What Dustin Johnson Teaches Us About The MBL Rule

There are two approaches to being a caddy of a professional golfer.  One time I went to the Woman’s US Open on Long Island and was surprised by how involved some of the caddies were, not only in picking out clubs but in helping to position some of the world’s best players before they shot.  They did everything but swing.   This is a prescriptive approach to caddying:  intricately lay out every step taken to insure the best results.

Then there is a principles-based approach.  The caddy recognizes that he is simply assisting someone who already knows what he is doing.  He hands out the proper club and might suggest a putting line but you hardly seem him in the picture.  His goal is to stay out of the way of his charge’s proper execution.

On Thursday, the NCUA not only proposed radical revision to its Member Business Loan (MBL) regulations, but also a radical revision of how it regulates MBL activities.  Specifically, NCUA is proposing to shift from a prescriptive approach to a principles-based approach.  This means that many of the nettlesome provisions of the MBL loan process will be eliminated.  Those credit unions most actively involved in MBL loans will instead have to have detailed policies and procedures that are unique to their membership and lending practices.  Examiners will judge these practices against guidance developed by NCUA.  (http://www.ncua.gov/about/Documents/Agenda%20Items/AG20150618Item6b.pdf)

For the record, I think it’s a great and original idea that is well worth trying, but whether it ultimately has a positive or negative impact will vary widely based on the competency of individual credit unions and how much flexibility credit unions in general are given by examiners.  Some credit unions will relish the increased flexibility; others will find the lack of specific bright line rules less helpful.  In today’s blog, I’m going to go over the positives of the proposal and in tomorrow’s I will outline the potential negatives.

Just how radical is this proposal? The amendments clarify that the MBL cap is a multiple of a credit union’s net worth requirements, not a fixed percentage of assets. Another part of the proposal that could provide MBL cap relief has to do with the introduction of a commercial loan category.  Commercial loans are loans that wouldn’t be counted against a credit union’s MBL cap.  For example, under existing regulations a mortgage to purchase a second home that is not the borrower’s primary residence is an MBL (assuming the mortgage is for at least $50,000).  Such loans would be classified as commercial loans and not counted against the MBL cap.  The idea closely tracks NCUA’s Risk-Based Capital proposal.

But wait . . . there’s more.  Currently, there is a host of concentration limits placed on MBL loans and a corresponding list of available waivers.  The proposal would do away with seven such limits and waivers. This means, for example, that credit unions would no longer have to get personal guarantees for their loans; would no longer be subject to a specific loan to value ratio and would no longer have to have someone with at least two years of experience overseeing your MBL program.

If you participate out portions of your MBLs, another change has to do with the definition of “associational borrowers.”  Current regulations limit how much money can be lent to any one such borrower and by proposing a narrower definition your credit union will have greater flexibility in making and selling loans.

Okay, you ask, so what is the catch?  In place of the existing prescriptive regulations, credit unions will have to have detailed policies explaining why they structure their MBL programs the way they do.

The good news is that you no longer have a regulatory requirement to get personal guarantees when you make MBL loans. The bad news is that your policies and procedures better explain the circumstances under which the credit union grants such loans.  The good news is your credit union will no longer have to have someone with two years of MBL experience.  The bad news is it will need policies and procedures outlining the minimum qualifications of its MBL employees.  Examiners will be the ultimate arbitrators of your efforts.

Credit unions with both assets less than $250 million and total commercial loans less than 15 percent of net worth that are not regularly originating and selling or participating out commercial loans would be exempted from creating and implementing these more involved procedures. Still this new approach means big responsibilities for larger credit unions and their boards.  More on that tomorrow.

 

 

 

 

June 23, 2015 at 10:08 am Leave a comment

Why Ride-Sharing Impacts Your Credit Union

Ride sharing is about to have a bigger impact on your credit union than you may have thought possible.

Yesterday, the Attorney General and the Department of Financial Services reached an agreement with the Lyft Ridesharing Service that will allow it to start plying its trade in Buffalo and Rochester. Since July 2014, the AG and the DFS blocked the company from operating in Buffalo contending that it was violating the Insurance Law by not requiring people who signed up as drivers on the service to comply with basic insurance requirements. The agreement announced yesterday addresses some of the insurance concerns but could still leave credit unions holding the bag in the event one of your members gets into an accident while providing a Lyft ride.

Lyft is a ride sharing service that competes against Uber. The service matches people who need a ride with willing drivers using an App. The two parties negotiate the fare. Here’s where it gets interesting. Your typical car insurance has a livery exception, meaning that if one of your members gets into an accident providing ride-sharing services they won’t get coverage. Needless to say, this makes your collateral worthless.

The agreement reached yesterday specifies coverage for three distinct periods: the time during which the Lyft driver is waiting for pick-up requests; the period between when a driver has accepted a request and the driver is going to pick up the passenger; and the period running from when the driver begins transporting the passenger to when he drops them off. While this is a step in the right direction, drivers are still not required to obtain comprehensive collision insurance that would protect the vehicle against property damage. In other words, the agreement doesn’t go far enough to protect lenders.

The Legislature had been considering passing legislation to address the issue, but with time running out on an already past deadline Legislative session, movement in this area is unlikely. The agreement raises several questions for credit unions to consider. Most importantly, while the agreement just applies to Buffalo, it may provide a template for ride sharing services to start operating in other parts of the state. Uber is already in operation in New York City under an agreement with that city’s Taxi and Limousine Commission.

Is there a way for credit unions to protect themselves? You may be able to mandate that members get special comprehensive collision insurance if they decide to become a ride sharing driver. The problem is, that you won’t know if they have honored this requirement until they get into an accident.

June 19, 2015 at 8:49 am 1 comment

CFPB Postpones Mortgage Disclosure Effective Date

 

I have some good news this morning.  CFPB Director Richard Cordray announced yesterday that the Bureau was moving back the effective date of the integrated disclosure mortgage requirements from August 1st to October 1. (http://www.consumerfinance.gov/newsroom/statement-by-cfpb-director-richard-cordray-on-know-before-you-owe-mortgage-disclosure-rule/)  The announcement comes after the Bureau had steadfastly resisted increasingly desperate  calls from Congress and industry stakeholders to delay the effective date.  In its  statement, the Bureau explained that it was proposing the new effective date after discovering an administrative error that would have resulted in a two week delay in implementing the regulation.

The  integrated disclosure rules  require that  closing disclosures be received by a home buyer three business days before a mortgage loan is “consummated.” The  two month delay gives credit unions more time to prepare for these changes and it also  gives us more time to  clarify a core concern of New York credit unions: When a loan is considered “consummated” for purposes of NYS law.  Stay tuned.

FED Holds Its Fire On Rate Hike…For Now

Even as it sees signs of an economy growing at a moderate pace, the Fed decided yesterday not to raise short-term interest rates. Instead it  stressed, to the extent that it publicly stresses anything, that it will probably raise rates by the end of the year.  It also is continuing to rollover its existing portfolio of  Mortgage Backed Securities it purchased during its period of Quantitative Easing. (http://www.federalreserve.gov/newsevents/press/monetary/20150617a.htm)

If you are hoping for a reprieve from those razor-thin Net interest Margins don’t hold your breath. And remember,  this period of historically low rates comes as  the Bureau is expected to propose restrictions on overdraft fees in the coming months.  Yes,  expect running a credit union to be as challenging as ever.

One more depressing thought: This recovery, as anemic as it is, can’t last forever.  What would the Fed or a divided Congress be able to do to fight another downturn?     As the Economist pointed out in a recent editorial the economic recovery is entering its sixth year and if another contraction occurs, as a result of a Greek Default for example:

“Rarely have so many large economies been so ill-equipped to manage a recession, whatever its provenance… Rich countries’ average debt-to-GDP ratio has risen by about 50% since 2007. In Britain and Spain debt has more than doubled. Nobody knows where the ceiling is, but governments that want to splurge will have to win over jumpy electorates as well as nervous creditors.” (http://www.economist.com/news/leaders/21654053-it-only-matter-time-next-recession-strikes-rich-world-not-ready-watch)

Move Over Alex

Alexander Hamilton, the nation’s first Treasury Secretary, will have to share space on the $10 bill with a yet unnamed woman.  The Treasury announced that, starting in 2020,  it will either start issuing some bills with Hamilton on one side and the unnamed matriarch on the other or a mix of bills, some with Hamilton and some with his female counterpart.  My vote would be Maria Reynolds who would serve as a reminder that our politicians haven’t changed as much as we think we have and yet we managed to grow into a great country.

As explained in this Huffington Post Blog from 2011:

“In the summer of 1791, Hamilton was the target of what a modern-day espionage novel would call a “honey trap,” set by a blonde 23-year-old named Maria Reynolds. Hamilton then became the target of outright blackmail, by the woman’s husband (who was quite likely in on the whole scheme from the beginning), while Hamilton continued to see Maria for more than a year. This information eventually found its way into the hands of his political enemies, who confronted Hamilton. Hamilton explained that he was not (as had been charged) been playing fast and loose with the nation’s money; but rather he had merely been playing fast and loose with another man’s wife, and paying him off for the privilege, out of his own pocket.”

Today he would be charged with Structuring to evade BSA reporting requirements.

Incidentally, Hamilton was also NYS’s first Chancellor of its Board of Regents and you can find his portrait in the Education Department building in Albany. (http://www.huffingtonpost.com/chris-weigant/americas-first-political-_b_1080813.html)

 

June 18, 2015 at 8:38 am Leave a comment

Are You Underpaying Your Tellers?

That is the question that popped into my mind this morning after spotting an article reporting that TD Bank was slapped with a lawsuit yesterday alleging that it violated the Fair Labor Standards Act (FLSA) by misclassifying a “teller services manager” as an exempt employee. The lawsuit is by no means unique, but the simple fact that employees continue to bring these claims indicates that financial institutions are continuing to ignore the impact that the FLSA is having on their operations. In addition, with major regulations on employee classifications to be released within weeks by the Department of Labor, this and similar cases demonstrates why I feel that the Department of Labor will introduce the most potentially impactful regulations for credit unions this summer.

Remember that under the FLSA, employees are presumptively entitled to overtime if they work more than 40 hours a week. Very generally speaking, the law creates an exemption for employees who exercise managerial control. As I have previously explained, fueled by the Department of Labor, suits alleging the misclassification of non-exempt and exempt employees have become more common and more expensive. This trend was highlighted earlier this year when the Supreme Court upheld the right of the Department of Labor to classify mortgage originators as non-exempt employees.

The TD Bank case (Reinaldo Kuri v. TD Bank N.A ) is fairly typical. The employee in question alleges that even though he was given the title of manager, his duties included “spending the overwhelming majority of his time” engaged in the duties of non-exempt bank tellers and customer service representatives. In addition, he alleges that he “did not exercise any meaningful degree of independent judgment,” but instead had to rely on the policies, practices and procedures set by the Bank.

This argument shows why employers increasingly find themselves in a Catch-22 when it comes to classifying their employees. A typical credit union is too small to cleanly delineate exempt and non-exempt duties. Your typical manager chips in by helping out with teller duties and anything else that needs to be done around the credit union. In addition, any credit union that doesn’t have policies and procedures in place detailing how it expects its employees to carry out their duties is committing operational negligence.

Under existing regulations (29 CFR 541.700), you judge whether an employee is classified as exempt or non-exempt based on her primary duties. The good news is that under existing regulations, the amount of time an employee spends performing exempt work is not the sole criterion used to determine whether or not an employee is exempt. This means, for example, that the branch manager, whose primary duty is managing the branch but on any given week may spent the majority of his or her time performing non-exempt duties, can still be classified as an exempt employee. The bad news is that the Department of Labor is expected to propose narrowing this exception so that any employee who spends the majority of her time doing non-exempt work will be considered a non-exempt employee. Think of how much this could cost you in overtime.

But even without these proposed changes, financial institutions continue to ignore the changing employment landscape at their own risk. For instance, if TD Bank loses this lawsuit, it could be required to pay cumulative damages and reimburse employees for their unpaid overtime.

June 17, 2015 at 8:36 am Leave a comment

What is the Real MBL Cap?

At the Association’s Annual Convention the man who stole the show was none other than NCUA’s newest board member, J. Mark McWatters. Usually, attendees listen in respectful silence as the board member du jour explains how he feels the pain of being over-regulated while in the next breath explaining the need for additional regulation.

But in McWatters, we have at least one board member who sincerely believes the fewer regulations, the better. And, he seems to believe that when regulations are necessary they should be focused as narrowly as possible on the issue they seek to address. I’ve never seen any audience respond so well to a lawyer in my life, especially one who feels the need to mention he’s a lawyer about once every thirty seconds. His message was like catnip in a room full of kittens.

I also drank a good bit of his Kool-Aid. The part of his speech that got me the most intrigued was when he raised the possibility that NCUA could, if it wanted to, raise the MBL cap, at least for larger credit unions, without additional legislation. This is not a theoretical discussion. At its Board Meeting this Thursday, NCUA will be unveiling proposed MBL reforms and McWatters urged the audience to scrutinize and comment on this proposal.

First, a quick primer. The Federal Credit Union Act does not explicitly cap Member Business Loans (MBL) at 12.25% of a credit union’s assets. Instead, it caps MBLs at the lesser of 1.75 x the actual net worth of the credit union or 1.75 x the minimum net worth required for a credit union to be well-capitalized. Since credit unions have to have at least a 7% net worth to be well-capitalized, we have all gotten used to assuming that the MBL cap is 12.25%. However, take a closer look at the statute, as McWatters urges, and here is where it gets interesting.

As we all know from NCUA’s Risk-Based Capital proposal, NCUA feels it has the authority to define when complex credit unions, which it is seeking to define as those with $100 million or more in assets, are well-capitalized. If NCUA has its way, such credit unions will be well-capitalized only if they have a minimum Risk-Based Capital ratio of 10%. An argument can be made that based on a plain reading of the statute, these credit unions’ MBL cap would be 17.5%. Intriguing, isn’t it?

Of course, as NCUA has made abundantly clear, reasonable minds can differ about what constraint the Act actually places on credit unions. Still this interpretation is certainly supported by the statute and deserves to be given serious consideration by the entire Board.

June 16, 2015 at 8:45 am 1 comment

Fees, Mortages and Power

I don’t know what shocks people in Washington more: the fact that Congress is willing to abdicate virtually all of its powers over consumer protection laws to one independent agency or the fact that Richard Cordray is that rarest of public officials who is actually using these powers to do exactly what the Bureau was set up to do. The latest example of this disconnect between Congress and the Bureau can be seen in two examples that have a direct impact on credit unions.

First, with the Integrated Mortgage Disclosure rules that take effect on August 1, Congressmen are urging the CFPB to codify a delay in the enforcement of these rules. The CFPB has made it clear that while it expects nothing more than a good faith attempt on the part of lenders to comply with these requirements, it sees no need or benefit to the consumer in further pushing back the implementation date. For those of you who still haven’t decided how you are going to comply with these requirements, God Speed and good luck!

A second example of the CFPB’s enormous powers is demonstrated in the emerging debate over over-draft fees. The CFPB prides itself on being a data driven organization. As reported earlier this week in the CU Times, in November 2014, it demanded that payment processes provide information to the Bureau about the order in which banks and credit unions clear checks. From the CFPB’s perspective, it makes a heck of a lot more sense to go to a handful of companies to get this information rather than demand it of every financial institution in the country.   The problem is that this kind of huge fishing expedition costs money and, assuming that the Bureau that Never Sleeps isn’t about to reimburse Fiserv and others for the cost of this research, someone’s going to have to pay for it.

What these two examples have in common is that they underscore that Congress has given too much power to a single Bureau and ultimately a single person. For example, Section 1022 of the Dodd-Frank Act provides that the Bureau may require covered persons and service providers participating in the consumer financial services market to answer specific questions in the form prescribed by the Bureau. In other words, the Bureau may ask for anything that directly or indirectly can help it monitor the provision of consumer services.

I don’t begrudge the Bureau for exercising this power. Instead, my new gripe is with Congressmen who pretend as if they are powerless to do anything about it. The CFPB is here to stay; but, there is nothing to stop Congress from re-examining and restricting some of the powers it has given the Bureau.

June 12, 2015 at 8:47 am Leave a comment

Making Loans Cheaper and Better?

Automated lending threatens to eat banks for lunch, or so asserts an analysis by Reuters this morning once again reporting on the potential use of automation and Big Data to revolutionize the lending process. The article highlights a young entrepreneur who, after being turned down for a loan by Wells Fargo, was able to secure a $19,000 line of credit from online lender Kabbage, albeit at a much higher interest rate than he would have gotten from a credit union or bank.

The founder of Kabbage explains that he can make underwriting decisions based on Facebook data that is as effective as using a credit score. The confluence of technology, Big Data and Silicon-valley entrepreneurship is already having a profound impact on lending. In Russia, banks are experimenting with making a business loan as easy as going to an ATM. So, don’t get me wrong, any lender who isn’t paying attention to these trends and re-examining existing practices is not, in my ever so humble opinion, exercising appropriate due diligence. But whether this technology represents a wholesale transformation of traditional lending or will ultimately represent the latest failed attempt by non-traditional lenders to ignore erstwhile lending standards remains to be seen.

Most importantly, as Jaime Diamond has pointed out, these non-traditional lenders haven’t been tested in an economic downturn. As we learned from the mortgage meltdown, it’s easy to look like an economic genius when the economy is growing, the real test is how much money you have left when the good times end. Secondly, once the novelty of these lending arrangements wear off, I wonder if what we will be left with is a version of payday loans for entrepreneurs.

In the short to medium term, anyway, you can still get cheaper business loans from a credit union than you can from places like Kabage. Finally, Silicon Valley acts as if banking has been in the technological dark ages. In fact, one of the things that surprised me most about the industry since I dove into it about eight years ago is how technologically savvy it already is. I think the vast majority of consumers would be surprised to find out that their mortgages and loans were approved by an automated underwriting system. As a result, financial institutions are not quite as backward as the Silicon Valley startups suggest.

One of the key challenges facing companies today is to figure out what changes are so transformative that they make a traditional business model obsolete (e.g. iTunes and the record industry) or simply disruptive (i.e. debit cards). No doubt technology is disrupting traditional lending models, but whether it is making them obsolete is far from certain.

See you at the Sagamore!

June 11, 2015 at 7:04 am Leave a comment

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Authored By:

Henry Meier, Esq., Associate General Counsel, New York Credit Union Association

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