Posts filed under ‘Regulatory’
The Federal Reserve yesterday decided to go along with NACHA and mandate that all financial institutions be able to provide same-day payment of ACH transactions. Currently, a credit union receiving an ACH has until the next business day to complete the transaction. This mandate will be phased in starting September 23rd 2015 and is slated to be fully operational by March 16, 2018.
The shift to mandatory same day processing capability seems like a really big deal to me but has so far not generated all that much excitement in CU Land. . Under the new framework NACHA envisions two “submission and settlement windows” of 10:30 a.m. ET with settlement occurring at 1:00 p.m. and an estimated afternoon submission deadline at 3:00 p.m. ET with settlement occurring at 5:00 p.m. The Receiving Depository Financial Institution will receive a Same Day Entry fee of 5.2 cents for each same-day transaction (That’s right, we are seeing the birth of a new fee for merchants and financial institutions to squabble over for years, nay decades, to come).
If you’re a small credit union concerned about the costs of implementing same day processing the Fed feels your pain…to a point. In approving these changes it noted that upgrading to accommodate same day processing may impose new costs on smaller institutions but it concluded “that exempting small institutions would undermine the ubiquity—and therefore the utility—of the service.” It also rejected the use of a tiered fee system with smaller institutions getting more than 5.2 cents. Remember not all parties will request same day processing. The Fed expects that any additional expenses will ultimately borne by the customer requesting expedited settlement.
I know a few of my more astute readers are asking isn’t this old news? Yes and No. NACHA already approved changes to its operating rules in May 2015. The Fed, along with the Electronic Payments Network operates the ACH system and it requested feedback on whether or not it should go along with the plan. In addition, the fed has offered financial institutions the option of voluntarily providing same day settlement since 2010 but less than 1 percent of FedACH customers are using the service.
This moves the payment system one step closer to where it ultimately has to be: real-time clearance. As your average consumer gets used to paying at the checkout line with a wave of her IPhone and settling a bar tab by simply transferring money into her friend’s account the idea of a gap between payment and settlement won’t be acceptable. Here is a link to the Fed’s announcement and a link to a previous blog I did on the subject,
For better or worse, New York State’s Department of Financial Services (DFS) made history yesterday. It was the first regulator on either the state or federal level to propose regulating virtual currency operators. Its regulations proposing licensing requirements were finalized this past June and yesterday the Department announced that Circle Internet Financial is the first corporation to receive a BitLicense.
Under New York’s new regulations companies engaging in “virtual currency business activity” involving New York or New York State residents must be licensed. These regulations generally define virtual currency business activity as encompassing the receiving, storing, buying, or exchanging of virtual currency. Circle Internet is one of the growing number of companies specializing in platforms that allow consumers to send and receive payments between each other electronically. Presumably, the BitLicense will make it easier to offer its members the option of paying for goods in either Bitcoins or traditional currency. New York State banks and credit unions are exempt from licensing requirements. (3 NYCRR 200.3)
In honor of the late, great Yogi Berra, who passed away yesterday, you might say that when it comes to virtual currency, New York came to a fork in the road and took it. Former Superintendent Benjamin Lawsky made the regulation of virtual currency a top priority of the Department. Is it better to let the industry grow organically to maximize the attractiveness of New York as a center of Bitcoin innovation? Or will an appropriate regulatory framework help spur innovation by helping to distinguish the vast majority of legitimate virtual currency entrepreneurs from the bad actors who are attracted to its potential application to money laundering?
In March 2013, FinCEN issued guidance outlining the applicability of the Bank Secrecy Act to persons administering virtual currency exchanges, but as I noted New York is the first entity to issue Bitcoin licenses.
Incidentally, I have been looking over Yogi Berra’s statistics this morning and he is one of greatest of the truly great Yankees. It wasn’t too long ago when getting a plaque in Monument Park at Yankee Stadium was more difficult that making it into the Hall of Fame. In contrast, it seems like just about every other day this year another Yankee’s number has been retired. That’s too bad because Yogi is one of the handful of people who truly deserve the honor.
You can tell that the kids are back in school and everyone’s resigned to the fact that summer is over. The fact is that there has been more credit union news generated in the past two days than there has been for the entire summer. Here are some highlights with the usual caveat that the opinions I express are my own and that, lest you think I am suffering from forgetfulness, I reserve the right to circle back to any of these issues in an expanded form at a future date.
Board Meeting Results
At yesterday’s NCUA Board Meeting, the Board finalized an interpretive ruling increasing from $50 to $100 million the size of credit unions considered small under the Regulatory Flexibility Act. As I explained in a previous blog, the true impact of this change won’t be known until we see how aggressively NCUA uses the designation to exempt credit unions from regulations. According to NCUA, the change means that an additional 733 federally-insured credit unions fall under the enlarged threshold.
The $100 million ceiling is actually lower than some industry advocates had argued for, pointing out that similar designations for the banking industry can be as high as $550 million. In the preamble to the updated interpretation, the NCUA responded to these critics by pointing out that the $100 million threshold actually means that a proportionate number of credit unions will be considered small.
Corporates Thrown A Bone
As readers of this blog will know, I have been critical of the industry’s efforts to ensure that all credit unions, regardless of their size, have access to emergency lines of credit. Remember, the question is not if we are going to face another financial crisis, but when. Consequently, I am pleased that NCUA took a small step to help credit unions yesterday by giving corporate credit unions the ability to provide bridge loans of up to 10 business days to credit unions awaiting funding for loans approved through the Central Liquidity Facility (CLF). These loans will be excluded from the calculation of a corporate credit union’s net assets for purposes of determining their capital requirements. Much more needs to be done in this area, but at least this is a start.
NCUA Gets Another $130 Million for Corporate Stabilization Fund
While I was skeptical of how successful it would be, NCUA’a aggressive legal pursuit of the investment banks that provided failed mortgage-backed securities to corporate credit unions continues to bear fruit for the industry. On Wednesday, the NCUA announced that it had settled one of its claims against the Royal Bank of Scotland for $129.6 million. This settlement stems from mortgage-backed securities purchased by Members United and Southwest Corporate Credit Unions.
NCUA has now recovered $1.9 billion as a result of these lawsuits. We won’t know for several years just how much money can be used to reimburse credit unions for the special assessments they’ve had to make as a result of the MBS purchases made by the failed corporates. But with the NCUA overcoming significant procedural hurdles in recent months, it is possible that its litigation will ultimately result in substantial reimbursement for credit unions. Chairman Matz deserves credit for going forward with this litigation.
Do Banks Have Reason to Fear Credit Union Loan and Membership Growth?
American Banker is reporting this morning that “credit unions are adding members and loans at an accelerated clip, though the accuracy and relevancy of these numbers are up for debate.” The article points out that for credit union advocates this increased growth is proof that people continue to lack confidence in the banking industry. To credit union critics, statistics on credit union members are both unreliable and misleading. For example, our good friend Keith Leggett concedes that while there is still some dissatisfaction with larger banks, a lot of the new credit union members “are basically members in name only.” (e.g. they are becoming members to get a car loan with no intention of doing more of their banking at the credit union)
I actually think both the critics and supporters of credit unions have valid points in this discussion. Skeptics are right to point out that a lot of membership growth is somewhat shallow. The metric that the industry ultimately has to work to improve is the number of consumers for whom the credit union is their primary financial provider. That being said, capital constraints permitting, every time a member gets a loan from a credit union, credit unions are provided with one more opportunity to make a sales pitch. Considering how difficult it is to get people to switch accounts, the sheer volume of people taking a look at credit unions should not be underestimated. Furthermore, the banking industry continues to minimize consumer dissatisfaction with its Great Recession antics at its own peril.
On that note, let’s have a nice weekend, with a special thanks to all of you who showed up at the Association’s Legal and Compliance Conference this past week.
An unusually busy Thursday, so here are some quick notes to keep in mind as you start your credit union day. I’ve also been gracious enough to intersperse these notes with my football predictions, which, as many of you may know, are certified as capital for RBC purposes by the NCUA.
Taxi Medallions Under Scrutiny
The plight of New York’s Taxi Medallion credit unions, which specialize in making loans for the purchase of taxi medallions, is getting more and more attention lately. Yesterday, NCUA led its press release summarizing the quarterly performance of credit unions by noting that medallion loan growth in federally insured credit unions rose 4% in the year ending June 30, 2015. On a less sanguine note, the CU Times is reporting this morning that a New York judge has refused to rule that consumers summoning a ride using an App based ride sharing service such as Uber is engaged in street hailing. The medallion industry argued that since only medallion taxis were authorized to pick up riders from the street, ride sharing services were violating the law. The decision is going to be appealed, according to the article.
Fearless Football Prediction No. 1
Overwhelmed by guilt, Tom Brady admits his complicity in deflating footballs and makes amends by quitting football so he can go around the country making balloon animals for children’s birthday parties.
Senate MBL Bill Introduced
Yesterday evening our good friends at CUNA sent word that Republican Senator and Presidential hopeful Rand Paul and Democratic Senator Sheldon Whitehouse have introduced legislation that would authorize NCUA to raise the MBL cap for well-capitalized credit unions on a case-by-case basis from 12.25% of total assets to 27.5% of total assets. Bill language provided by CUNA indicates that the legislation would apply to credit unions that have been within 20% of the current cap for at least two years and can demonstrate, among other things, that they are well-capitalized and have five years of MBL underwriting and servicing experience.
Fearless Football Prediction No. 2
NFL Commissioner Roger Goodell resigns to begin his own labor arbitration firm. He is replaced by former Secretary of State and National Security Advisor Condoleezza Rice. The NFL explains that anyone used to dealing with the mess in Iraq is surely qualified to deal with the mess Goodell has left behind.
NY AG Settles Buffalo Redlining Case
In a case I’ve talked about in a previous blog, New York’s Attorney General Eric Schneiderman announced yesterday the settlement of a lawsuit in which Evans Bank was accused of intentionally refusing to make mortgage loans available to Buffalo residents who lived in the City’s predominantly African-American Eastside neighborhoods. The allegations against Evans were both serious and disturbing. According to the press release, Evans has agreed to amend its lending area to include the disenfranchised neighborhoods. It has also agreed to establish an $825,000 Settlement Fund to help establish affordable housing in Buffalo.
Fearless Football Prediction No. 3
As much as it pains me to say this, the Dallas Cowboys beat the Pittsburgh Steelers 35-24 to win the Superbowl.
This past week I introduced my oldest daughter to the great American tradition of voluntary homelessness called camping. I’m not quite ready to take her canoeing in the Adirondacks as my father did with me so instead, armed with the barest of essentials-fully charged IPhones and a six-pack for dad-I settled for a beautiful spot called Thompson’s lake. The weather was beautiful and we had a great time hiking and kayaking but I couldn’t escape the feeling that I was willingly helping to populate a Shanty Town, albeit one with Priuses, Pilots and pickup trucks waiting to take their owners back to civilization.
Having spent time immersed in this tableau of Americana I am now more prepared than ever to respond to the latest knee jerk banker attacks on MBL lending. According to this morning’s American Banker “Irate Bankers” have Flooded NCUA with letters opposing NCUA’s MBL plan. According to NCUA the large majority of comment letters express opposition to the proposal.
What has the Bankers so hopping mad is NCUA’s proposal to amend its MBL regulations to replace the existing overly prescriptive MBL regime with one in which credit unions would have greater flexibility to create MBL programs that reflect the unique needs of their membership. Lest there be any confusion, credit unions aren’t allowed to do what they want. They would have to create a detailed set of policies that address all of the areas covered by existing regulations and supervisory guidance would be used by examiners to judge the effectiveness of these programs. Plus an MBL cap would still be in place.
I’m a little confused by the Bankers’ lines of argument.
I thought banks were being strangled by excessive regulations? They should be supportive of NCUA’s efforts and point out to their own regulators that regulations shouldn’t be judged by how detailed they are but by how effectively they further safety and efficiency.
Instead, according to the American Bankers Association’s comment letter, the amendments set forth in this proposal will lead to safety and soundness concerns as business lending regulations become increasingly lax and increased commercial lending becomes more appealing to the credit union industry.
Really? Never mind the fact that examiners may very well end up having more not less power to regulate individual credit unions. By replacing prescriptive rules with guidance credit unions won’t be able to evade potentially legitimate supervisory concerns by complying with the specific requirements of a given regulation. In fact, it’s possible that some credit unions might find this new MBL approach overly restrictive. Also every major issue covered currently in regulation will have to be addressed in policy.
The Bankers are concerned that the amendments use a “loophole” to expand credit union lending authority. Existing regulations cap MBL loans at 12.25 percent of a credit union’s total assets. If by a loophole the bankers mean that NCUA has the audacity to adopt the plain language of federal law than they have a point. Federal law says nothing about limiting credit union MBL loans to 12.25 percent. Instead it limits the aggregate amount of MBLs that a credit union may make to the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under the FCU Act for a credit union to be well capitalized. Nothing NCUA is proposing goes beyond this Congressional mandate.
The backing industry loves to hide behind community and independent banks when it fits their purposes. Its real concern, of course, has precious little to do with safety and soundness but maintaining as many lending roadblocks as they can.
The problem is that small businesses need loans and the economy has plenty pf room to grow and many small businesses have complained that they aren’t getting access to loans. The ultimate goal of banking regulations should be to make life easier for Americans, not perpetuate banker monopolies. It’s sad that the banks have nothing better to do with their time than keep credit unions from helping consumers.
The blog is going on its summer hiatus. I could say that I am using the upcoming week to help get the kids ready for school, but the truth is that with two fantasy football drafts to prepare for I need to take a break from analyzing credit union news and regulations to ponder really important questions like: Who will Green Bay’s primary receiver be this year? Are there any running backs worth drafting in the first round? And just how many weeks will Tom Brady miss?
But before I get started I wanted to remind you of NCUA’s proposed MBL amendments and why they are even more important than they appear to be.
In case you missed it, NCUA is proposing to give credit unions greater flexibility in making MBL loans. It is moving to what it describes as a principles-based approach under which the existing detailed mandates will be replaced with a requirement that credit unions actively engaged in making MBL loans, or that are over $200 million in assets, design and implement a broad range of policies and procedures addressing MBL lending. For example, the existing requirement that a credit union have at least one person with two years of experience underwriting its MBL loans would be replaced with a requirement that staff have experience directly related to the specific types of commercial lending in which the credit union is engaged. This is including, but not limited to, demonstrated experience in conducting commercial credit analysis and evaluating the risk of a borrowing relationship using a credit risk rating system.
Credit unions will be evaluated on the basis of “supervisory guidance to examiners, which would be shared with credit unions, to provide more extensive discussion of expectations in relation to the revised rule.” Which brings me to why this proposal is even more important than meets the eye: it will give both credit unions and the NCUA the opportunity to hash out once and for all the difference between supervisory guidance and regulations. Based on my reading of the case law-and keeping in mind this is my opinion- from a compliance standpoint there is no practical distinction between an agency’s interpretation of its regulation and a regulation itself.
For example, earlier this year the Supreme Court upheld the right of the DOL to issue an interpretation making mortgage originators nonexempt employees eligible for overtime. (Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199, 1212, 191 L. Ed. 2d 186 (2015). The mortgage bankers argued that this “interpretation” was an amendment to a rule which could only be changed after notice and comment. The Supreme Court said that a regulation is only amended when language is changed. As Justice Scalia commented in a concurring opinion “[a]gencies may now use these rules not just to advise the public, but also to bind them. After all, if an interpretive rule gets deference, the people are bound to obey it on pain of sanction, no less surely than they are bound to obey substantive rules, which are accorded similar deference. Interpretive rules that command deference do have the force of law.”
Also remember that even when an agency interpretation is intended to give a credit union greater flexibility that same guidance gives examiners greater flexibility to determine if a credit union is acting properly.
Now don’t get me wrong. I’m not saying that NCUA isn’t genuinely interested in giving CUs greater flexibility. It is, and it deserves a tremendous pat on the back for its willingness to do so. But because the new MBL framework will only be as useful as NCUA’s guidance and examiner oversight, an ongoing dialogue with the agency is crucial. Everyone needs to be on the same page.
That’s why industry stakeholders, including the New York Credit Union Association, are urging NCUA to submit its MBL guidance to a formal notice and comment period. Doing so will help everyone understand just how much additional flexibility they have to make MBL loans. In addition, everyone has to understand that there will be bumps along the road. Adults have to be willing to sit around a table and talk out their differences.
On that note – see you next Tuesday as the blog marks its fourth anniversary.
If at First You Don’t Succeed. . .
Visa and Target announced a settlement intended to compensate card issuers for the high profile data breach of the Minnesota retailer that compromised an estimated 40 million debit and credit cards. The price tag is reportedly $67 million. The agreement comes months after issuers, including credit unions, scuttled a proposed $19 million settlement with MasterCard. NAFCU’s Carrie Hunt is quoted in the WSJ: “This settlement is a step in the right direction, but it still may not make credit unions whole.”
Stay tuned. This will be an interesting issue to keep an eye on in the coming weeks as the specific terms are analyzed.
Foreclosures in New York: Alive and Well
NY’s foreclosure problems are far from resolved, especially in NYC’s suburban communities according to State Comptroller Thomas Dinapoli, who has the numbers to back it up. Between 2006 and 2009, the number of new foreclosure filings jumped 78%. They leveled off in 2011, hitting a low of 16,655, but shot up again. Filings climbed to 46,696 by 2013 before edging back to 43,868 in 2014, still well above pre-recession levels, according to the report.
By the end of 2015, there were over 91,000 pending foreclosures with Long Island and the Mid-Hudson accounting for a disproportionate share. The four counties with the highest foreclosure rates are all located downstate: Suffolk (2.82 percent, or one in every 35 housing units), Nassau (2.47 percent, or one in every 40 housing units), Rockland (2.26 percent, or one in every 44 housing units), and Putnam (2.10 percent, or one in every 48 housing units). Counties in Western New York and the Finger Lakes regions, in contrast, tended to have lower pending foreclosure rates and decreasing caseloads.
The good news is that these numbers most likely represent a backlog of delinquencies rather than a further deterioration of economic conditions. The Comptroller reports that there are fewer foreclosures at the beginning of the process while activity at the end of the process (notices of sale, notification that the property has been scheduled for public auction) is accelerating.
The backlog of foreclosures reflects not only the aftershocks of the Great Recession but also the inevitable result of a foreclosure process that is hopelessly byzantine and invites delay. Maybe there will be a grand bargain in which state policymakers take steps to expedite foreclosures in return for lenders having to comply with one of the nation’s most onerous and lengthy foreclosure processes. In the meantime, I’m curious if the trends persisting in New York began to spread nationally thanks to the adoption of New York style regulations on the national level. Here is a link to the report.
Time Extended for Two-Cents on Online Lenders
You have more time to sound off about the extent to which online marketplace lenders should be regulated if you are so inclined. The Treasury has extended until September 30th the deadline for responding to its Request for Information on the proper regulation of online lenders. The RFI asks a series of questions related to companies operating in three general categories of online lending: (1) balance sheet lenders that retain credit risk in their own portfolios and are typically funded by venture capital, hedge fund, or family office investments; (2) online platforms (formerly known as “peer-to-peer”) that, through the sale of securities such as member-dependent notes, obtain the financing to enable third parties to fund borrowers; and (3) bank-affiliated online lenders that are funded by a commercial bank, often a regional or community bank, originate loans and directly assume the credit risk.
Are these flash-in-the-pan industries that will fold with the next economic downturn or innovative disruptors of the banking model? If they are the later they may hit credit unions particularly hard. According to the Treasury, small businesses are already more likely than their larger peers to go online for their products and services. Online lending may provide them with a means to quickly access the cash that traditional lenders are reluctant to provide them during economic downturns.