In the movie The Untouchables, in which Kevin Costner plays an idealistic Eliot Ness trying to take down Al Capone within the law, an exasperated, street-wise beat cop played by Sean Connery explains that to take down the mob, if they put one of your guys in the hospital, you put one of their guys in the morgue.
News Flash: The banking lobby is out to kill the credit union industry or at least maul it beyond recognition. This is one of those times when it’s important to fight back for the sake of fighting back. I am usually not a big fan of comment letters for the sake of comment letters but this is an exception. And if you get a chance, tell your Congressmen and Senators that the Bankers have gone off the deep end.
The ostensible issue triggering the latest scrap is NCUA’s proposed amendments to its Chartering and Field of Membership manual to give federal credit unions greater flexibility in expanding their fields of membership. As highlighted by an article in this morning’s American Banker, the bankers are going downright apoplectic over the proposal, implying that NCUA is trying to circumvent the law and putting tax dollars at risk. We have heard it all before. (http://www.americanbanker.com/news/community-banking/fight-over-credit-union-membership-flares-up-again-1079054-1.html?utm_medium=email&ET=americanbanker:e5995385:4561993a:&utm_source=newsletter&utm_campaign=daily%20briefing-jan%2028%202016&st=email&eid=346f8f5eef3bcd6205524af410f42291)
In reality, many of the proposed changes, though important, are not the type of fundamental changes that would provide huge benefits for all credit unions. This is not a criticism of NCUA simply a recognition of the fact that it is adhering to the laws that bankers are suggesting they are seeking to violate. The result is that the banking industry is more ginned up in opposing these regulations than the industry is about supporting it. And that has to change. There are some fights that have to be fought out of principal, and this is one of them.
I’m not suggesting that NCUA will back away from these amendments. What concerns me is that, in an age when the person who screams the loudest, no matter how incoherently he rants, gets the most attention. Banks are coming across as more upset over the proposal than credit unions are enthusiastic about it. While both reactions make some sense this is the latest skirmish in which the industry has to fight back and fight back hard.
Why is it so important? The banking industry has a two prong strategy for attacking our industry: (1) Keep it from growing by strangling credit unions within their antiquated FOM constraints; and (2) end the tax exempt status of the industry by arguing that it is putting community banks at risk and is somehow unworthy of the exemption.
The first goal can be achieved primarily with lawsuits and regulatory advocacy. The second goal is a legislative one.
The uncompromising opposition of bankers to any credit union growth already has impacted all credit unions. The implicit message the banks consistently send to politicians is that helping credit unions simply isn’t worth the hassle. And NCUA’s amendments, while helpful, are still more restrictive than they need to be. The industry has to lay the groundwork for amendments more dramatic than HR 1151. If it doesn’t use this and other opportunities to be heard above the banker noise, this is never going to happen.
I’ve been intrigued by this question for a while now. While some costs related to data breaches, such as the replacement cost of compromised cards, are easy enough to quantify, the costs related to reputational damage are both much harder to quantify and potentially much more impactful to your credit union’s bottom line.
Against that backdrop, I’ve always been on the lookout for surveys gauging consumer attitudes toward cybersecurity. The latest such survey I found was recently released by the consulting firm Morrison and Foster. The most intriguing take away from its analysis is that at least once in the last year, 35% of its 900 respondents had decided not to purchase products or services because of privacy concerns. In addition, when you look at the privacy issues that most concern consumers, there is little wonder why financial institutions have a particularly acute interest in mitigating cyber theft. Half of the respondents said that identity theft was their biggest privacy concern.
When the survey broke out what consumers consider their most sensitive pieces of information, there is little wonder why financial institutions have to take cyber security particularly seriously. In both 2011 and 2015, survey respondents listed their social security number, passwords and IDs used to access accounts and services, and payment card information as their most important concerns.
Finally, consumers take the risk of identity theft much more seriously than they did four years ago. In 2015, 52% of the respondents indicated that identity theft was their primary privacy concern compared to only 24% in 2011. In contrast, only 3% of respondents listed government monitoring as their primary privacy concern, a decrease of 4% since 2011.
Does all this mean that you run the risk of losing members based on the perception of your cyber protections? Maybe not. When the same respondents were asked why they trusts companies with their personal information, 24% responded that no company is perfect. As the survey analysis explained, “some consumers have given up on the ability of companies to protect sensitive and personal information.”
Consumer ambivalence is what intrigues me so much about this issue. On the one hand, they expect and deserve a baseline commitment to protect their privacy. On the other hand, the CEO could easily bankrupt the credit union investing is cybersecurity technology. The challenge is finding the sweet spot that mitigates risk, provides consumers with the latest technology and is respectful of the bottom line.
The latest example of how the New York middle class is being pushed to the breaking point comes courtesy of Long Island.
It goes without saying that whenever politicians talk about holding the line on taxes, you can bet fees are going to go up; but my Long Island brethren are taking this to an extreme. The fees homeowners have to pay for processing real estate transactions in Nassau and Suffolk Counties are going through the roof. Even if you are one of those Up-Staters, who proudly proclaim that they have never driven on the Long Island Expressway and never ever will, the story is worth noting. Many counties across the state are both looking for funds and trying to keep taxes down.
Just how bad is it on Long Island? According to the January 15th issue of the Long Island Business News, 2016 has seen fees increase as much as 300 percent, causing closing costs to rise to as much as $2,000. According to the paper, real estate fees now cost the Nassau County home owner $1,920 in Nassau, $945.50 in Suffolk but only $345 in Westchester. Just how ridiculous is it? A Mortgage Satisfaction Letter now costs $570.50 in Nassau County and $245 in Suffolk but “only” $120 in Westchester and $112 in NYC. It costs $645 to record a deed in Nassau, $315 in Suffolk but only $120 in Westchester. http://libn.com/2016/01/15/fee-fright)
I know some of you are saying that this is the price people choose to pay for living on Long Island; the problem is that these fees are inherently regressive. They have to be paid by everyone regardless of whether or not they scrimped and saved to buy a relatively modest starter home or their dream home. Also, you are talking about areas that already have among the highest recording taxes in the nation.
Besides Nassau and Suffolk are extreme examples of what troubles me about the State as a whole. While there are many areas in the state where people can be assured of their kids getting a world-class education; the middle class is being nickeled and dimed out of existence and being forced to pay for the maintenance of government services that are simply not sustainable. A nephew of mine in his twenties has moved to Austin and if I was in my twenties I would go south as well. That’s where the growth is. Low taxes and warm weather are an attractive combination.
Yesterday, the NCUA held a board meeting but the most interesting news to come out of the agency was its joint announcement with the Treasury Department that they would be streamlining the process for credit unions to become Certified Depository Financial Institutions (CDFI). The agencies hope to double the number of credit unions with that designation by the end of 2016. According to the Treasury, there are currently 296 certified CDFIs, the majority of which are already designated as low-income credit unions.
CDFIs are institutions that have as a primary mission promoting community development. Low-income credit unions are already eligible for many of the benefits that come with a CDFI designation, but CDFIs are eligible for additional technical and financial support from the Treasury Department. To me, it seems like a great idea. But I’ve been surprised by the number of credit unions reluctant to be designated low-income and I will be curious to see if history repeats itself when it comes to CDFI certification.
Credit Unions Get Opportunity to Comment On Overhead Transfer Rate
Score one for NASCUS. The Association led the charge to open up NCUA’s process for determining the Overhead Transfer Rate to greater public scrutiny. Yesterday, NCUA followed through on a promise and announced that it would take public comments on how the agency’s Overhead Transfer Rate and federal credit unions operating fee are calculated. Now it’s time for the industry to put up or shut up on this issue. NCUA has always been skeptical that industry feedback on this issue would be of much value. If the industry doesn’t respond to this opening with thoughtful analysis, their skepticism will be vindicated.
NCUA Outlines Supervisory Priorities for 2016
NCUA released a letter to federally insured credit unions (that includes you state charters) outlining its supervisory priorities for the coming year. On the top of its list was cyber security assessment. All credit unions are encouraged to use the Cyber Security Assessment Tool released by the FFIEC last June. Here’s a blog I did on this issue last year.
Other priorities include credit union incident response procedures for data breaches regarding member information and BSA compliance with a special emphasis on the risk posed by Money Service Businesses. The complete list is available here and is worth a read.
There are even more issues I could talk about today, but there is other work to be done and there’s a little more than 48 hours to go before the Patriots and Tom Brady send Peyton Manning into retirement with a humiliating defeat. On that note, have a great day.
NY’s Department of Financial services on Tuesday clarified the index to be used by lenders to determine if a residential mortgage loan is a subprime loan.
Under Banking law Section 6-M a subprime home loan “means a home loan in which the initial interest rate or the fully-indexed rate, whichever is higher, exceeds by more than one and three-quarters percentage points for a first-lien loan, or by more than three and three-quarters percentage points for a subordinate-lien loan, the average commitment rate for loans in the northeast region with a comparable duration to the duration of such home loan, as published by the Federal Home Loan Mortgage Corporation (herein “Freddie Mac”) in its weekly Primary Mortgage Market Survey (PMMS) posted in the week prior to the week in which the lender provides the ‘good faith estimate’”
The catch is that Freddie Mac sopped publishing the index on January 1st. The DFS announced that in its place the Freddie Mac PMMS average commitment rate for loans in the United States should now be used as the appropriate threshold. The 1-year Average Prime Offer Rate, as published by the Federal Financial Institutions Examination Council, is now “ the appropriate metric for calculating the subprime threshold for loans with a fixed rate of less than three years.” (http://www.dfs.ny.gov/legal/industry/il160119.pdf)
The Point will be providing more of the specifics on the memo and I know our Compliance department will also be spreading the word as well so I am going to pull back the lens a little. There is an assumption on the part of some federal credit unions that they are automatically not subject to state laws. Categorical assumptions of this kind are dangerous. For instance 6-M applies to “exempt organizations” which state law defines as including both state and federal banks and credit unions. (N.Y.Banking Law § 590 (1)€ (McKinney).
Sure, NCUA has broad preemption powers. For instance, it has repeatedly explained in opinions of counsel that it has the authority to preempt “any state law” purporting to limit or affect rates of interest and amounts of finance charges”. But New York law doesn’t limit what mortgage rates can be charged but simply imposes additional disclosure requirements on subprime lenders. Besides NCUA has never opined that 6-M is preempted by federal law. (https://www.ncua.gov/Legal/OpinionLetters/OL1997-0225.pdf)
One more thing: Don’t assume that your credit union doesn’t make subprime loans. With interest rates at historic lows it is surprisingly easy to trigger the NY tripwire. If you aren’t running your rates against the 6-M criteria you should be.
The most intriguing change NCUA is proposing to its Chartering and Field of Membership Manual that it officially issued on December 10th is one that would, for the first time, acknowledge that technology is transforming banking. This change alone makes NCUA’s proposed changes intended to give federal credit unions greater flexibility in expanding their membership worthy of the full- throated support of the entire industry. At the same time, the proposal’s limitations underscore that the truly radical changes that need to be made to credit union membership requirements can only come by way of Congress.
Currently, when a multiple common bond credit union seeks to add a select group of members it must demonstrate that the group to be served is within “reasonable proximity” to the credit union’s “service area,” which includes reasonable proximity to a credit union branch, shared branch, a mobile branch that visits the same location on a weekly basis or a credit union owned electronic facility. In other words. If a potential member can’t walk or drive to a physical location that member doesn’t have access to a credit union’s services.
This is nonsense. NCUA wants to end this antiquated view of the world at least for multiple common bond credit unions. It is proposing that groups be considered to have reasonable access to a service facility so long as they have online access to a transactional website.
Just how important is this change? It’s a step in the right direction, albeit a baby step towards giving federal credit unions the flexibility they need to compete in a world in which technology is making the traditional brick-and-mortar model of banking obsolete and fundamentally changing the concept of what should be considered a community.
For instance, this morning’s New York Times reports that the growth of so-called financial technology companies has the biggest banks in the world scrambling to develop online, smartphone-driven banking platforms. It explains that “some banking habits are changing across the population. In 2010, 40 percent of Americans with bank accounts visited a physical branch once a week, while only 9 percent made a mobile transaction weekly, according to survey research by Javelin Strategy and Research. By 2014, the percentage reporting weekly visits to bank branches fell to 28 percent, while the weekly mobile banking share tripled, to 27 percent.”
Meanwhile credit unions are constrained by reasonable proximity tests. Of course the regulation is a good first step but it doesn’t go far enough, fast enough. The change that needs to be made is one that replaces the requirements that community credit unions operate in “well-defined local communities” with one requiring credit unions to operate in well- defined communities. After all, Merriam Webster defines a community not only as “ a group of people who live in the same area (such as a city, town, or neighborhood)” but also as “ a group of people who have the same interests, religion, race, etc.“ The problem is that by mandating that communities be “local,” Congress constrained growth to communities in the same proximity
Still NCUA’s proposal is an important one and you should take the time to express your support. You have until February 8th to do so.
It might not be sexy, but credit unions scored an important regulatory victory earlier this week when the Federal Housing Finance Agency (FHFA) decided not to impose additional requirements on financial institutions that are members of the Federal Home Loan Bank system even as it went ahead with tighter regulation of the insurance industry. I know that sounds about as exciting as watching public access television, so let me explain.
The Federal Home Loan Bank system is made up of 12 regionally based banks funded by membership investment. It has been around since 1932. It is one of those Depression-era creations of the federal government intended to, in the words of the Supreme Court , put “ long term funds in the hands of local institutions in order to alleviate the pressing need of homeowners for low cost” mortgages (See Laurens Fed. Sav. & Loan Ass’n v. S. Carolina Tax Comm’n, 365 U.S. 517, 521-22, (1961). As of 2014, 19% of credit unions were bank members.
Institutions applying for membership have to have 10% of their assets in mortgage loans at the time they apply. (An exemption from this requirement for institutions with less than $1 billion in assets doesn’t apply to credit unions). The proposal under consideration by the FHFA would have required that this and other asset requirements be assessed on an ongoing basis. This would have been particularly troubling, because many credit unions sell their mortgages to Fannie and Freddie. It also was another example of regulatory overkill. Remember this proposed regulation came out just as the NCUA was unveiling proposed risk weightings for larger credit unions subject to risk based capital requirements.
Fortunately, commonsense prevailed. In announcing the final regulations, the FHFA decided that “While members’ ongoing commitment to housing finance is important to ensuring fidelity to the Bank Act, FHFA believes that the statutory requirement for members to continue their commitment to housing finance can be addressed, for the time being, by monitoring the levels of residential mortgage assets they hold.“
Credit unions almost got caught in the crossfire of a much bigger battle involving the insurance industry that you may continue to hear about. Insurance companies are allowed to be bank members because many of them invest in mortgages. According to the agency, captive insurance companies are being created by Real Estate Investment Trusts primarily so that they can qualify for FHLB membership. Subsequently, the insurance companies transfer FHLB advances to their parent REITs. The final regulation still makes captives ineligible for membership but existing captive members will have five years to pack their bags.
Folks, regulatory advocacy might not be exciting. Whenever my kids ask me what I do for a living, their eyes glaze over. But the FHFA’s final rule is the latest example of how it really does make a difference.
I will be back on Tuesday. Have a great long weekend.