Regulators are once again proposing restrictions on the way federal student loan aid is distributed and banks are once again crying foul. It’s a predictable and increasingly tiresome sideshow that keeps us from focusing on the real problem confronting our higher education system: the skyrocketing cost of a college degree.
Before I get on my soapbox, here is the informational part of today’s blog. According to the U.S. Department of Education, there has been a proliferation of agreements between financial institutions and colleges whereby financial institutions offer prepaid cards and debit cards on which students can receive their federal student aid. These cards can also be co-branded with the college’s logo. According to the Government Accountability Office, 11% of colleges and universities participating in federal student aid programs have entered into these kinds of agreements and 40% of all post-secondary students are enrolled in such institutions.
On Friday, the U.S. Department of Education proposed regulations to clamp down on these contracts. According to the Department, the proposed regulations would prohibit institutions from requiring students or parents to open specified accounts into which credit balances are deposited; require institutions to ensure that students are not charged overdraft fees on an account offered by a financial institution with which the school has a contractual relationship; require colleges and universities to provide a list of options from which students may choose to receive credit balances; and require institutions to ensure that payments made to a student’s pre-existing accounts are as timely as and no more onerous to the student as those accounts marketed to the student. The regulation is published in today’s Federal Register.
Banks responded quickly to this proposal saying that these existing arrangements offer students a cost-effective means of accessing their funds and suggesting that the Education Department may be overstepping its jurisdiction by prohibiting overdraft fees.
Now I am climbing on to my soapbox. For more than a decade now, advocates for higher education reform have complained bitterly about the cozy relationships that some colleges have entered into with financial institutions. For instance, Governor Cuomo drew national attention as Attorney General for his investigation into the relationship between academic institutions and banks.
There is nothing wrong with any of these proposals, but let’s not delude ourselves into thinking that banking practices are to blame for the skyrocketing cost of a college education. According to the College Board, the average cost of tuition at a public, four-year college for an in-state student is $9,100. The average tuition at a four-year private college is $31,231. Remember this doesn’t cover living expenses, books and beer money. I wish the groups advocating for the type of regulations proposed by the Education Department would call for an investigation into the skyrocketing cost of getting a college degree in this country. Increasingly, it seems to me as if the children of middle class parents are being held hostage by institutions of higher learning: pay us whatever we ask for or risk your child’s future.
As you all know by now, starting in August remodeled closing statements will have to be received by buyers three business days before a mortgage loan is consummated. Recently, Richard Cordray told a gathering of realtors that the closing industry has nothing to fear from this requirement. As someone who has criticized this mandate I want to give you the other side of the argument before I explain why the Director’s response is about as misguided as the Patriots’ defense of Tom Brady.
He explained that:
“The three-day requirement should not interfere with a successful closing, as some have claimed. In fact, there has been some serious misunderstanding about what kinds of major changes would cause a delay of the closing date, so I want to take a moment to clear that up right now.
The timing of the closing date is not going to change based on any problems you discover with the home on the final walk-through, even matters that may change some of the sales terms or require seller’s credits. On the contrary, we listened carefully to your concerns and limited the reasons for closing delays to only three narrow sets of circumstances: (1) any increases to the APR by more than 1/8 of a percent for fixed-rate loans or more than 1/4 of a percent for variable-rate loans; (2) the addition of a prepayment penalty; or (3) a change in the basic loan product, such as moving from a fixed-rate loan to a variable-rate loan. That is it. We recognize that various other things can and do change in the days leading up to the closing, so the rule makes allowances for those ordinary changes without delaying the closing date in ways that neither the buyer nor the seller may be able to accommodate very easily.”
This is one that the Director and I are going to have to agree to disagree on. The logistics involved in implementing this proposal are a mess. A member is presumed to have received a closing disclosure three business days after it is delivered or placed in the mail. For example If you are using snail mail-which is the safest way of complying with the three day requirement-and , you are open on Saturday and there are no intervening holidays you are going to have to get your closing statement out on a Thursday to close the following Thursday. Try working that out with your attorneys.
Major mathematical glitches occur and paperwork is misplaced When these occur and the closing is delayed because you got the paperwork out late or a serious problem is discovered at closing I would suggest letting your member vent by having them call the CFPB.
To its credit the CFPB has responded to legitimate concerns in the past. There are some commonsense compromises that it should implement (1) Create a same day presumption of receipt for all closing disclosures delivered by email where the member has explicitly agreed to accept these documents by email. As it stands now you can use email but the three days that the member needs to stare at the closing document don’t start running until receipt is acknowledged. I personally miss email all the time. (2)Create a next day presumption of receipt for overnight mail and (3) Authorize waiver of the three day requirement when a transaction must be completed within three days to provide funding for a subsequent home purchase.
The first two changes were considered but rejected by the Bureau when it promulgated these regulations. This last change would mean that no one is denied the house of their dreams because the federal government thinks it will be a good idea for them to stare at their closing documents for three days.
With apologies to those of you who hate sports analogies, some recent research produced by the Federal Reserve Banks of New York and Chicago demonstrates that we are living in a wedge shot economy: it looks great from about 150 yards out but as you get closer things aren’t quite as good as they seem. Suffice it to say that Fed officials have a tough decision to make about when to raise short term interest rates. If the economy is gaining strength, the time to start raising rates is now or the economy could overheat. Conversely, imposing interest rates on a feeble economy is the financial equivalent of bloodletting.
Just how sluggish is the economy? The first bit of analysis comes from the Federal Reserve Bank of New York’s Liberty Street Blog, which, by the way, is a site well worth bookmarking for anyone interested in following economic trends in a digestible format. It analyzed the most recent Quarterly Report on Household Debt and Credit and its findings go a long way toward explaining why the housing industry has lagged as a stimulus to economic growth even as the worst of the Great Recession fades in the rearview mirror.
Credit card spending is rising for people across the credit score spectrum but even the most credit worthy borrowers are holding back on housing debt. New mortgage originations are 70% lower than they were in 2013. In addition, since 2008, the “lions share” of new mortgages have gone to persons with credit scores of at least 720.” This presumably older and cash heavy demographic isn’t snapping up McMansions at bargain prices either. Instead “[t]he upsurge in originations by creditworthy borrowers in 2012 and 2013 consisted mostly of refinances and added relatively little to outstanding balances, thanks to record low mortgage rates.” In other words, the people with the best credit and most money to spend are cutting back on home buying just when the economy needs it most. Truly patriotic Americans would be taking on debt for the good of the nation. Just joking.
Then there is the more heated debate about just how good a job the economy is doing creating jobs for people who want them. Economists will tell you that every economy has a natural rate of unemployment. Policymakers have to determine what that rate is and raise rates once slack is out of the economy.
Look at the headlines and an economy with an unemployment rate of 5.4% adding more than 200,000 new jobs is enough to make any self-respecting inflation hawk break into a cold sweat. After all, do we really want a repeat of the late 70’s with its toxic mix of high interest rates, high inflation and disco?
But what if demographics have changed the potential workforce and there is a lot more slack in the economy than the headline numbers suggest? If this is the case, it is a best premature and at worst counterproductive to raise rates.
The latest researchers to wade into this conundrum are from the Federal Reserve Bank of Chicago. In a recent report, Changing Labor Force Composition and the Natural Rate of Unemployment, they argue that changing demographics mean that the economy has a naturally lower level of natural unemployment than it did just 15 years ago. Consequently, policy makers can wait longer before dampening economic growth. They argue that demographics are destiny and that a growing supply of college educated job applicants and unemployed teens will create an economy better able to accommodate workforce expansion. According to their calculations, the natural rate of unemployment is currently slightly below 5% and will, if present trends continue, decrease to around 4.4% to 4.8% by 2020.
The problem I have with this argument is that it assumes that a college degree will always equal employment and that teens will naturally be absorbed into the workforce as they age. I hope they are right, but, increasingly, I have my doubts.
On that cheerful note, get to work and keep working.
The news that Sylvia G. Ash has been named the first woman chair of the Board of Directors in Municipal’s 99 year history has a symbolic importance that we should all take a moment to consider this morning. We spend so much time thinking about how to make our businesses, communities and government better that we sometimes lose sight of the fact that change does come and it tends to be for the better.
Municipal was formed 99 years ago, making it the oldest credit union in the state. This means that when it was formed, women didn’t have a Constitutional right to vote, could be discriminated against on the basis of their gender, and had few legal rights independent of their husbands. An 1889 article published in the Banking Law Journal entitled “Can a Woman Legally Hold the Office of Director in a National Bank?” gives you a sense of just how radical this idea would have been. The author boldly proclaimed “I am clearly of the opinion that women are qualified to and may legally act as directors of national banks. . . This would, of course, also lead to the conclusion that, in the absence of any state statute to the contrary, they could also lawfully act in the directorate of state banks.” This is the type of legal analysis that used to pass for bold and progressive back in the day.
Ms. Ash is also African-American. Federal law didn’t ban racial or gender discrimination in employment until the mid-1960s. Finally, Ms. Ash is also an accomplished attorney and Judge who, incidentally, graduated from Howard University, where Thurgood Marshall also got his law degree. At one point, Howard University was responsible for graduating half of the nation’s African-American lawyers.
In a small way, the selection of Ms. Ash helps demonstrate that times really do change, ideas matter and advocacy makes a difference, at least in the long run. Some of you might be reading this and saying to yourself that this would have been big news in the 1960s, but not in 2015. My point is that if we don’t appreciate how far we’ve come, we won’t have a particularly good sense of how best to continue the journey.
Nothing to do with credit unions but yesterday Tom Brady was suspended four games for having his footballs deflated prior to the AFC championship game.
Let me get this straight: He won the game and won the Super Bowl. His punishment is to spend four extra weeks on the couch at home watching the games with his super model wife Gisele Bundchen rather than being scowled out by Bill Belichick as he gets attacked by a bunch of 300 pound defensive lineman with 4-4 speed out to cripple him? Sign me up.
Target Settlement Can Go Forward
Effectively saying his hands were tied, a federal judge in Minnesota refused to block a proposed settlement between Mastercard and Target from going forward. Under the agreement $19 million is being set aside for eligible banks and credit unions to settle their claims for operational costs and fraud-related losses on MasterCard-branded cards affected by the data breach. Upon accepting the offer, each issuer will release MasterCard, Target and its acquiring banks from all claims related to the data breach.
The settlement takes effect if 90% of eligible issuers opt into it by May 20th . A group representing smaller banks and credit unions argued that the court should block the settlement because it does not adequately compensate smaller issuers or explain the consequences of the settlement.
“The agreement between Target and MasterCard is nothing more than an attempt by Target to avoid fully reimbursing financial institutions for losses they suffered due to one of the largest data breaches in U.S. history,” said an email from the banks’ co-lead counsels, Charles Zimmerman of Zimmerman Reed and Karl Cambronne of Chestnut Cambronne according to today’s American Banker. The attorneys have previously argued that the settlement is a “sweetheart” deal that provides issues with paltry settlements.
The judge was by no means unsympathetic to these concerns however he decided that the banks’ “issues with the settlement are understandable, but they are also not susceptible of a legal remedy,” according to the paper.
The institutions seeking to block the settlement were Umpqua Bank, Mutual Bank, Village Bank, CSE Federal Credit Union, and First Federal Savings of Lorain.
Flanagan Takes The Helm
When a Speaker is chosen for the House of Parliament in Great Britain he is ceremonially dragged to his new seat. After all, If the Monarch was displeased with parliament the first person attacked was the speaker.
Suffolk County Republican Chairman John Flanagan was chosen as the new head of the New York State Senate replacing Dean Skelos who was recently arrested on corruption charges.
I got to know the Senator when I worked in the Assembly Minority and he was the Ranking Member of the Ways & Means Committee. He was by no means dragged to this position but he faces some extremely tough challenges leading a conference were Republicans hold a one seat majority and public confidence is shaken.
That being said, he’s a great pick. He has been either a close observer or intimately involved with the budget process for more than two decades, having served as the ranking member of the Assembly’s Ways & Means committee and as Chairman of the Senate’s Education Committee. If you want to know how Albany works then you have to know education.
As for our issues, His district is populated some of the state’s most successful credit unions and he approaches issues with an open mind. My guess is that those of you who get to meet him will be impressed.
To no one’s surprise, FHFA Director Mel Watt announced in a speech Friday in California that the GFE’s would extend their participation in the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) until the end of 2016. This coincides with the end of the Obama Administration. What a coincidence.
Started in 2009, these programs were the primary Administrative response designed to assist consumers affected by the Mortgage Meltdown. Under the HARP and HAMP programs, eligible mortgages are either refinanced or modified to make them more affordable. Despite the fact that these programs have been around since 2009, the Director estimated that there are more than 600,000 eligible mortgage holders who have not yet taken advantage of them, including close to 19,000 New Yorkers.
The announcement follows the FHFA’s announcement last month that it was not raising the guarantee fees charged by Fannie and Freddie.
Some quick thoughts. Regardless of a whether or not you agree that HAMP and HARP are worth keeping, the fact that we are still utilizing these programs six years later indicates yet again how slow moving and unimaginative the nation’s response to the mortgage meltdown has been.
Hopefully, there will come a time when Congress has a thoughtful debate about restructuring the nation’s housing support system or comes to the conclusion that Fannie Mae and Freddie Mac should be reformed but not eliminated. Right now, nothing new is being done. The country is as dependent on Fannie and Freddie today as it ever has been. It’s as if they never really went bankrupt.
Don’t be fooled by the fact that it’s a beautiful morning here in Albany New York and Memorial Day is right around the Corner. These are actually compliance omens. It means that time is running out for your credit union to take a serious look at how it plans to comply with the new integrated disclosure requirements that kick in for mortgage applications received on or after August 1. You will be providing a loan Estimate and a Closing Document to your members.
My concern is that, whereas the industry spent months fretting over the QM rules, the sense I get is that the integrated disclosure rules haven’t generated the same angst. To the extent this is because you have used the last year to get ready I apologize and you can go on with your day. To the extent that there are some of you who think this rule is something that your vendor will take care of grab a second cup of coffee-this is admittedly dry reading in the morning-and ask yourself these basic operational questions. The new mortgage disclosures involve operational considerations that will impact your credit union’s bottom line.
Are you ready to make sure that your anxious homebuyers receive their Closing Disclosures at least three days before the loan is consummated?
This is probably the change with which you are most familiar. The days of a member getting the HUD1 at closing are over. With very narrow exceptions a Closing Disclosure must be received at least three business days before consummation. (A business day for purposes of the closing Disclosure requirement is all calendar days except Sundays and legal holidays)
An example provided by the CFPB illustrates just how big a change this is. If your member receives the closing document by overnight mail on a Saturday the earliest you can close is Thursday, assuming there are no holidays in between. This means that you better reach out to your network of attorneys and have a discussion about who is ultimately responsible for preparing the closing disclosure and getting it to the member. You also should practice calming down your homebuyers if new disclosures have to be provided and you can’t allow them to close on Thursday. This is by far the most foolish requirement I’ve seen the CFPB impose on the home buying process but you still have to figure out how you are going to comply.
Do your originators know what an application is? Have you given any thought to what information you are going to ask potential mortgage applicants and in what order? Gone are the days when an application is whatever you say it is. Like it or not anytime a member provides your employees with six magic pieces of information they have provided you with enough information to be given a Loan Estimate These 6 pieces of information are: The consumer’s name; The consumer’s income; The consumer’s social security number to attain a credit report; The property address; An estimate of the value of the property and The mortgage loan amount sought.
There is no wiggle room here: once you get this information a member must be sent an estimate within three business days. (For purposes of this disclosure a business day is any day you are substantially open for business excluding Sundays and legal holidays)
The flexibility you have under the rule is the order with which you request the information, For example if you are wacky enough to want to know the loan term that the member is in the market for there is nothing to stop you from making that the first question you ask. There is also nothing to stop you from prequalifying members by getting only five of the magic factoids so long as the member is informed that the prequalification is not a Loan Estimate and the member is not prohibited from giving you other information.
If your staff does not properly understand this subtle but important change you won’t be providing Loan Estimates when you should be or, conversely, so mechanically conforming to these new requirements that you don’t get all the information you are allowed to before making lending decisions.
What vendors do you want to insist your members use for settlement services? The Loan Estimate requires you to provide your buyers with a breakdown of origination charges, an estimate of settlement services they cannot shop for and estimated services they can shop for.
Easy enough. But the amount that the estimated charges in a Loan Estimates can vary from actual costs disclosed in the Closing Document without triggering a tolerance violation depends on how much freedom you give your member to shop for a vendor.
This means that if you always insist that members use Old Friend John to do all appraisals and he costs more than you estimated on the Loan Estimate then the member can’t be made to eat the difference.
But let’s say you allow the member to shop for an appraiser and provide him with a list with the name of at least one appraiser that he may use. If your buyer chooses from you list of suggested appraisers than the appraisal charge is grouped together with other charges that, in the aggregate, can vary by up to 10% with the increased cost paid by your member.
Let’s say that after giving you member the right to shop for settlement costs and providing him with a list of appraisers he ignores your recommendation and gets ripped off by his Uncle Bob. The increased cost can be passed on completely to the member.
If I succeeded in scaring you into action just go to the CFPB’s website-it has some great resources. Have a nice weekend.