Posts filed under ‘Regulatory’
Today, our friends at the Bureau That Never Sleeps (AKA the CFPB) take their first formal but cautious steps towards regulating not only payday loans, but what I am going to describe as medium- term loans. If you’re thinking that your credit union doesn’t do payday loans, you may be right. But everyone who makes loans has an interest in understanding the parameters that the Bureau ultimately puts around lending products.
The basic approach is to impose ability-to-repay requirements on lenders making loans of 45 days or less, as well as certain longer medium-term loans with an APR of 36% or greater. Lenders would have the option of establishing that borrowers have the “ability-to-repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing.” An alternative approach would relax the underwriting standards so long as a consumer’s income is verified and, among other things, the loan would not result in the consumer receiving more than three loans in a sequence and six covered short-term loans from all lenders in a rolling 12-month period. This approach also could not result in the consumer being in debt on covered short-term loans with all lenders for more than 90 days in the aggregate during a rolling 12-month period.
The Bureau is also considering imposing restrictions on lending and debt collection practices for what the Director describes as “high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent.” The good news is that credit unions making the short term loans authorized by NCUA regulations are already satisfying potential requirements. The CFPB wants to impose NCUA’s parameters on other lenders.
Why do I describe the CFPB’s approach as cautious? Because it didn’t announce proposed rules yesterday or technically even propose an Advanced Notice of Proposed Rulemaking. Instead it released a 30 page outline of what it is thinking about proposing and why. I’ve never seen anything quite like it and I love it. It enables stakeholders to quickly understand the general direction of where the Bureau is headed and comment on it without having to delve into hundreds of pages of mind numbing detail – that can come later. What we have now is a proposed proposal.
Incidentally, the CFPB stressed in the outline that it is not seeking to regulate overdrafts with this proposal.
That seems to be the attitude of many millennials based on the number of surveys that consistently report that those born between 1982 to 2000 are at best indifferent and at worst skeptical when it comes to financial institutions.
For example, according to recent research conducted by Goldman-Sachs, 33% of millennials don’t think they will need a bank in the near future. In addition, 50% of the surveyed millennials are counting on tech startups to overhaul banks. Interestingly, this group is not only skeptical of banking, but profoundly impacted by the Great Recession. According to this survey, less than half of them have a credit card.
This is consistent with what I’ve described in previous blogs: a generation that will make its banking relationship decisions in a vastly different way than any previous generation. In addition, this is a generation that is more than willing to scrap traditional banking models. After all, Facebook announced recently that it is debuting an App to allow its users to make account to account transfers. Can you imagine the previous generation so willing to transfer cash without breaking out the checkbook or walking down to the bank.
I came across this survey as I was taking one more look at a proposal by the CFPB to make reloadable general purpose prepaid cards subject to Regulation E. I just can’t make up my mind when it comes to the proper role of regulation and the prepaid card. On the one hand, as an advocate for credit unions, it makes sense that as prepaid cards provide consumers with almost all the same benefits they get from a traditional banking accounts and debit cards that these accounts be subject to the same regulatory requirements such as disclosures and overdraft protections. On the other hand, the growth in prepaid cards reflects, in part, a generational shift away from traditional banking. Like them or not, the availability of these cards in stores such as Walmart have provided access to financial products for a group of people who may have otherwise chosen to forego or at least delay entering traditional banking relationships.
My concern is that by making prepaid cards more like traditional accounts from a regulatory perspective, we run the risk of squelching innovation. Rather than imposing traditional account regulations on prepaid cards, let’s assume that in the aggregate your average consumer opting for the prepaid card knows what he or she is doing, and is willing to take the risk in return for a different kind of consumer product. After all, from a generational standpoint, millennials have seen what traditional banking can do to their parents. Who can blame them if they are not all that impressed.
NCUA Sues HSBC
HSBC became the latest investment bank to be sued by NCUA over its alleged failure to properly scrutinize mortgage-backed securities purchased by bankrupt corporates. This time, NCUA is headed to Manhattan Federal Court.
HSBC was a trustee for 37 trusts that issued residential mortgage-backed securities. As with almost all its other cases, NCUA is arguing that HSBC breached its fiduciary obligation to properly assess the quality of the mortgages it used to create these securities. As alleged in the complaint, “an overwhelming number of events alerted defendants to the fact that the trusts suffered from enormous problems, yet it did nothing.” Money recovered in these and other lawsuits after legal payouts will be used to reduce credit union costs related to losses to the Share Insurance Fund.
Typically, your faithful blogger likes to prepare posts first thing in the morning to provide you with the most up-to-the-minute information that is going to impact your credit union day. Today, I’m cheating. As you read this post, there is a good chance that I am still sleeping, having binged on a late night college hoop extravaganza. Later today, I will be playing poker with 25 fellow hooky players. I must be rested and sharp for such a day’s work.
Why am I telling you this? I just watched an Internet broadcast of yesterday’s NCUA board meeting and I couldn’t resist giving you my take on some very good news. In fact, I am as pleased as I would be if I got dealt a Straight Flush on the River.
In the latest example of how an infusion of new blood has given the agency enthusiasm for real mandate relief, the NCUA has decided to go forward with plans to eliminate the Fixed-Assets Cap. This cap currently limits federal credit union expenses for buildings, furniture, equipment – including computer hardware and software, and real property to 5% of a credit union’s shares and retained earnings unless they get a waiver. The really good news is that NCUA is proposing to far exceed its initial proposal made in July of 2014 and not only eliminate the cap, but do so without a requirement that credit unions submit a fixed asset management program (FAM).
When NCUA initially proposed eliminating the fixed asset cap, it coupled this proposed reform with a requirement that credit unions submit a highly detailed plan and mandating procedures to insure a board’s involvement in the project. Credit unions and associations, including NYCUA, argued that while they supported elimination of the cap in concept the FAM was so onerous that the proposed “reform” was of little value. Yesterday, the agency proposed doing away with both the cap and the proposed FAM. Instead, guidance will be issued to give credit unions and regulators a sense of when a credit union is taking on too much risk.
This means that NCUA should and will have the authority to question building plans, but that credit unions should be able to execute expansion dreams so long as they can justify them. In yesterday’s board meeting, NCUA’s Larry Fazio quoted the Gospel of Luke – I’m not kidding – for the following proposition:
“Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it? For if he lays the foundation and is not able to finish it, everyone who sees it will ridicule him, saying, ‘This fellow began to build and was not able to finish.’(14:28-30).
Regardless of what your religious beliefs are, with or without a formal cap, NCUA always has had and always will have the authority to question building plans on safety and soundness grounds. NCUA may not be requiring credit unions to develop a detailed FAM, but credit unions should be able to demonstrate that they have thoroughly analyzed the cost and benefits of their project by, for example, doing cost projections. They also should be able to show that the board was actively involved in the building decision. Neither of these conditions are unreasonable and I would much rather credit unions be prepared to demonstrate how their projects reflect their unique needs instead of being required to comply with inflexible regulations.
The Board also decided to go forward with an amendment establishing a standard occupancy requirement. Under existing regulations, an FCU must partially occupy the buildings acquired for future expansion within three years and unimproved property within six years. NCUA is going forward with plans to require credit unions to partially occupy property within 5 years of its acquisition whether or not it is improved. NCUA is going to put these new changes out for a 30-day comment period.
On that note, enjoy the basketball and remember people who chase straights and flushes arrive on planes and leave on buses.
Two things happened yesterday that will impact your credit union. What remains to be seen is how great an impact they will have.
Most importantly, the Federal Reserve’s Open Market Committee gathered yesterday for its first meeting since January. Reports indicated that the Fed is losing patience. To be more accurate, meetings of the Federal Reserve’s Open Market Committee are accompanied by a statement providing clues as to where the Fed thinks the economy is headed. In its January statement, it explained that “[b]ased on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” If, as expected, the Fed removes this line from today’s statement, it is a sure sign that it will be raising interest rates for the first time since 2008, probably no later than June.
For almost a decade now, regulators have been warning against the dangers posed to financial institutions over-exposed to a sudden spike in interest rates. I have always thought these fears were exaggerated, but the Fed’s policy statement will signal the start of what could be the most volatile period of rate gyrations you have had to deal with in quite some time. Remember that in June of 2013, a statement by then Chairman Ben Bernanke indicating that the Fed would soon be moving to raise interest rates resulted in the average rate for a 30-year fixed rate mortgage to surge more than 100 basis points between June and September. Ironically, the Fed ultimately did not raise rates at that point, and mortgage rates tumbled yet again. The question is: will the Fed’s statement today touch off another analogous period or has the market already baked in an anticipated rate increase?
The second thing that happened yesterday you should keep your eye on is the CFPB’s announcement that it is beginning a “public inquiry” into credit card industry practices. Since the inception of the CFPB, your faithful blogger has always thought that it would take steps to fundamentally amend Regulation Z, not only for mortgage lending, as it was charged to do under the Dodd-Frank Act, but for all open-ended lending.
The CFPB is charged with conducting a biennial review of the CARD Act. As part of this review, the Bureau is seeking public comment on credit card practices for purposes of presenting a report to Congress. Pure speculation on my part, but if I were a consumer advocacy organization, and I wanted to change the way consumer lending is done in this country, I would sure want to lay out my blueprint while a Democratic President is still in office. Stay tuned.
Here are three things you should know if you want to be one of the cool kids at the water cooler this morning.
Yesterday, the Supreme Court issued one of the handful of decisions each year that directly impact your credit union’s operations. Most importantly, if you have employees whose job is to assist prospective borrowers in applying for various mortgage offerings, the Supreme Court upheld a Department of Labor interpretation mandating that such persons be treated as non-exempt employees. This means, for example, that originators are entitled to overtime for the time they work over forty hours.
If you don’t do mortgages, I have some bad news and some good news for you. The bad news is that the Court gave agencies like the NCUA the green light to continue and arguably expand their practice of issuing guidance “reinterpreting” existing regulations. The case decided by the Court yesterday (Perez, Secretary of Labor, et al v. The Mortgage Bankers Association, et al) involved the validly of a legal interpretation issued by the Department of Labor in which it opined that mortgage originators should be treated as non- exempt employees. The mortgage bankers argued that the DOL’s interpretation amounted to a new rule and could only be imposed following a formal rule making process. The Court overturned lower court precedent and concluded in a unanimous decision that a formal rulemaking notice and comment period is only required when an agency amends – i.e. changes the wording – a regulation. It can issue all the interpretations it wants and the only remedy for the regulated is to argue that an interpretation is “arbitrary and capricious.” Don’t be surprised if you see amending the Administrative Procedures Act become a major component of Republican regulatory reform efforts.
The good news? You also have three Justices begging for future challenges to the APA. In the short run, the agencies won a major victory yesterday with the Court giving them expanded powers to interpret their own regulations. But, in the long run, the Court will probably give less deference to agencies drafting their own regulations. In the meantime, your credit union faces the potential of more regulatory oversight. Oh Boy!
Regulatory Relief On The Way?
There was some good news on the regulatory front yesterday. Chairwoman Matz dubbed 2015 “the year of regulatory relief.” (I think she stole that from the Chinese calendar) while outlining an impressive-sounding list of reform proposals. The list Includes expanded use of supplemental capital, authorization for large credit unions to securitize mortgage loans and greater Field of Membership flexibility.
All of this sounds promising, but let’s not get too excited until we see the detail. Let’s not forget that NCUA has already proposed changes to FOM requirements that make it more, not less, difficult for credit unions to expand their associational based memberships. In addition, even with yesterday’s Supreme Court ruling, it’s far from clear how much the use of supplemental capital can be expanded without amendments to the law.
Schneiderman Secures Credit Rating Agency Reform
NY AG Eric Schneiderman continued to raise his profile on consumer protection issues yesterday when he announced what is being described as a national settlement with the three major credit rating agencies: Experian, Equifax, and Transunion. Under the agreement, the CRA’s will, among other things, agree to enhanced dispute resolution procedures and delay the recording of medical debt for 180 days. One passage of the press release really got my attention: the settlement “prohibits the CRAs from including debts from lenders who have been identified by the Attorney General as operating in violation of New York lending laws on New York consumers’ credit reports.”
Although the settlement involves the reporting agencies, furnishers of credit information such as credit unions aren’t completely off the hook: “The Attorney General’s agreement requires the three CRAs to create a National Credit Reporting Working Group (“Working Group”) that will develop a set of best practices and policies to enhance the CRAs’ furnisher monitoring and data accuracy.” Stay tuned.
With apologies to those of you who have the temerity to consider football boring, yesterday afternoon the credit union industry was granted the legal equivalent of a referee reversing his call based on an instant replay review. Not just any ruling, instead of the game being over, NCUA can continue to fight to reclaim funds on behalf of credit unions.
Specifically, I am referring to a ruling by the Court of Appeals for the 10th Circuit which revived a lawsuit NCUA brought against Barclays Capital, Inc. seeking more than half a billion dollars for the role it played in issuing mortgage-backed securities sold to the now defunct U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. NCUA is essentially claiming that the bank violated security laws by failing to accurately disclose the quality of mortgages in mortgage-backed-securities purchased by these entities. As you all remember, these and other securities tumbled in value in less time than it took House Republicans to demonstrate that they still don’t know how to govern.
If successful, NCUA would use these funds to offset credit union premiums paid into the Temporary Credit Union Stabilization Fund. All this is a rather long winded way of saying that the success of this and other lawsuits could directly impact your credit union’s bottom line.
Things looked bleak for the home team until recently. Barlays successfully argued in federal district court in Kansas that NCUA waited too long to bring its lawsuit. The court ruled that NCUA only had three years from the date it was appointed Conservator in 2009 to bring a lawsuit. Yesterday’s ruling reverses that decision. It increases the likelihood that, barring a successful appeal by the bank to the Supreme Court, Barclays will ultimately agree to settle up with NCUA.
I’ll save you most of the gory legal details – if you really want to know the difference between a statute of limitations and a statute of repose, I’ve included a link to the decision. Suffice it to say that NCUA’s lawsuit was saved because the court ruled that Barclays lawyers had to honor a pledge not to challenge NCUA’s right to bring the lawsuit after three years had passed.
What is a Complex Credit Union, Anyway?
In its revised Risk-Based Capital Proposal, NCUA broached the idea that more than asset size be used to determine whether a credit union is complex and therefore should be subject to the enhanced RBC framework. I’ve always been frustrated that the industry throws around terms such as systemic risk without actually trying to define what that means in the context of the credit union industry. In her speech last night, Federal Reserve Board Chair Janet Yellen provided an overview of the Fed’s efforts to regulate the truly systemically important financial institutions. She defined large institutions for regulatory purposes very simply as “those firms whose distress would pose significant risk to financial stability.”
Why do I like this definition? Because NCUA has implicitly decided to define financial risk as any risk that could cause a loss to the Share Insurance Fund. In contrast, if it only concentrated on the relative handful of credit unions whose downfall could materially impact the entire industry, an RBC framework could be devised with a much higher compliance threshold, a much more sophisticated RBC framework, and potentially greater flexibility for the credit unions subject to its oversight. I know this won’t happen, but hey, I can dream.
Sign Up Time for the J. Mark McWatters Show
For those of you who want to take advantage of NCUA’s decision to enter the 21st Century and simulcast its board meetings over the Internet, NCUA has posted a sign up link for the March Board Meeting to its website. Given the combative stance taken by newest board member McWatters, this might actually be entertaining. I’m actually considering pitching a Cross-Fire like show to CSPAN that would feature the arch-conservative McWatters debating financial regulation with everyone favorite bank-bashing liberal, Massachusetts Senator Elizabeth Warren or maybe a “Big Brother” show in which the two have to live in the same house with each other and debate the morning news over breakfast. For the political geek set, this could be reality TV at its best.
Enjoy your day, they tell me that the weather is supposed to get nice any day now.
One of the things that I have learned about the credit union industry since I joined it about eight years ago is that there are few places as alert to subtle changes in communities as is the credit union branch. By- and-large you really do know your members.
So there are few people as well positioned as your average credit union employee to sense when an older member is being exploited or is becoming confused.
So I emphasize with New York’s Department of Financial Services , which recently issued a Guidance urging financial institutions to make greater use of existing federal and state laws that allow financial institutions to report suspected cases of elder abuse. According to the Department NY has the third largest elderly population in the country but financial institutions are underreporting suspected abuse.
The Department “recommends that financial institutions in New York make greater efforts to protect the elderly from financial exploitation by adopting red flag protocols, enhancing staff training, and reporting suspected financial abuse to Adult Protective Services (“APS”) or other authorities.” I added the underline. The Department goes onto describe existing legal protections for financial institutions as well as best practices for financial institutions to follow.
Credit unions want to help and protect their members but we don’t need more Guidance. The single best step regulators can take to aid detection of financial abuse is to authorize the wider and faster distribution of SARS or the creation of state level facsimiles.
Financial institutions already use SARS to report elder abuse. The Manhattan DA’s office already extensively uses them to investigate elder abuse. Using SAR reporting as a model regulators could prioritize disseminating SARS involving elder abuse to local police and prosecutors and state legislators could give financial institutions reporting suspected elder abuse to local welfare agencies the identical protections they currently get for reporting SARS These steps would quickly aid the elderly without imposing additional mandates on financial institutions,
Here is the Guidance
It’s nice to have a strict constructionist in high places but….
NCUA board member Mark McWatters told CU Times that he would vote against any Risk Based Capital plan that includes capital levels for both Adequately Capitalized and Well capitalized credit unions. McWatters’s line in the sand makes board member Rick Metsger and not Chairman Matz the most important figure in the RBC debate. It also highlights yet again the question of NCUA’s authority to mandate that complex credit unions be anything more than adequately capitalized.
This may sound boring but as a CEO and reader of this blog pointed out to me recently, the distinction is a crucial one for those credit unions ultimately subject to an RBC framework since they will have much more flexibility if they only have to worry about being Adequately capitalized. Under the latest NCUA RBC proposal for a complex credit union to be Well Capitalized it would have to have a Net-Worth Ratio of 7% or greater and an RBC ratio of 10.0 or greater. To be Adequately Capitalized that same credit union would have to have a Net-Worth Ratio of 6% or greater and an RBC ratio of 8% Remember NCUA is proposing that only credit unions with $100 million or more in assets be subject to am RBC requirement.
The industry certainly has a good faith basis for questioning the extent of NCUA’s powers-if it didn’t NCUA would not have spent money on a legal opinion letter addressing the issue-but the argument is by no means a sure-fire winner for credit unions. Let’s not lose sight of the fact that NCUA has responded to industry concerns by proposing a vastly improved though by no means perfect RBC framework. Rather than obsessing about legalities the industry should be patting itself on the back for a successful lobbying effort and focusing on ways to make the revised RBC proposal even better. Here is a link to the article,