Posts filed under ‘Regulatory’
Responding to Congressional pressure, NCUA released a comprehensive report yesterday defending its decision to impose an updated Risk-Based Capital system on complex credit unions and renewed its call for congress to authorize expanded use of supplemental capital by the industry.
“The high-quality capital that underpins the credit union system is a bulwark of its strength and key to its resiliency during the recent financial crisis. However, most federal credit unions only have one way to raise capital—through retained earnings, which can grow only as quickly as earnings. Thus, fast-growing, financially strong, well-capitalized credit unions may be discouraged from allowing healthy growth out of concern it will dilute their net worth ratios and trigger mandatory prompt corrective action-related supervisory actions.”
NCUA called on Congress to pass HR 989, introduced at the urging of New York credit unions by Long Island Republican Peter King and California Democrat Brad Sherman. It would allow NCUA to authorize well capitalized credit unions to take subordinate supplemental capital provided doing so does not alter the cooperative nature of the industry.
Keeping in mind that low-income credit unions can already use supplemental capital, and that a more sophisticated capital system goes hand-in-hand with a more sophisticated capital system this proposal is common sensical to me but I know not all credit union people would agree.
In her CU Times article this morning Heather Anderson highlighted NCUA’s explanation of its supervisory powers. (It’s in Section VI of the report). For those of you concerned that NCUA is giving itself a little too much flexibility with examiner Guidance the report will provide few assurances.
“While elements of a supervisory review of capital adequacy would be similar across credit unions, evaluation of the level of sophistication of an individual credit union’s capital adequacy process should be commensurate with the institution’s size, sophistication, and risk profile, similar to the current supervisory practice. NCUA will develop and publish supervisory guidance for examiners on how to apply this provision.” It explained
This means that the next stage of the RBC process will hopefully involve a healthy dialogue between the industry and regulators explaining just how much examiners are told to mandate capital requirements for individual credit unions that are in compliance with regulatory requirements. With interest rates likely to rise over the next three years expect to hear plenty more about interest rate risk.
The report is also another example of NCUA demonstrating that it is in fact responsive to, as opposed to indifferent to, congressional concerns. This wasn’t entirely clear to me after testimony by Chairman Mats before the House Financial Services Committee earlier this year. Her performance was a great example of how to lose friends and not influence people. It is modeled after HR 2769 which was voted out of the House Financial Services Committee. It calls on NCUA to review and explain four aspects of its RBC rule.
Here is the report.
I’ll be blogging again on Monday. In the meantime Happy Thanksgiving everyone and thanks for reading.
Yesterday, NCUA unveiled more than a dozen distinct changes to its Field of Membership (FOM) regulations. It will take a few days to figure out the precise impact these changes, some of which are highly technical, will have on credit unions. But, regardless of their ultimate impact, NCUA’s proposal is crucial when viewed in the context of the larger challenges facing the industry.
Let’s face it, credit unions are constrained by a legislative and regulatory framework designed in the early part of the 20th Century. Limiting credit unions to distinct employee groups, distinct communities, and distinct associations made sense in an era where most communities had a manufacturing base and the suburbs had not yet changed the concept of community. Today, the Internet creates world-wide communities and the traditional model of an employee picking up his paycheck on Friday night on his way out of the local mill is obsolete.
Consequently, there is no bigger challenge facing the credit union industry writ large than removing restrictions on who it can serve. Against this backdrop, NCUA deserves credit for taking a fresh look at its existing FOM regulations. But let’s remember that it was only in 2010 that NCUA, under pressure from banker litigation challenging its flexibility when approving community charter expansions, imposed many other restrictions that NCUA is now proposing to tinker with. For example, before 2010, credit unions could provide a “narrative” explaining why a proposed service area constituted a well-defined local community. A 2010 amendment did away with this flexibility, instead mandating that credit unions fit proposed expansions into pre-defined statistical areas.
Yesterday’s proposal doesn’t bring back the narrative option, but by making some of those technical changes I was referring to, it potentially gives credit unions greater flexibility to serve communities, particularly in underserve areas.
Keeping an eye on all of these efforts, of course, is the banking lobby. Its core effort over the last two decades has been to restrain the growth of credit unions by retraining FOM flexibility. The framework that results from this proposal can’t be so flexible as to bear little resemblance to the federal Credit Union Act or result in community charter expansions that can be attacked as arbitrary.
This is why it is so important to view these regulations not as an end in themselves, but as part of a larger effort to educate the public and elected representatives about why charter reform is so important. NCUA deserves credit for this proposal. But the type of changes the industry most needs can only come through legislative action. In the meantime, this is one of those key proposals where substantive feedback, particularly from individual credit unions, is absolutely crucial.
The best way to deal with an argument you can’t win is to start another argument. Not only on the merchants have t some great lawyers, and great lobbyists but they know how to frame an argument better than any industry I have watched.
The latest example of their talent for changing the subject comes in the form of a joint letter signed by nine Attorneys General including Eric T. Schneiderman of New York and Lisa Madigan of Illinois. In the letter they urge the country’s largest banks to expedite chip-and-pin technology . They explain that implementation of such technology is “imperative” to protect consumers and that as the largest issuers these banks share a responsibility for a safer system. (http://www.ct.gov/ag/lib/ag/press_releases/2015/20151116_chipandpinmultistateletter.pdf)
(Remember that Visa and MasterCard have shifted liability for Point-of-Sale fraud onto merchants who can’t process chip based transactions for customers who have been provided with chip cards. But they don’t require consumers to punch in a PIN code to complete the transaction. A signature is good enough.)
First the politics: AG stands for Aspiring Governor. This letter is the latest example of how supporting merchants has been conflated with supporting consumers. There are plenty of legitimate criticisms of the Mega-Banks but lax security is not one of them. Conversely, merchants get away with acting as if every retailer in the country owns a hometown bodega and is eking out a living as it gets nickel-and-dimed to death by banks. Never mind the fact that major retailers like Target have waited decades to implement chip based card technology and that their indifference has resulted in consumers losing millions of dollars.
Unfortunately this blame the financial institution strategy is working beautifully. Instead of criticizing merchants for refusing to adopt chip based technology despite being given several years of lead time policy makers are debating the merits of signatures Versus PiIN.
Now for the policy. In fairness to the merchants, most countries mandate chip- and-PIN not a signature, The problem is that there is little evidence that this really makes transactions substantially safer from fraud in the medium to long term . As Julie Conroy, a fraud analyst, recently explained in an interview with Brian Krebs of the KrebsOn Security website when Great Britain adopted Chip and Pin PIN there was a dip in Fraud but criminals quickly adjusted. “The increased focus on capturing the PIN gives them more opportunity, because if they do figure out ways to compromise that PIN, then they can perpetrate ATM fraud and get more bang for their buck.” A PiN is a static piece of information that can and will be stolen. (http://krebsonsecurity.com/2014/10/chip-pin-vs-chip-signature/)
Once again merchants are packaging their financial self interest in the guise of consumer protection. First there was the swipe fee and now there is the evil card issuer not doing all it can to protect the consumer. Why does government feel the need to pick sides in what is not a dispute about safety but a dispute about money?
This argument is also unfortunate because both sides know that we are debating the merits of chip based technology that is already more than two decades old. I have no doubt that by the time the debate gets settled criminals will have largely made it obsolete and consumers won’t be any safer.
Quick cultural point. I like Adele but I think she could sing this blog and turn it into a hit. But alas, I digress.
What’s gotten my attention this morning is the brewing battle between New York’s AG, Eric Schneiderman and fantasy sports Internet providers FanDuel and DraftKings. While it may not directly impact your credit unions, I wouldn’t be surprised if you find out precisely how many gambling members you have if all the sudden their ability to access these fantasy providers with their credit cards is blocked.
You might remember that the issue of gambling over the Internet was dealt with on the federal level when Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (31 USCA Sec. 5301). The statute banned using the Internet to make a bet or wager, but it stipulated that betting does not include participation in any fantasy or simulated sports games. (31 USCA Sec. 5362).
I am sure it’s just a coincidence that two of the highest profile owners in the NFL, Jerry Jones of the Cowboys and Robert Kraft of the New England Patriots, reportedly have invested in fantasy sports companies.
So why do the Attorney Generals of Nevada and New York feel they have the right to block these companies from operating? Because the statute also stipulated that its purpose was not to preempt “any state law prohibiting gambling.” As a result, the Attorney General’s argument centers on his interpretation that fantasy sports are games of chance prohibited under both the state constitution and state law.
Here’s where it gets a little closer to home for your credit union. Actually coming up with a system for enforcing the Internet better bans was left to the regulators. When the pertinent regulations were eventually finalized, they largely left credit unions and banks off the hook provided they have policies and procedures in place for determining if any if their business accounts are involved with gambling. The entities that really have to make a tough call this morning are the credit card networks and third party processors. They are responsible for coding illegal gambling transactions. If they agree with the AG then a member using a credit card to access a fantasy site should be blocked, if they don’t then they should continue processing the transactions as if nothing has changed. FanDuel has suspended New York Business but I don’t believe DraftKings has followed suit
Put this in context. DraftKings and FanDuel are each valued at more than $1 billion. According to Bloomberg business, New York accounts for over 5% of FanDuel’s customers and over 7% of DraftKings. Losing New York would cost then at least $35 million and more importantly put their entire business model at risk.
Credit unions got a temporary stay of execution yesterday on one of the most importantly regulatory proposals that no one really wants to think about. The Financial Accounting Standards Board decided to put off until early next year final action on new accounting standards that would radically alter the way your credit union accounts for anticipated losses. ( Perhaps the Board didn’t want to deal with such a weighty issue around the time of the office holiday party. You know how crazy accountants can get when they get a few in them? Good Times )
Just how big a deal is this proposal? With the caveat that I am so bad at accounting that family legend has it that it was apparent at the age of ten that I would not be taking over my father’s accounting practice, if the FASB goes forward with this proposal it will have a more direct financial impact on most credit unions than the risk based capital reforms we have spent so much time fretting about. Currently losses have to be recognized when they become Probable. The FASB is moving towards an approach in which losses would have to be accounted for based on expected losses using a broader range of data such as the historical performance of similar contracts. It raises the real possibility that more money will have to be put aside to guard against potential future losses earlier in a loan’s life to guard against losses that may or may not materialize. As the exposure draft explains:
“the estimate of expected credit losses would be based on relevant information about past events, including historical loss experience with similar assets, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the assets’ remaining contractual cash flows. An estimate of expected credit losses would always reflect both the possibility that a credit loss results and the possibility that no credit loss results.” That sounds expensive to me
And I’m not the only one. In its comment letter the normally understated CUNA predicted that the proposed changes would cause an immediate and drastic increase to the ALLL accounts of credit unions. it contended that this increase, which could double or even triple current ALLLs, would result directly in a reduction of retained earnings for many credit unions.
Even with yesterday’s delay it is still anticipated that the new standards will be finalized in the first quarter of next year and take effect in 2019. You don’t have as much time as you think. If I were you I would be getting a preliminary accounting assessment of how this proposal could impact your CU before your accountant starts hitting the holiday party circuit.
Here is some additional information
ihttp://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176160587228&acceptedDisclaimer=trues a link to the proposal and FASB’s announcement
NY’s Department of Financial Services yesterday sent out a unique letter to key state and federal regulators, including the NCUA, urging them to start implementing a more rigorous and robust cyber security framework and implicitly warning them that New York will go ahead with efforts to strengthen oversight of cyber security with or without their help.
According to Anthony J. Albanese, Acting Superintendent of Financial Services, “[t]here is a demonstrated need for robust regulatory action in the cyber security space, and the Department is now considering a new cyber security regulation for financial institutions. The Department believes that it would be beneficial to coordinate its efforts with relevant state and federal agencies to develop a comprehensive cyber security framework that addresses the most critical issues, while still preserving the flexibility to address New York-specific concerns.” The letter is intended to “help spark additional dialogue, collaboration and, ultimately, regulatory convergence among our agencies on new, strong cyber security standards for financial institutions.”
This is usually the type of memo circulated behind closed doors. My translation of the Department’s action is that it is frustrated by what it believes is insufficient federal action to address cyber security. New York is willing to coordinate its efforts but is ultimately moving forward with or without the feds.
The letter explains the steps that New York is considering taking, including imposing increased requirements on institutions for cyber security policies and procedures; oversight of data held by third parties; multi-factor authentication requirements for consumers and employees who have access to sensitive data; a requirement for institutions to have a chief information security officer; the adoption of standards reasonably designed to ensure the security of all applications utilized by an institution; and quarterly audits and protocols for providing regulators notice of cyber security breaches.
The letter doesn’t spell out precisely what entities would be subject to this framework, but by calling on a public dialogue the Department clearly wants it to apply to both state and federal institutions among the widest possible scope of industries. The proposals aren’t surprising since the Department has consistently expressed concern in recent years that too little is being done to monitor cyber security in general and third party oversight in particular.
What surprises me so much about the letter is that it amounts to a public rebuke of federal regulators. After all, the purpose of the Federal Financial Institutions Examination Council (FFIEC ) is to coordinate regulatory oversight of these issues. In fact, it recently issued a guidance on detecting cyber security threats.
Where the dialogue ends up is anybody’s guess. It will be interesting to see just how long New York waits before implementing a more rigorous security framework with or without the blessing of federal regulators.
Speaking of the FFEIC, two days ago it issued a revised Management booklet, which is part of the FFIEC Information Technology Examination Handbook (IT Handbook). The handbook has been updated to incorporate cyber security concepts as part of information security. See more at: http://www.ncua.gov/newsroom/Pages/news-2015-nov-revised-management-booklet.aspx#sthash.7NLsdTx7.dpuf.
Life used to be a lot simpler for mortgage lenders.
Now, things are even more complicated than they appear to be. Exhibit 1 is Sec. 1304 of NY’s Real Property Actions and Proceedings Law. On the face of it Sec. 1304 is straight forward. It provides that a pre-foreclosure notice must be provided to “the borrower” at least ninety days before a lender, an assignee or a mortgage loan servicer commences legal action against the delinquent borrower. Judging by the number of cases in which lenders have had foreclosures dismissed for violating this requirement, it is not as simple as it looks.
For example, just who is the “borrower” for purposes of this notice and are there steps your credit union can take to avoid any confusion over this issue? A clearly exasperated Richmond County judge provided some useful answers to both of these questions in OneWest Bank FSB v. Prestano, 49 Misc. 3d 1209(A) (N.Y. Sup. Ct. 2015), a case that was decided last week.
When Giuseppe and Caterina Prestano originally brought their home they both signed the note and the mortgage. Things get interesting because, when the house was subsequently refinanced, only Giuseppe Prestano signed the note. The mortgage, with its two riders (1-4 Family and Adjustable Rate), was signed by both Prestanos.
Mr. Prestano committed suicide; but, before he died he received a Sec. 1304 notice. Caterina did not. In the subsequent foreclosure action she argued that this invalidated the whole foreclosure. The bank argued that she was not a borrower because her name was not on the note. Here is the problem with that argument as the court saw it: if she was not a “borrower” then her signature on the Mortgage and Riders is there merely to consent to Giuseppe Prestano mortgaging his interests in the property and her ownership interest in the real property cannot be foreclosed upon. In other words the bank put itself in the corner in which it could either argue that it had complied with Sec. 1304 and lose the right to foreclose on the entire property or concede that it had violated Sec. 1304 and have to start the foreclosure from scratch.
Here is the real helpful part of the case: The judge pointed out that this dilemma could have been avoided had Giuseppe left her off the mortgage document entirely and been instead asked to execute a “consent to mortgage.” By such a document she would declare she was not obligating herself either on the Note or Mortgage, but would acknowledge that should her spouse default on his obligations, the lender could institute a foreclosure proceeding against the entire premises.
Consent to mortgage documents are a great device that have historically been used more frequently in commercial real estate transactions rather than residential ones. With so many different disclosures and notices being required now at so many different stages of the lending process, the more clearly you delineate who the borrower is, the better off you are. Now, don’t get me wrong, obviously the ideal situation is to have all borrowers sign both the mortgage and the underlying note. But increasingly, couples are doing their own thing. For example, one spouse might be starting their own business while the other continues to work at a 9-5 job. As a result, clearly delineating the right to foreclose on property is becoming that much more important.