It’s a lot easier to support free speech when you only support the free speech you agree with. So I am sure that Google’s announcement that it will ban advertisements for payday loans starting on July 13 will win kneejerk plaudits from all the usual suspects and high praise for its “corporate responsibility.” That’s too bad. Here’s why.
First, defining a payday loan isn’t as easy as Google thinks it is. Just ask the CFPB which is still tinkering with its payday loan regulations. In its blog announcing the advertising ban, Google said it would apply to loans where repayment is due within 60 days of the date of issue or to loans with an APR of 36% or higher. Credit union payday alternative loans can require repayment within a month and, depending on how the APR is calculated, Google’s criteria could include loans provided by credit unions. As researchers at the New York Fed argued “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.”
Personally, I can’t stand these products and I would love to live in a world where there wasn’t a demand for them. But, there has always been and there will always be people in desperate need of cash. With its usury cap, payday loans are ostensibly banned in New York; but, New Yorkers get them every day. One of the reasons why Municipal Credit Union in New York City is one of the oldest credit unions in the country is because loan sharking was so rampant in the early 1900’s that people demanded a safe alternative. And it isn’t just the poor anymore. Approximately half of American households live paycheck to paycheck. Banning payday loan advertisements isn’t going to change that. Payday loans are a symptom of economic disparity and finding a cure is much more challenging than pretending that there isn’t a need for these loans.
Finally, there are issues here that are much more important than payday loans. I don’t want Google using its power to determine which products are worthy of being in the marketplace and what products are not. There would be a justifiable uproar this morning if Google announced that it was banning ads for birth control pills, for example, or no longer accepting advertisements for marijuana stores in states where they are legal; but you won’t hear an uproar this morning because payday loans are politically incorrect. The problem is that Big Brother is just as dangerous to free speech as a private sector behemoth than as a Government censor.
But, increasingly, Americans are only supportive of the free exchange of ideas that they agree with. This is not just unfortunate, it’s dangerous.
A couple’s home on Long Beach Long Island is destroyed by Hurricane Sandy. They fall on hard times and become delinquent on their mortgage loan. They file for Chapter 13 bankruptcy, which allows them to reorganize their debts, still owing hundreds of thousands of dollars on their mortgage loan.
The bank makes a reasonable business decision not to seek to exercise its lien but instead to allow the homeowners to keep their home which is worthless. The homeowners make the reasonable decision that they don’t want the home. Even though it is worthless, there are still property taxes to pay and the responsibility to maintain it. Over the bank’s objection the bankruptcy court agrees to a Chapter 13 reorganization plan in which the property is vested in the bank but Can the property vest in the bank over its objection?
The first court to look at this case answered that question with a Yes. ( In re Zair, 535 B.R. 15, 16 (Bankr. E.D.N.Y. 2015). It concluded that by surrendering the property to the bank, HSBC as the first lien holder, became the owner of the property.
Round 2 recently went to the bank when federal district court overruled the bankruptcy court. ( HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *1 (E.D.N.Y. Apr. 12, 2016). The case is important and instructive since it involves an exploration of what your credit union is actually getting with its mortgage.
As explained by the district court, a Chapter 13 repayment plan is only confirmable if, with respect to each secured creditor, one of the following is true: (1) the creditor consents to the plan; (2) the plan provides for the creditor to retain his security interest in his collateral and receive periodic payments equaling the present value of the collateral, or (3) the debtor agrees to surrender the collateral so that the creditor may pursue any legal remedies he may have.
What everyone agrees on is that a debtor can surrender his property to a creditor. What is in dispute is whether the surrender vests legal right and responsibilities for the property to the creditor\lienholder. (11 U.S.C.A. § 1322(b)(9) (West). HSBC argued that it could not be forced to assume responsibility for the property. Our homeowners argued that “Without being able to vest the property, as is specifically permitted under Section 1322(b)(9), the Debtors are at the whim of the [Bank] and will be incurring expenses associated with the Property, such as real estate taxes, until if and when the [Bank] completes a state court foreclosure.” HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *5 (E.D.N.Y. Apr. 12, 2016).
In the end the District court sided with the bank. It explained that “the Bank is entitled to the full array of property rights that accompany its position as first-priority lienholder, including and especially the right to foreclose its security interest, or to refrain from doing so.” The concept of surrender necessarily contemplates permit[ting] the creditor to exercise its property rights “to do nothing to recover its collateral”); HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *12 (E.D.N.Y. Apr. 12, 2016).
Why is this important? Because the stigma of walking away from a house is fading away and policy makers are looking for ways to make creditors take responsibility for vacant property without taking away foreclosure protections for debtors. You don’t want a world in which it becomes even easier for homeowners to reorganize their debts by making their underwater mortgage someone else’s problem.
The economy continues to look great on paper. If you’ve seen a spike in demand for consumer credit, you’re not alone. The Federal Reserve reported on Friday that consumer credit increased at an annual rate of 10 percent in March, a sharp rise that confounded the expectations of economists.
The Fed reports that credit unions continued a steady increase of consumer lending so far this year. The amount of consumer credit lent out in March by credit unions increased to $350.6 billion. Incidentally, the Federal Government is estimated to have held $986.2 billion in consumer debt thanks to student loans.
Earlier in the day, the Department of Labor reported total non-farm employment increased in April by 160,000 and that the unemployment rate remained steady at 5%. The jobs performance was a bit lower than economists had expected. The number of long term unemployed declined by 150,000 but continue to make up close to 26% of the unemployed. If you look at the demographic breakdown, the unemployment rate for Hispanics increased to 6.1% in April, while other groups largely remained unchanged. For instance, the unemployment rate for African-Americans remained at 8.8%, more than double that of Whites (4.3%).
I had some family over last night and we were all talking about how the economy just doesn’t seem as strong as the statistics say it is. I find it hard to believe that a truly healthy economy would be fertile ground for the nostrums offered by Mr. Sanders and Mr. Trump. And, how many of you are seeing members as anxious to borrow money as they were in previous economic upswings? Perhaps Friday’s consumer credit report is a turning point. Or maybe just another blip in the more general economic malaise.
Albany is getting down to its post-budget business, especially now that the seat vacated by former Senate Majority Leader Dean Skelos has been won by Democrat Todd Kaminsky. This week’s Senate Banks Committee agenda includes legislation important to credit unions.
Most importantly, legislation sponsored by Senator Savino (S.7183) would clarify when a mortgage is considered consummated under New York State Law. Under the TRID regulations, closing disclosures must be received by a homebuyer at least three business days before a mortgage loan is consummated. Currently, there is no statutory definition of consummation and there is case law that suggests that consummation actually occurs at the time that the credit union or bank sends a commitment letter to a mortgage applicant. The bill clarifies that for purpose of compliance with federal law, consummation occurs when a mortgage applicant signs a promissory note and mortgage. Here is a previous blog I’ve done on the topic.
A second bill on the Committee’s agenda, S.7434, mandates the creation of a state-wide data base of vacant foreclosed property. Under this bill, when a bank or credit union obtains a judgement of foreclosure on residential property that is or has become vacant or has been abandoned, the mortgagee is required to provide notice of the vacancy to the Department of Financial Services within ten days. The Attorney General (AG) and municipalities would have access to the database and the hope is that it will make it easier to hold mortgagees responsible for maintaining the property. The AG will have the authority to fine institutions that violate this section. Unlike a proposal previously put forward by the Attorney General, this bill does not seek to impose responsibilities on financial institutions for vacated property on which they have not obtained a judgement of foreclosure.
CFPB Unveils Class Action Protection Proposal
At a New Mexico field hearing yesterday, the CFPB formally unveiled a proposal that would prohibit banks and credit unions from including arbitration clauses in account agreements that prohibit consumers from joining class action lawsuits. The CFPB is taking this step pursuant to the Dodd-Frank Act which mandated that it study the use pre-dispute arbitration clauses and make regulatory changes where appropriate.
This is a big deal for many industries that have turned to arbitration clauses as a means of controlling liability risks. It is not clear to me how many credit unions use arbitration clauses, but at the hearing yesterday it was suggested that the use is growing in the industry, particularly by larger credit unions. If you would like to know my personal opinion of the CFPB’s proposal, here is a blog I did on arbitration clauses earlier this week for CU Insight (how’s that for a shameless plug, I figure if I take the time to write this stuff, I might as well encourage people to read it).
Here is a question for you to ponder over the weekend. Can a bankruptcy court overseeing a Chapter 13 reorganization vest legal title in residential property in a bank or credit union over the objection of a bank or credit union holding the mortgage on which it has not yet foreclosed? Or, put another way, you know that abandoned piece of property that simply isn’t worth foreclosing? Can you be made to take legal title? I’ll be providing the answer to this question next week. I am sure you can’t wait, but enjoy your weekend nevertheless.
President Obama may have named Rick Metsger Chairman of NCUA’s Board(https://www.ncua.gov/newsroom/Pages/news-2016-may-metsger-appointed-ncua-chairman.aspx) but Board member J. Mark McWatters has served notice that he is ready willing and able to play a decisive role in blocking regulations as long as he remains with NCUA.
The transition to a two member board provides the NCUA an opportunity “to avoid heavy handedness” and tailor rules to outliers he explained in a column explaining his in NCUA’s May newsletter. (http://www.ncuareport.org/ncuareport/april_2016?pg=7#pg7) In other venues he has been even blunter, explaining in a speech before the National Association of Credit Union Service Organizations that Matz’s departure presents an opportunity to hit the ” pause button” on new regulations. At the same time, McWatters has indicated an interest in instituting an 18 month exam cycle. Chairman Metsger has also consistently demonstrated an interest in mandate relief. The exam cycle might be an area of common ground.
Much of this comes as welcomed news to credit unions, even if the truly onerous regulations are coming from the CFPB these days. But remember, there are some things that credit unions want done. For example, NCUA still hasn’t finalized regulations making fields of membership for federal credit unions more flexible. And the guidance to accompany NCUA’s new MBL framework is something the industry will need time to understand and implement.
Remember too that this regulatory hiatus may continue for quite some time. We are in an election year and I don’t see anyone in a rush to replace Matz .This means that if and when McWatters gets to move over to the Export-Import Bank Chairman Metsger could be a very lonely man.
What happens if there is something that really has to be done? Only the shadow knows
There are two reasons governments nationalize corporations: (1) The company is losing money and it is considered too important to fail; or (2) it is making lots of money and the government wants to get its hands on it. Fannie and Freddie have had such a roller coaster ride since 2008 that they have been victimized by both impulses. Since credit unions have a vital stake in the future of the secondary market, they shouldn’t shy away from voicing their opinion.
Yesterday, Freddie Mac announced a $200 million loss for the first quarter. It attributed the loss to those blasted GAAP accounting rules. (If only companies could come up with their own financial statements without accountants getting in the way, the economy would be so much stronger.) Specifically they explained that interest rate volatility, combined with the way they book their derivatives, made things look worse than they actually are. Yada, yada, yada. http://www.freddiemac.com/investors/er/pdf/2016er-1q16_release.pdf
Freddie’s announcement raises questions about the continued wisdom of an aspect of US housing policy, which has thus far received too little attention. In September, 2008 the Government handed the GSEs a lifeline and $187 million was drawn from the treasury. Congress also empowered the FHFA to act as conservator or receiver of Fannie and Freddie, and to take over the rights of any stockholder, officer, or director. The Government originally took preferred stock; but, starting in 2012, the Government started sweeping all GSE profits exceeding capital buffers. Considering that the GSEs have made lots of money in recent years, this was a good deal for the Government. In fact, it was such a good deal that the Treasury is being sued by private stockholders claiming that the Government is taking money that belongs to them. Perry Capital LLC v. Lew, 70 F. Supp. 3d 208, 217-18 (D.D.C. 2014).
But, does this policy make sense if the GSEs are losing money? “This development reinforces my concern over current federal policy regarding the GSEs, who have more than fully repaid the funds they borrowed during the 2008 financial crisis,” said Rep. Michael Capuano, D-Mass. He is a member of the House Financial Services Committee, who has emerged as a level headed voice of reason on housing policy and was quoted in this morning’s American banker as saying. “Despite this, they must continue sweeping all their profits to the Treasury Department. The policy needlessly prevents them from building a capital reserve, which leaves taxpayers vulnerable in the event of a future crisis.” http://www.americanbanker.com/news/law-regulation/freddies-quarterly-loss-renews-cries-to-end-profit-sweep-1080807-1.html
A lot happened yesterday in NYS politics. Long-serving Southern Tier State Senator Thomas W. Libous, whose career terminated following a federal perjury conviction, passed away after battling prostate cancer.
Hugh Farley has announced he is leaving the State Senate after 40 years. For decades, Farley was one of the most influential banking policy makers as Chairman of the Senate Banks Committee.
And, of course, Sheldon Silver was sentenced to 12 years in jail, in addition to a hefty fine, and ordered to pay restitution of over $5 million.
On Friday, NCUA’s Office of Small Credit Union Initiatives released a series of video modules dedicated to “merging from the merging credit union’s perspective.” It’s like the flight attendant reminding passengers that their cushion can be used as a flotation device as they are flying over the Atlantic Ocean.
These videos would have been more appropriately titled “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” If you think I’m exaggerating, watch the videos for yourself.
The recurring themes are (1) there is no shame in merging; (2) merging when your credit union is relatively strong gives you more leverage than merging when you are weak; (3) merging can preserve and increase membership value; and (4) contracts can be negotiated to protect employees and services. And did I mention that there is no shame in merging, especially for those of you whose board meetings are taking on the look of the activity committee of a Boca retirement village? Module 2 ends with this uplifting quote from the CEO of a $900 million credit union: “Most small credit unions are too proud to merge. They see merger as a failure rather than a benefit to members. So they will only merge at the inflection point of a CEO retirement or financial stress.”
What bothers me about the videos isn’t their content: NCUA’s ever so subtle nudge is a reflection of reality. There are approximately 275 mergers a year. Mature industries consolidate, particularly in the financial sector. Besides, the trend is by no means unique to the credit union industry. Just ask First Niagara. People want cheap, effective products and services and the only way of providing this grab bag is to hold down costs and increase economies of scale. And, let’s be honest, a credit union with a shrinking membership and no strategic plan for growing the base isn’t helping anyone by living off its excess capital.
What concerns me about the videos is that unlike the commercial banking sector, the credit union industry could literally merge itself out of existence. As of December, there were 481 credit unions with $500 million or more in assets and a little more than 200 of those have assets of $1 billion or more. From a purely economic standpoint, many credit unions with less than $500 million should consider merging. But, the credit union industry is unique. While it’s indisputable that the bigger credit unions can more cost effectively provide services and that many of our largest credit unions use their increased size to give people a better deal than they would get from banks, it’s doubtful that the industries not-for-profit cooperative model can survive politically as if the industry is comprised almost exclusively of billion dollar institutions. It’s ultimately the small guys – even the endangered home-based CUs – that keep the industry viable.
The industry is unique in that it needs a healthy mix of asset sizes. If a credit union has no chance to grow then, of course, merging makes sense and you should take a look at these videos. But, I’m afraid that there are too many credit unions that are willing to give up without a fight.
For instance, there is a great generation of community conscience, tech savvy millennials: why are they in such short supply on credit union boards? States like New York have made important changes to help credit unions grow by expanding their fields of membership: why have so few credit unions taken advantage of these changes? Credit unions exemplify the cooperative model: why are they so reluctant to form CUSOs to combine back office services? With so many aging boards, why are there credit unions without succession plans? With so many Americans looking to make the most of their money, why are there credit unions that refuse low income status even though it would help them grow and help their members?
NCUA’s right. There is no shame in merging, but there is shame in going down without a fight.