result is that the banking industry is more ginned up in opposing these regulations than the industry is about supporting it.  And that has to change.  There are some fights that have to be fought out of principal, and this is one of them.

I’m not suggesting that NCUA will back away from these amendments. What concerns me is that, in an age when the person who screams the loudest, no matter how incoherently he rants, gets the most attention.  Banks are coming across as more upset over the proposal than credit unions are enthusiastic about it.  While both reactions make some sense this is the latest skirmish in which the industry has to fight back and fight back hard.

Why is it so important? The banking industry has a two prong strategy for attacking our industry: (1) Keep it from growing by strangling credit unions within their antiquated FOM constraints; and (2) end the tax exempt status of the industry by arguing that it is putting community banks at risk and is somehow unworthy of the exemption.

The first goal can be achieved primarily with lawsuits and regulatory advocacy. The second goal is a legislative one.

The uncompromising opposition of bankers to any credit union growth already has impacted all credit unions. The implicit message the banks consistently send to politicians is that helping credit unions simply isn’t worth the hassle. And NCUA’s amendments, while helpful, are still more restrictive than they need to be.  The industry has to lay the groundwork for amendments more dramatic than HR 1151.  If it doesn’t use this and other opportunities to be heard above the banker noise, this is never going to happen.

January 28, 2016 at 9:52 am 1 comment

3 Quick Hits for Your Friday Morning

Yesterday, the NCUA held a board meeting but the most interesting news to come out of the agency was its joint announcement with the Treasury Department that they would be streamlining the process for credit unions to become Certified Depository Financial Institutions (CDFI). The agencies hope to double the number of credit unions with that designation by the end of 2016. According to the Treasury, there are currently 296 certified CDFIs, the majority of which are already designated as low-income credit unions.

CDFIs are institutions that have as a primary mission promoting community development. Low-income credit unions are already eligible for many of the benefits that come with a CDFI designation, but CDFIs are eligible for additional technical and financial support from the Treasury Department. To me, it seems like a great idea. But I’ve been surprised by the number of credit unions reluctant to be designated low-income and I will be curious to see if history repeats itself when it comes to CDFI certification.

Credit Unions Get Opportunity to Comment On Overhead Transfer Rate

Score one for NASCUS. The Association led the charge to open up NCUA’s process for determining the Overhead Transfer Rate to greater public scrutiny. Yesterday, NCUA followed through on a promise and announced that it would take public comments on how the agency’s Overhead Transfer Rate and federal credit unions operating fee are calculated. Now it’s time for the industry to put up or shut up on this issue. NCUA has always been skeptical that industry feedback on this issue would be of much value. If the industry doesn’t respond to this opening with thoughtful analysis, their skepticism will be vindicated.

NCUA Outlines Supervisory Priorities for 2016

NCUA released a letter to federally insured credit unions (that includes you state charters) outlining its supervisory priorities for the coming year. On the top of its list was cyber security assessment. All credit unions are encouraged to use the Cyber Security Assessment Tool released by the FFIEC last June. Here’s a blog I did on this issue last year.

Other priorities include credit union incident response procedures for data breaches regarding member information and BSA compliance with a special emphasis on the risk posed by Money Service Businesses. The complete list is available here and is worth a read.

There are even more issues I could talk about today, but there is other work to be done and there’s a little more than 48 hours to go before the Patriots and Tom Brady send Peyton Manning into retirement with a humiliating defeat. On that note, have a great day.



January 22, 2016 at 8:49 am Leave a comment

Technology Outpaces FOM Requirements

The most intriguing change NCUA is proposing to its Chartering and Field of Membership Manual that it officially issued  on December 10th is one that would, for the first time, acknowledge that technology is transforming banking.  This  change alone makes NCUA’s  proposed changes intended  to give federal credit unions greater flexibility in expanding their membership worthy of the full- throated support of the entire industry.   At the same time, the proposal’s limitations underscore that the truly radical changes that need to be made to credit union membership requirements can only come by way of Congress.

Currently, when a multiple common bond credit union seeks to add a select group of members it must demonstrate that the group to be served is within “reasonable proximity” to the credit union’s “service area,” which includes reasonable proximity to a credit union branch, shared branch, a mobile branch that visits the same location on a weekly basis or a credit union owned electronic facility.  In other words. If a  potential member can’t walk or drive to a physical location that member doesn’t have access to a credit union’s services.

This is nonsense. NCUA wants to end this antiquated view of the world at least for multiple common bond credit unions.  It is proposing that groups be considered to have reasonable access to a service facility so long as they have online access to a transactional website.

Just how important is this change? It’s a step in the right direction, albeit a baby step towards giving federal credit unions the flexibility they need to compete in a world in which technology is making the traditional brick-and-mortar model of banking obsolete and fundamentally changing the concept of what should be considered a community.

For instance,  this morning’s New York Times reports that the growth of so-called financial technology companies has the biggest banks in the world scrambling to develop  online, smartphone-driven banking platforms.  It explains that “some banking habits are changing across the population. In 2010, 40 percent of Americans with bank accounts visited a physical branch once a week, while only 9 percent made a mobile transaction weekly, according to survey research by Javelin Strategy and Research. By 2014, the percentage reporting weekly visits to bank branches fell to 28 percent, while the weekly mobile banking share tripled, to 27 percent.”

Meanwhile credit unions are constrained by reasonable proximity tests.  Of course the regulation is a good first step but it doesn’t go far enough, fast enough.  The change that needs to be made is one that replaces the requirements that community credit unions operate in “well-defined local communities” with one requiring credit unions to operate in well- defined  communities.  After all, Merriam Webster defines a community not only as “ a group of people who live in the same area (such as a city, town, or neighborhood)” but also as  “ a group of people who have the same interests, religion, race, etc.“   The problem is that by mandating that communities be “local,” Congress constrained growth to communities in the same proximity

Still NCUA’s proposal is an important one and you should take the time to express your support.  You have until February 8th to do so.

January 19, 2016 at 9:18 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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