Posts tagged ‘OCC’

Why You Need to Start Preparing for the End of Libor

New York State’s decision to mandate that regulated financial institutions report in writing the steps they are taking to prepare for the end of Libor is a tad heavy-handed. That being said, the Department is onto something by putting financial institutions on notice that it is time to think about life after the London Inter-Bank Offered Rate. In other words, even if you are not a state charter, your institution should start assessing the impact of a post-Libor world on your operations. Here’s why.

Libor is in many ways a classic British creation reflecting how much banking norms have changed in a very short time. It has its roots in key banks in a group of institutions in the old city, consulting with each other on a daily basis about the interest rates they were charging. In an era when half the people on the phone undoubtedly knew each other from their days at Eton and Oxford, this kind of chummy professionalism was not unheard of. In fact, Libor became such a widely used index for pegging interest rates that credit unions are still allowed to use it when making their own variable rate investments, pursuant to 12 C.F.R. 703.14, even though it is not a domestically derived index. Unfortunately, Libor’s simplicity made it extremely easy for investment bankers to conspire to manipulate. For example, Bank A could simply lobby the other banks to set a higher index rate on a daily basis.

This was, of course, illegal. NCUA successfully sued banks over their Libor manipulation. In late July 2019, it unsuccessfully tried to get out of its settlement after realizing just how much investment interest had been lost to the industry.

It is not surprising, then, that regulators want to see Libor ended, and it is widely assumed that this will occur by the end of 2021. DFS has joined other financial regulators in telling financial institutions that it is time to plan for life after Libor. For example, a faithful reader directed me to the most recent OCC risk assessment, in which it explained that “many market and banking participants use Libor as a benchmark for pricing financial instruments. The OCC is increasing regulatory oversight of this area to evaluate bank awareness and preparedness for Libor’s anticipated cessation.”

While it is true that credit unions do not have hundreds of sophisticated contracts tied to interest rate derivatives, as the existing regulatory framework makes clear, credit unions have long used Libor as an index. The end of Libor can be easily prepared for. In contrast, the failure to make plans now could get you enmeshed in the proverbial sticky wicket of contract disputes, which would make for great blog content, but a lousy day in credit union land.

Something to do for the weekend

For those of you who inexplicably want to get out of the house this weekend, instead of watching a gazillion hours of football, yours truly suggests going to see Knives Out. It is by far the most intelligent, entertaining movie I’ve seen in years. It is the type of plot which typically makes for one of those 10 hour Netflix series.

On that note, enjoy your weekend. Go Titans.

January 3, 2020 at 9:16 am 2 comments

It’s Back: Beware of the Inverted Yield Curve

One of the many things that spooked Wall Street yesterday was the return of the dreaded inverted yield curve. Specifically, on Monday, Bloomberg reported “the spread between 3- and 5-year yields fell to negative 1.4 basis points , dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed.” Why does this matter?

Well, you folks know a lot better than I do that from a banking perspective as the yield for shorter term bonds rises faster than the yield on longer term bonds, you end up in a classic squeeze of your operating margins making it more difficult to generate money off member funds. In addition,  the yield curve has an uncanny knack foredicting a coming recession, which makes sense because the higher yield being demanded for shorter term investments means that investors would rather put their money where they can lock in returns for the next few years.

Remember there is also a huge safety and soundness/interest rate risk component to all this. I would expect your examiners to be scrutinizing your knowledge of your interest rate risk exposure in the next round of examinations even more so than usual.

By the way, the inverted yield curve is coming at a time when things on the international stage may once again have a potential impact on the American economy. Just as the Greek debt crisis in the fear of that country opting out of the Euro produced economic reverberations throughout the international economy, we will have to wait and see just how big of an impact England’s inability to decide on divorce terms with the European Union will have on world economic growth.

By the way, British Prime Minister Theresa May, may go down as one of the worst politicians ever. A vote on the plan she negotiated with Europe establishing the terms of England’s post-Brexit relationship with Europe is expected next week and has so far been about as well received as year old candy on Halloween. It’s so bad that the one thing opponents and proponents of Brexit agree on is that Britain would be better off with no Brexit deal than the one being offered by May. That’s quite the trick.

New York’s Economy Continues to Grow But Gaps Remain

Closer to home, the New York Federal Reserve Bank released its latest analysis of the New York economy and if you’re a downstate credit union finding it hard to fill positions you’re not alone. According to the bank, “Employment in New York City is up about 25 percent from its trough following the Great Recession, which is considerably more than the nationwide increase. Meanwhile, upstate New York has not fared as well. Albany had seen solid job growth through much of the expansion, but growth has slowed over the past year. In Western New York, after years of modest employment gains, Buffalo and Rochester have seen job growth slow considerably since 2016.” One can only wonder just how much more the Upstate and Downstate economies will diverge once Amazon moves into town.

OCC: New York DFS Jumped The Gun On FinTech Litigation Again, New York Responds “Not So Fast”

In this letter to the court, the OCC explained that DFS’s lawsuit must be dismissed because no harm has been suffered by anyone since no FinTech Charter has been issued. Meanwhile, the CU Times reported that DFS has responded to this allegation by asking the court to block the OCC from approving any FinTech Charters before the litigation is resolved. Stay tuned, at some point we will actually have extremely important litigation defining the parameters of the OCC’s chartering powers and helping to frame an important public policy debate about how best to regulate hybrids of banks and technology companies.

December 5, 2018 at 9:07 am Leave a comment

CU BSA Practices Under The Microscope Again

The Wall Street Journal is the best paper in America but if all you did was read the Journal, you could be forgiven for thinking that credit unions, as opposed to the megabanks which simply ignore BSA requirements and then pay large fines, are the biggest weakness in the country’s anti-money laundering framework.

The latest CU to find itself in the WSJ’s crosshairs is $24 billion PenFed Credit Union. According to the article in the WSJ, in 2016 and 2017 staff members at the credit union were concerned enough about inadequacies in the credit union’s AML compliance framework that they raised their concerns with senior staff and regulators. Specifically, the Journal reports that concerns were raised about “understaffing, gaps in reporting of potentially suspicious transactions to the government, insufficient monitoring of wire transfers, a lack of anti-money-laundering training for senior leaders and inadequate scrutiny of potentially high-risk customers.” The Journal points out that many of these concerns are raised during a time of fast growth by the credit union which is the third largest in the country.

Buried a little deeper in the article we find out that PenFed’s program was subject to a document of resolution and there is no suggestion that the problems highlighted in the article haven’t been addressed or resulted in money laundering activities.

I’m talking about this article for two reasons. First, when issues get public attention they tend to get the attention of your examiners so, as always, make sure your AML/BSA framework is as good as it can be.

I would argue that the single biggest cause of credit union liquidations is the lack of adequate internal controls to identify serious problems and to get those problems addressed. To be sure, at $24 billion, PenFed should be held to a much higher standard than other credit unions but all credit unions should ask themselves not only if they have a compliance system that looks good on paper but one that allows people to identify mistakes so that they can actually be addressed and minimized. In some ways, with the caveat that we don’t know all the facts and obviously mistakes were made, it appears that PenFed’s system, worked exactly the way you want a compliance system to work. Employees identified concerns and had the confidence to make sure senior executives and regulators were made aware of these problems.

Those Who Don’t Learn the Lessons of History are Bound to Repeat It…

This is one of my favorite quotes, which I just found out courtesy of a Google search is credited to George Santayana – I bet you didn’t know that reading this blog helps win Jeopardy. Anyway, this quote came to mind this morning as I read a summary of a proposed regulation by the Federal Reserve, FDIC and the OCC which would introduce more flexible capital requirements for banks with $100 billion or more assets depending on the type of activities they engage in. Specifically banks with $100 billion or more assets, could be subject to less stringent capital requirements based on the risk of activities they engage in such as short-term wholesale funding, cross jurisdiction activity, and the amount of exposure they have to non-bank assets.

Strip away the fancy language and a mere ten years after the greatest economic meltdown since the Great Depression, regulators believe that they have a good sense of what banks and what activities pose a systemic risk to the banking system. I know I’m cynical but I find this hard to believe.

November 1, 2018 at 9:17 am 1 comment

DFS Takes On OCC FinTech Charter

Image result for Department of financial services new yorkThey say that the definition of insanity is doing the same thing over and over again and expecting a different result. In my own case, I don’t know if its insanity or stupidity that has lead me to spend decades of beautiful fall Sundays glued to my TV in the hope of watching both the Giants and Jets play good football in spite of the fact that this rarely ever happens. The Giants are starting 0-2 again and the Jets? Well, they are the Jets.

Conversely, even though the DFS had an earlier lawsuit seeking to block the approval of FinTech Charters by the Office of Comptroller of the Currency thrown out as premature, the DFS did the right thing Friday when it once-again sued the OCC for seeking to charter FinTech bank charters. This time the OCC has issued a draft licensing manual and the time seems to be ripe for the court to consider fundamental legal questions, the answer to which will radically reshape the landscape in which your credit union operates.

First, what is a FinTech charter? As conceived by the OCC, it is a non-depository federally chartered institution which pays checks or lends money. Specifically, 12 CFR 5.20(e)(1) has permitted the OCC to charter special purpose national banks that conduct one of three core banking activities: taking deposits, paying checks or lending money. The OCC anticipates that FinTech charters “will elect to demonstrate that they are engaged in paying checks or lending money.” (See Pg. 5 of the Controller’s Licensing Manual Draft Supplement)

So what has New York’s Department of Financial Services so upset? First, the definition of a FinTech could potentially cover virtually every institution with an app that does not accept deposits and as such is subject to state level licensing requirements. For example, check cashers don’t accept deposits and neither do money transmitters. In other words, from the perspective of state regulators, the FinTech charter amounts to nothing less than a federal power grab which would largely make them obsolete.

Second, consumer advocates and state regulators argue that this new charter will provide a means to allow institutions to circumvent state level consumer protection laws. For example, in its complaint, the DFS argues that approval of a FinTech charter could lead “in New York to the proliferation of prohibited payday lending by out-upstate OCC chartered entities seeking to import their usurious trade into the state to exploit the financially vulnerable” because it would give them a means to easily circumvent the state’s interest rate cap.

But as these policy issues get debated, the actual issue to be considered in this lawsuit is a straight forward one: does the OCC, which is empowered under the National Bank Act to charter and oversee national banks, have the authority to extend its charter to non-depository institutions so long as they engage in other core banking activities? In other words, what is a bank? Does anyone really know what time it is? Does anyone really care? Just wanted to see if you’re still paying attention.

Do credit unions have a stake in this fight? You bet they do. The competitive pressures that the industry faces are already enormous. But can you imagine how those pressures are going to grow if you suddenly find yourself competing directly against Facebook and Apple with immense capital at their disposal? It gets even worse when you consider that these institutions will not be subject to capital requirements similar to your credit union’s – because they won’t take deposits – or a fraction of the consumer protection laws which make your life so much fun.

 

September 17, 2018 at 8:55 am Leave a comment

Seven Questions About FinTech Charters

Image result for fintechYesterday’s announcement by the OCC that it will begin accepting FinTech Bank charter applications is as big a development for banking as passage of the Riegle-Neal Act in 1994 which lead to the rapid consolidation of community banks and credit unions that we are still seeing today and the enactment of the Gramm Leach Bliley Act which broke down depression barriers between commercial and investment banking leading to the behemoths that we live with today. FinTechs will over time have a profound effect on the way credit unions and all financial institutions go about their business. Here are some questions I’ve been asking myself and some preliminary answers:

What is a FinTech Charter anyway? In 2003, the OCC amended §12 CFR 5.26 (e)(1). The new regulation authorized the creation of special purpose banks that do not engage in fiduciary activities but conduct at least one of the following core banking functions: receiving deposits, paying checks, or lending money. At the time the provision received little attention but it is this regulation that the OCC argues allows it to authorize special charters for companies that use computer platforms to process payments or lend money for example.

Why would companies be interested in a FinTech Bank Charter? As the New York Times explained this morning, tech companies have been advocating for just such a charter because they believe it will allow “online lenders and payment companies to more easily and directly compete with traditional banks, a change that one regulator said would allow innovative businesses to expand nationwide.” With a national charter, these companies will have one set of national rules. This has always been the appeal of a national charter.

Why should credit unions care? Now for the potentially more troubling reason, at least from a competition standpoint. Maybe not today, maybe not tomorrow, but someday and someday fairly soon, bigger FinTech companies will not be as dependent as they are now on establishing banking relationships. For example, many credit unions now have contracts with Apple’s iPay. The new charter will make it much easier for Apple to not only facilitate payments but ultimately to facilitate payments using its own bank. Think of how many vendors you have and then think of each one as a potential competitor.

Are there safety and soundness risks? That’s a great question Henry. The major concern that I have with this new charter is that it will further degrade the firewall between commercial business and banking. This approach worked great for the American economy in the 1920’s but not so much in the 1930’s. In its FinTech Chartering Manual released yesterday, the OCC acknowledged that FinTech’s will be unique. They will not accept deposits and therefore not be subject to FDIC oversight. But they will have to meet capital requirements. But even these capital requirements will be unconventional as much of the money for these businesses is raised by venture capitalists.

What are the appropriate capital requirements for FinTech charters? No one will really know precisely what an appropriate capital buffer will be for these financial entities. Here is my worst case scenario: Facebook creates a FinTech subsidiary that specializes in processing payments and making consumer and mortgage loans. How would the general public react the next time they find out that the parent company loses 20% of its value in one day? Even assuming that there is an adequate firewall between Facebook and its affiliated bank, I think your average consumer will react very nervously to this news.

How will this affect credit unions? To me the charter underscores why credit unions face an existential threat. Limiting the growth of any financial institution, let alone one that is dependent on deposits, is an antiquated regulatory straightjacket in an age of internet banking. If the industry does not get greater flexibility to grow, all but the largest credit unions are going to suffocate.

What Happens Next? The OCC is now accepting FinTech applications and the way it is talking, you can bet there are a few already in the hopper. Part of the application process is a public comment period which will allow interested stake holders to weigh in with any concerns that they have. There will also be lawsuits. In May 2017, in response to a white paper, New York State’s Department of Financial Services filed a lawsuit claiming, among other things, that the OCC did not have the authority to create FinTech charters. That case was dismissed late last year because the court concluded it was premature to bring such a lawsuit but with the OCC now open for business, the lawsuit making the same basic arguments is sure to come.

But I said it before and I will say it again. These companies are an inevitable outgrowth of changes in the economy. While it’s fun to grouse about competitive inequities, it’s much more beneficial to recognize the new reality and to start positioning your credit union to compete in this evolving ecosystem.

In an ideal world Congress would get involved in such an important issue. There are too many important legal and policy issues to be left exclusively to unelected regulators and federal judges but Congress hasn’t exactly demonstrated that it has the ability any longer to deal with complicated important issues.

 

August 1, 2018 at 11:00 am Leave a comment

Lessons From Wells Fargo

Greetings from your faithful blogger, who is back from a trip to Riverhead, Long Island where he helped celebrate the 50th birthday for a friend he’s known for more than 30 years now. He’s getting old!

After plenty of time to review the latest news on the train ride home, I wanted to talk a little bit about the much publicized fine imposed on Wells Fargo by the OCC and the CFPB. By the way, you know your compliance department is really screwing up when even Mick Mulvaney’s CFPB wants to publicize the fact that they’re fining you.

If we learned anything over the last ten years, it is that all too often the big banks go through the car wash with the windows down and it’s credit unions and small community banks that end up getting soaked. If you’re in charge of compliance at your credit union, the finings against Wells that should concern you are not just its already well publicized practice of adding gap insurance to car loans without even bothering to tell the borrower, but rather a more subtle and frankly legally ambiguous fine for its treatment of rate locks.

As outlined in the Cease and Desist Order, “it was the Bank’s policy that if (a) a mortgage loan application did not close within its initial interest rate lock period in circumstances where the Bank was responsible for the failure of the loan to close and (b) the customer chose to extend the interest rate lock period, the extension fee was to be charged to the Bank, and not the customer.” So far, so good, I bet this is similar to your policies related to mortgage loans. According to the Order, where Wells went wrong was “customers were improperly charged mortgage interest rate extension fees when the Bank should have borne those costs.”

To me, this fining underscores the need to review your existing policies and procedures regarding rate lock extensions and member charges. You better be able to document that is was the member’s fault for a rate lock period’s expiration and not the credit union’s. Given the ambiguities that can go into the home buying process, this is much easier said than done. For instance, a member might quickly provide you with needed documentation to complete underwriting without understanding that it’s not the right paperwork. To me, the fining against Wells Fargo demonstrates that any ambiguity is going to be interpreted in favor of the member.

Bottom line: the CFPB has consistently stressed that regulatory actions should be treated as guidance that puts the industry as a whole on notice. By reading the Wells Fargo Consent Decree, many of you will be shocked by just how sloppy one of the biggest financial institutions has been when it comes to compliance. But you also should keep in mind that the guidance provides low hanging fruit for examiners to look into the next time your credit union’s mortgage practices are under review.

I am headed Downtown and hope to see many of you at our Annual State Government Affairs Conference that kicks off today.

April 23, 2018 at 7:44 am Leave a comment

Why OCC’s Fintech Charter Is A Game Changer

Its the end of the world as we know it whether we realize it or not.

On Friday, The OCC announced that it had the power to grant bank charters to financial technology companies and was going to use it.   Specifically, it explained that fintechs could apply to operate “special purpose” banks.

It laid out the case for its legal authority but invited the public to comment on the issues involved as it moves forward.  Needless to say, the CU industry should weigh-in.

How big a deal is this? Time will tell but think of it this way: When Apple introduced Apple Pay it had to partner with banks and credit unions that were willing to use its technology to facilitate payment transactions.  Now, with the OCC moving forward with its plans, the Apples of the world can simply become  special purpose banks so long as they engage in at least one of three “core activities” receiving deposits, paying checks, or lending. 12 C.F.R. § 5.20.

It’s not just the big guys who are going to benefit. Credit unions now meet with vendors anxious to interest them in technology that can do everything from instantaneously underwrite loans to facilitating quicker payments to making toast for members.  These startups need your business to get to consumers.   Now they will have the option of competing against you rather than partnering with you.

As the Comptroller explained in his remarks “Many fintechs will choose to partner with existing banks or provide services to banks and other financial companies, but some will seek to become a bank. In those cases, it will be much better for the health of the federal banking system and everyone who relies on these institutions, if these companies enter the system through a clearly marked front gate, rather than in some back door, where risks may not be as thoughtfully assessed and managed.”

The OCC’s announcement is also  likely to set off  a mad scramble among state regulators. After all, why should states give the federal government a monopoly over an entirely new type of financial institution?

As for credit unions, the OCC’s move demonstrates yet again why they need more FOM flexibility.  When everyone is connected in a virtual community limiting CU’s  to physical boundaries makes no sense.

All of this will, of course,  further accelerate changes to a financial landscape that are already affecting  the way your credit union does business and against whom it is competing.  Good luck.

December 5, 2016 at 9:20 am 3 comments

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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