Posts filed under ‘Regulatory’
As expected, at yesterday’s board meeting the NCUA proposed raising the cap below which a credit union is considered a small credit union for regulatory relief purposes from $50 to $100 million. According to NCUA, the increase means that an additional 745 credit unions will be eligible for potential relief from future regulations for a total of approximately 4,869.
Great job by the agency in coming forward with the proposal; but we won’t really know how much this helps the industry for some time to come. First, the agency has already exempted credit unions below the threshold from onerous mandates including those dealing with enhanced protections against interest rate risk and the proposed enhanced Risk-Based Capital framework. Second, many of the biggest mandates are out of NCUA’s hands. For example,the CFPB has been willing to extend mandate relief to institutions with as much as $2 billion dollars in assets, but these exemptions come with strings attached – such as a requirement that exempted institutions hold most of their mortgages. Thirdly, the fact that NCUA justifiably feels the need to dramatically raise the small credit union designation after having raised it from $10 million approximately two years ago shows you how quickly the industry is changing and not for the better. NCUA examined rates of deposit growth, rates of membership growth, rates of loan origination growth, and the ratio of operating costs to assets and determined that credit unions below $100 million are at a “competitive disadvantage” to their peers.
The branch is dead! Long live the branch!
I actually found myself muttering in disagreement as I read a report issued by the FDIC yesterday. It concluded, based on an analysis of bank branching patterns from as far back as 1935, that:
“New technologies have certainly created convenient new ways for bank customers to conduct business, yet there is little evidence that these new channels have done much to replace traditional brick-and-mortar offices where banking relationships are built. Convenient, online services are here to stay, but as long as personal service and relationships remain important, bankers and their customers will likely continue to do business face-to-face. “
Maybe the researchers who came to this conclusion can use their Blackberries to see if RadioShack could use their help. More on this in a future blog, but for those of you who still believe the branch model is alive and well, read away.
What would Karl Malden say?
Yesterday, the Justice Department scored a major antitrust victory when a federal judge in New York found American Express guilty of anti-trust violations. I haven’t read the 100+ page decision yet, but if I was Amex I would have gone to trial too.
One of the touchstones of antitrust law is market dominance. Amex isn’t exactly a card that your typical merchant has to accept these days if he wants to stay in business. It has been a long time since Karl Malden convinced consumers that they shouldn’t leave home without their American Express Card. The win underscores just how dominant a hand merchants have when it comes to demanding changes to the plastics industry.
By the way, if you are wondering what to do this weekend as you try to stay warm, On the Waterfront, starring Karl Malden and Marlon Brando, would be an excellent movie pick. It’s one of those cultural reference movies and includes the classic line “I could have been a contender.”
Maybe it’s because the desolate Albany landscape with its frozen mounds of exhaust-tinged snow and sub-zero temperatures makes me feel like I’m inhabiting a post-apocalyptic world, but a couple of days ago I got around to reading the FFEIC’s new appendix to its examination handbook dedicated to disaster preparedness entitled Strengthening the Resilience of Outsourced Technology Services. In all seriousness, it is a must-read for any credit union that has to have a business continuity plan (BCP) and contracts with third parties for services that should be integrated into this business plan. I bet that is almost every credit union.
Regulators have long emphasized the need for appropriate due diligence when entering into third-party relationships. In addition, Business Continuity Planning has been a major point of regulator emphasis since 9-11; not to mention that “once in a century storms” seem to be coming every other year. This new appendix zeros in on the importance to financial institutions of insuring that appropriate vendor services are integrated into BCP plans and testing. As the regulators commented in releasing the appendix, “a financial institution should ensure that its third-party service providers do not negatively affect its ability to appropriately recover IT systems and return critical functions to normal operations in a timely manner.“
The appendix highlights four key points of emphasis for examiners assessing third-party relationships.
(1) Third-party management addresses a financial institution management’s responsibility to control the business continuity risks associated with its third-party service providers (TSPs) and their subcontractors.
(2) Third-party capacity addresses the potential impact of a significant disruption on a third-party servicer’s ability to restore services to multiple clients.
(3) Testing with third-party TSPs addresses the importance of validating business continuity plans with TSPs and considerations for a robust third-party testing program.
(4) Cyber resilience covers aspects of BCP unique to disruptions caused by cyber events.
I don’t want anyone to break into a cold sweat thinking that a new compliance requirement is necessarily being imposed on them. If you don’t outsource core operational functions to third parties this appendix shouldn’t concern you much. But if your credit union can’t operate effectively unless a vendor is also on the job, then you have an obligation to work with that vendor and make sure that it has a Business Continuity Plan that is compatible with your own.
Think about it: if your vendor backs up all your account information at a facility down the block from your credit union, your BCP plan has some serious holes.
Don’t Fire Until You See the Whites of Their Eyes
Yesterday, the CU Times reported that Sen. Richard Shelby (R-Ala.), chairman of the Senate Banking, House and Urban Affairs Committee, would not rule out doing away with the credit union tax exemption as part of an overhaul of the tax code.
Shelby’s equivocation on the tax exemption underscores that tax reform poses dangers for credit unions, but his stance should hardly surprise anyone, nor should it send us scrambling to the ramparts as if the industry is in imminent danger. The fact is that in any push to overhaul the tax code a prominent veteran lawmaker like Shelby isn’t going to take anything off the table. There is a lot of negotiating to be done, if and when we ever get to a tax reform end game.
Should the industry be vigilant? Absolutely. But, in my ever so humble opinion (and I stress only my opinion), in recent years the industry has overreacted to the threat of tax reform with the result that it has not pushed aggressively enough for other parts of its agenda. There may come a time when we need to activate the grassroots in a major push to save the exemption, but that time is not here yet. In the meantime, let’s not let the bankers sideline our agenda every time they advocate for ending the exemption or draw too many conclusions every time a legislator gives less than 100 percent support for the industry.
In Congressional testimony yesterday, NCUA’s Larry Fazio announced that the agency would propose regulations providing regulatory relief to credit unions with less than $100 million in assets. Specifically, NCUA will be changing the definition of what constitutes a small entity credit union from one with $50 million in assets to one with less than $100 million in assets. Federal law gives NCUA the responsibility to consider the impact that proposed regulations have on smaller credit unions and to exempt such institutions from regulatory mandates when appropriate.
In January of 2013, NCUA amended the definition of the small entity from those with less than $10 million to those with less than $50 million in assets. At the time, NCUA estimated that this change meant that 67.8% of federally insured credit unions were designated as “small entities.” If NCUA follows through with its latest proposal, Fazio estimated that 77% of all credit unions would be eligible for enhanced regulatory relief.
Credit unions have already gotten a preview of how important such a shift could be with NCUA’s announcement that it is proposing to increase the threshold for Risk-Based Capital compliance from $50 to $100 million. In addition, credit unions with less than $50 million in assets were exempted from enhanced interest-rate risk policies. Going forward we won’t know for sure precisely what regulatory relief credit unions will entitled to until the regulation is finalized. At the very least, credit unions with less than $100 million in assets will be eligible for increased assistance from NCUA’s Office of Small Credit Union Initiatives and a framework has now been put in place to extend regulatory relief to a large majority of credit unions.
Now, don’t get me wrong. I think NCUA’s proposal is a great idea; but, the more the industry codifies distinctions between big and small credit unions, the more challenging it becomes to ensure that fundamental baseline distinctions between all credit unions and banks remain intact. You can bet a bank lobbyist will soon be arguing that if large credit unions are so different than small ones, why shouldn’t they be taxed. In addition, while regulatory relief is a welcome and important step by the NCUA, it will likely do little to halt the long term consolidation of the industry or the fact that those with $500 million or more in assets are the ones driving its aggregate growth.
As a result, I would like to see the industry couple the NCUA’s push for regulatory relief with an emphasis on recruiting the next generation of executives. I see a tremendous amount of enthusiasm displayed by people in their twenties and early thirties. I also see a fair number of people in their late fifties and early sixties nearing retirement. Mergers and consolidations are inevitable, but let’s make sure that credit unions don’t dissolve or merge because of a lack of potential leadership.
On that note, enjoy your day.
As someone who subscribes to the glass half-empty view of the U.S. economy, even I have to admit that Friday’s jobs report is a good indication that we will probably be seeing the Fed raise short term interest rates by the middle of this year.
The most important number to look at in terms of the employment numbers are those that assess wage and workforce participation growth. On both of these fronts, the news was moderately encouraging. Average hourly earnings rose by $0.12 to $24.75 in January. This is encouraging if only because average hourly wages actually dropped by $0.12 in December. Over the last twelve months, wages have grown a tepid 2.2%, but at least it is headed in the right direction.
As for my favorite statistic, the workforce participation rate, this increased to 62.9% in January, following a slight decline last month. Similarly, it’s actually a good sign that the unemployment rate ticked up slightly to 5.7%. This means that more people are actually looking for work. Remember the unemployment rate just represents the number of adults actively looking for work. The more long term unemployed you have, the less reliable it becomes as an indicator of economic growth.
Hanging together, or Hanging Separately
What to do as the big get bigger and the small stay small? As I’ve talked about in a previous blog, the Great Recession accentuated the divide between big and small credit unions. It’s an understatement to say that a disproportionate amount of the industry’s growth is coming from credit unions with $500 million or more in assets.
As a result, now more than ever before, credit unions have to combine resources. A great example of how this can be done comes from an article in today’s Wall Street Journal reporting that a group of small banks are joining together with Lending Club to expand their ability to offer consumer loans.
Participations are clearly a key element in any strategy to combine resources. In addition, websites like Lending Club are radically changing underwriting models. Increasingly, if banks and credit unions aren’t willing to provide uncollateralized loans, there is someone on the Internet who will. Of course, these raise huge compliance issues, most notably indirect lending doesn’t absolve a bank or a credit union from assessing the quality of a loan in which it participates. In addition, with credit unions, such loans can raise membership issues as well.
Still something needs to be done quickly. The WSJ points out that in 1994, banks and thrifts with less than $10 billion in assets held about 69% of U.S. consumer loans; that number has dropped to 9% as of 2014.
Last, But Not Least
I have advocated in this blog space for NCUA to provide live broadcasts of its board meetings. After all, for those of us who track regulations for a living, real time information about where the board members stand is a helpful indicator of what to expect in the future. Therefore, I want to give a belated thumbs up to the agency for announcing last week that starting with its February 19th board meeting, it will begin broadcasting these get-togethers live. Watch out C-SPAN.
Now that the blog’s done, I am going to have to tackle all that snow in my driveway. Amazingly, the snow didn’t magically disappear between the time I went to bed and got up. . .it’s days like this that I wonder why I live in the Northeast.
If today’s blog has a theme it’s how technology is continuing to evolve much quicker than our ability to properly regulate it.
Anthem breach likely to produce nervous members
Anthem Health Insurance disclosed yesterday that personal information involving tens of millions of customers have been compromised, According to a company press release, hackers gained unauthorized access to personal information from current and former members such as their names, birthdays, medical IDs/social security numbers, street addresses, email addresses and employment information, including income data. However the company has no evidence that “ credit card or medical information, such as claims, test results or diagnostic codes were targeted or compromised. ”Although the exact number of compromised records isn’t known the WSJ is reporting that the hackers gained access to data bases containing information on about 80 million customers.
Obviously expect calls from nervous members today wondering if they have been victimized by identity theft. The good news is that since Anthem decided to quickly disclose the breach the public may be better positioned than usual to prevent data thieves from taking full advantage of this treasure trove of personal data. Remember that under New York Law consumers may request that credit reporting agencies place a freeze on access to their credit reports. N.Y. Gen. Bus. Law § 380-t (McKinney).
Here is the company’s press release:
Given the pressing need to improve our nation’s cyber security infrastructure you might thing that a law that deters financial institutions from adopting the latest security is a bad idea. That is exactly what the Durbin amendment is doing. In an interview published by BankInfo Security Kimberly Lawrence, Senior VP of Global Corporate Initiatives for Visa estimates that by the end of 2015 70 percent of credit cards will be EMV chip enabled but only close to 40 percent of debit cards will be.
Why the difference? One reason is that Durbin makes EMV chip migration more expensive and challenging. It requires merchants to have a choice of two unaffiliated networks for processing transactions. EMV was never designed to interact with more than one network at a time so workarounds have had to be created . In addition, with merchant litigation challenging the Federal Reserve’s implementation of Durbin only recently concluded the regulatory environment has remained unsettled. Incidentally Lawrence , estimates that 50% of merchants will be able to accept the cards.
Remember that starting in October Visa and Mastercard shift liability for unauthorized transactions from an issuer that uses EMV cards to a merchant who does not. There is no requirement that both Debit and credit cards be EMV enabled at the same time You could even decide to forego EMV conversion completely if you decide the costs of conversion outweigh its benefits. Here is an article and interview.
Silk Road Founder Guilty
Ross Ulbricht, aka Dread Pirate Roberts, was found guilty yesterday of several counts related to drug trafficking and money laundering. As I explained in a previous blog (https://newyorksstateofmind.wordpress.com/2013/10/04/another-black-eye-for-the-bitcoin) by using the so called “hidden internet” he was able to offer an ebay like service for purchasing drug paraphernalia . Prosecutors alleged that he took a commission on all the sales, which were paid for with Bitcoins. His arrest underscored the concerns of public officials who argue that the computer generated currency could be a handy means of executing illegal transactions and should be closely monitored.
In a statement, US Attorney Preet Bharara proclaimed that Ulbricht’s conviction and the seizure of millions of dollars of Silk Road Bitcoins “ should send a clear message to anyone else attempting to operate an online criminal enterprise. The supposed anonymity of the dark web is not a protective shield from arrest and prosecution.” http://www.wsj.com/articles/silk-road-creator-found-guilty-of-cybercrimes-1423083107?mod=djemalertNEWS
Preet’s enthusiasm notwithstanding, with the amount of money to be made and the technology to make it possible I don’t think we have seen the last of the internet’s Silk Roads. This is your faithful blogger, AKA Dread Pirate Roberts, wishing all of you a pleasant day.
Yesterday brought us another example of the CFPB at its best. It proposed several amendments to its mortgage rules that will make it easier for institutions to quality as small creditors for purposes of the mortgage rules. This designation is important because it is easier for smaller institutions to make qualified mortgages than it is for their larger counterparts. For example, small creditors aren’t subject to stringent debt to income ratio requirements.
Under existing law, to qualify as a small creditor an institution must make 500 or fewer mortgages in a calendar year and have $2 billion or less in assets. The CFPB is proposing to raise that threshold from 500 to 2,000 mortgages. In addition, creditors that reach the magical 2,000 threshold will be given a grace period so they have time to adjust to the tougher QM standards.
In addition, according to the preamble, the Bureau’s proposal “also makes the limit applicable only to loans not held in portfolios by the creditor or its affiliates.” This clarifies that a loan transferred by a creditor to its affiliates does not count toward the threshold limit as long as the affiliate doesn’t subsequently sell the mortgage. The proposal also expands the definition of rural areas, which is helpful for QM purposes. On the negative side, the proposal would include the assets of a creditor’s mortgage originating affiliate(s) for purposes of calculating the $2 billion threshold.
Say what you want about the Bureau. It not only talks the talk, it walks the walk. It estimates that this proposal would expand the number of institutions that qualify as small creditors from 9,700 to about 10,400. The Bureau has been handed the unenviable task of strengthening mortgage underwriting standards without dramatically decreasing the number of people who ultimately qualify for a mortgage. To be sure, you won’t find this mandate in statute, but the American public and the politicians they elect are still inclined to believe that you can raise mortgage standards without keeping people from owning the home of their dreams. The Bureau’s the only agency I know that assiduously monitors the impact of its regulations on an ongoing basis and moves swiftly when it sees that its proposals have gone too far. Here’s a link to the proposal.
I’ll be back blogging on Tuesday as I am taking Monday off so that I don’t have to rush back from Long Island after celebrating at the 39th Annual Meier Family Superbowl Party.
In addition to telling credit unions to take a deep breath and a serious look at NCUA’s RBC 2 proposal, there’s one other aspect of the new approach to Risk-Based Capital that deserves serious consideration. Specifically, by creating a separate category of commercial loans and distinguishing these types of loans from traditional Member Business Loans, NCUA may be signaling that it is going to use its regulatory powers to consider granting credit unions greater flexibility from MBL cap constraints.
For example, as NCUA explained in a December 28, 2004 opinion letter (Exception to MBL Definition Letter), it has been the agency’s position since the early 1990s that even though loans secured by a member’s primary residence are not considered MBLs, a credit union must determine whether property is or will be the principle residence of the member borrower. In other words, that vacation home is an MBL loan. In contrast, the NCUA explains on page 228 of the preamble to RBC 2 that its proposed definition of a commercial loan would include all commercial purpose loans, regardless of dollar amount but exclude 1-4 family non-owner occupied first-lien real estate loans, which would instead be weighted as residential real estate. This change makes sense from a policy standpoint – after all, the member’s second home in Florida really isn’t a business investment.
A similar change would be made with regard to vehicle loans. For example, a loan to finance a fleet of vehicles would understandably be considered a commercial loan. In contrast, a consumer loan for risk rating purposes would be defined to include any loans secured by vehicles generally manufactured for personal, family or household use regardless of the purpose of the loan.
I’ve heard some credit unions complain that this proposal will create confusion by creating a commercial loan category distinct from MBLs. But remember, the commercial loan/MBL distinction only applies to the Risk-Based Capital framework. In addition, if NCUA decides to use it as a template for giving credit unions greater flexibility to make MBLs in the future, then I – for one – believe that a little more complexity is a price well worth paying.